Andy Mills says firms need to act now to make the grade for the FSA's Treating Customers Fairly initiative

Last week the FSA published its latest paper on treating customers fairly (TCF), entitled Treating Customers Fairly - Building on Progress. This is one of many publications that the FSA has issued in recent months representing a culmination of the work that it has been doing to assess the level of activity across the financial services industry, including general insurance firms, to address TCF issues.

The report contains a review of supervisory feedback from the regulator regarding the implementation of TCF in firms and recommends steps that should be taken to improve standards in relation to this principle.

The paper's strap-line, 'Building on progress', is indicative of the FSA's concern at the extent of progress across the financial services industry in this key area.

There are clear indications from the regulator that lack of action or ambition in progressing TCF will be highlighted in 'arrow' visits, particularly as TCF will form a major part of the 'arrow' agenda from September 2005 onwards.

Enforcement action may follow the identification of failings in TCF, resulting in public censure or penalties.

What does the FSA expect to see in respect of firms' approach to TCF? Supervisory teams will be looking at firms' practical efforts, particularly after any previous 'arrow' visits, to demonstrate that they are meeting requirements and treating customers fairly. Examinations will at the very least include an assessment of the following:

  • Whether firms have assigned senior management responsibility to TCF
  • The governance of TCF programmes or activities
  • Whether firms have established what TCF means for them in relation to their business and customer strategy.
  • In addition, if firms have conducted gap analysis activities, the FSA will be looking for progress in addressing any identified shortcomings.

    With this latest publication, which largely summarises the "cluster" reports published previously, the FSA steers firms on the areas to be considered when establishing fairness principles. These include remuneration, distributor/manufacturer relationships, strategic change and specific elements of the product lifecycle.

    Long way to g
    There is a recognition that while some firms have made progress with this issue, there remain a substantial number with a long way to go.

    There is also recognition that, understandably, less has been achieved in the general insurance arena, given that statutory regulation for intermediaries only became effective six months ago. However, insurers will need to be able to demonstrate reasonable progress given that Principle 6 [TCF] has been effective for regulated firms since 1 December 2001. The FSA is also keen to encourage open dialogue with the market on this subject as it stated in its recent newsletter, and welcomes the input of trade bodies in ensuing discussions.

    Brokers, intermediaries and third party administrators are all affected by regulatory changes and the firms will need to identify which areas of TCF, in particular the product life cycle elements, impact upon them. As the FSA says in its July paper: "Firms also need to take account of the impact of their actions on the ability of other firms they deal with (producers, distributors and outsourced suppliers) to treat their customers fairly."

    There will continue to be a healthy debate over the subject of distributor/manufacturer relationships and responsibilities. The FSA will publish further comment in this area in due course.

    In practical terms, what should firms be doing to minimise any adverse impact of the regulatory supervision of TCF? With the usual caveat regarding proportionality, the expectation is that at the very least:

  • A proper understanding of TCF is demonstrably embedded at senior management level and that senior management has decided on and possesses a clear and appropriate strategy to address the issue
  • Senior management can articulate with appropriate evidence how the firm is addressing TCF issues
  • The firm has established that fairness principles have been assessed against current practices
  • Action plans are in place to address shortcomings, and these actions have begun and have momentum.
  • Early preparation for supervisory visits is essential to be able to adequately demonstrate that TCF is at the forefront of the firm's agenda and is fundamental to its strategy.

    The time for talking is over - it is now time to act. Many firms have spent considerable time perusing the theory of TCF, but it remains to be seen whether action, in both quantum and pace, is sufficient to satisfy the FSA.

    ' Andy Mills is director of Grant Thornton's financial markets group