When does Treating Customers Fairly (TCF) become a reality? In the original planning, January 2014 was indicated as the planned date for implementing legislative changes envisaged in the regulatory framework.
If this is still the implementation date, a lot will have to happen between now and then. We advise readers to become comfortable with the concepts and aims of TCF, and not to wait till it becomes a legal obligation.
As part of the roll-out, a regulatory framework is being developed, within which firms must conduct their business. The framework, according to the FSB, will comprise a combination of market conduct principles and explicit rules.
A Road Map was published in March 2011 providing comprehensive information about this initiative. We recommend that you spend time reading this, as it will impact on how you conduct your business in future. It will help you assess to what extent your current client care measures are aligned with what will be required. Click here to download a copy. The FSB website contains a whole section containing TCF documents and tools – look for the Treating Customers Fairly button on the left on the home page. The latest communication that we could find was contained in FAIS Newsletter 14, published in January this year.
The following extract comes from a section in the road map entitled “What will the impact of TCF be on financial intermediaries, given their existing FAIS obligations?”
Clearly the FAIS Act already imposes extensive obligations on authorised financial services providers and their representatives that are relevant to the TCF fairness outcomes. In particular, intermediaries’ delivery of fairness outcomes 3 (clear information) and 4 (suitable advice) are to a large extent driven by the disclosure, advice, conflict of interest and licensing requirements under the FAIS Act. However, it does not follow that TCF will have no additional impact on FAIS regulated intermediaries.
Where the FAIS obligations are largely compliance and rules based, the outcomes based TCF framework will require intermediaries to ensure that their adherence to FAIS is complemented by being able to demonstrate that they have embedded the broader TCF culture framework within their organisations (TCF fairness outcome 1).
From a risk-based perspective, the culture and governance dimensions will require particular attention by larger financial services providers. Intermediaries will however also be expected to consider their role in delivering TCF fairness outcomes 2, 5 and 6 (the outcomes related to appropriate product and service design, product performance and service levels, and post-sale barriers).
Although the primary responsibility for these outcomes will rest on product suppliers themselves, financial intermediaries can and should bring greater pressure to bear on product suppliers to ensure that inappropriately designed and marketed products, poor post-sale service practices, and unreasonable post-sale barriers are challenged.
A useful distinction can be drawn between ensuring a product is appropriate for a particular target market, and ensuring the product is suitable for the particular customer concerned. The former is mainly the product supplier’s responsibility, and the latter is mainly the intermediary’s responsibility. However, it does not follow for example, that an intermediary can abdicate responsibility for recommending an unfairly or inappropriately structured product to a customer on the basis that ensuring fair product design is the product supplier’s responsibility. An appropriate level of product “due diligence” is expected from intermediaries.
Conversely, product suppliers cannot disregard poor selling practices of their products by intermediaries, for example where they are aware that products from their range are being sold to the wrong customers, and argue that it is solely the intermediary’s responsibility to ensure the product is suitable to the customer who purchases it. TCF will require product suppliers and intermediaries to share accountability for fair treatment of their mutual customers.
We commented previously on some of the issues raised above, specifically pointing problems with the practical implementation of some of these ideas.
- How will a financial intermediary bring pressure to bear on a product supplier, given his or her reliance on retaining their contract?
- What is regarded as “appropriate” due diligence? There are no guidelines on what the reasonable man test is in so far as due diligence, to be performed by a financial intermediary, is concerned.
We saw some practical examples recently of what we regard as NOT conforming to the spirit of Treating Customers Fairly. Two of these consist of promises by product providers of so-called “free” benefits, while the fine print proves that the client pays for this without being made aware of it. Another product house offered clients better returns by reducing commission as part of their commitment to treating customers fairly, which reminded me of the pig and the hen arguing about their contributions to breakfast, where the pig stated: “yours is an offering – mine is a sacrifice.”
It is clear that there is a need for serious adaptation in how the industry approaches TCF. If we do not make the required mind shift, we could end up with something akin to a game of hide and seek, or a game of chess where the pawns are sacrificed for the good of the bigger pieces.
There is no longer room for “Heads I win, Tails you lose.”