Treating Customers Fairly

I note with interest that South Africa is starting down the ‘Treating Customers Fairly’ path that Planners in the UK have been travelling down for a few years now.

Clearly, the differences in culture and structure do mean that a uniquely South African approach to this issue will be required, rather than simply a ‘rebadged’ UK one; however, it is worth considering the lessons learned in the UK, and to learn from strategies and tactics used by successful firms, not only to meet regulatory requirements, but also to build better and more profitable relationships with their clients.

Firstly, I want to address the whole concept of ‘Treating Customers Fairly’. Many of us had issues with the phrase. Breaking it down, we get the following:

· Treating: something done to someone

· Customers: We have clients, product providers have customers.

· Fairly: Of course we treat them fairly, otherwise they would leave us!

So, the first phase of this development involved a sense of denial, and the feeling amongst advisors that this process was much more concerned with product manufacturers rather than advisors and planners.

The problem with this mindset is the inconvenient truth that a significant amount of advice given is what we can label: “Compliant but C**p”.

In other words, the advice given meets minimum compliance standards, so cannot be attacked by the Ombud Service, or in a court of law, but falls short of the ethical standard we would expect. A good test is always to ask, “If this advice had been given to a member of my family, would I be happy to endorse it?”

If we accept that there is, indeed, room for improvement in the outcomes that some consumers experience, then that leaves the FSB with two possible courses of action:

1. They can either introduce ever more detailed rules to try to control the advice given, or

2. They can introduce an ‘Outcomes’ approach, of which TCF is a part, and work with the industry and profession to improve the advice that consumers receive.

Let us be absolutely clear. Addressing some of the issues involved in the manufacturing part of the process is important. Unfair contract terms, ‘Confusion’ marketing, barriers to claims and lack of clarity around charges are important issues, and the TCF process is one way to address these in a fairly profound way.

But, most consumers access products via some form of advisory process, and so the regulator will have to look hard at this part of the process as well.

So where does that take us? In practical terms, how do professional advisory and financial planning firms approach this initiative to ensure they and their clients benefit from the thinking behind it?

In short, where is all this going?

The 6 TCF outcomes are:

Outcome 1: Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture.

Outcome 2: Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly.

Outcome 3: Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale.

Outcome 4: Where consumers receive advice, the advice is suitable and takes account of their circumstances.

Outcome 5: Consumers are provided with products that perform as firms have led them to expect, and the associated service is of an acceptable standard and as they have been led to expect.

Outcome 6: Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint

For most advisory firms, it will be outcomes 3 and 4 that will require the greatest attention.

Much of this is about service, and many firms have tried to construct service propositions that ‘Treat Clients Fairly’ by treating them all the same.

Whilst laudable, the flaw here is the one set out by Kenneth Blanchard in his book The One Minute Manager Meets the Monkey: “There is nothing so unequal as the equal treatment of unequals”.

So treating everyone the same does not work … and neither is it commercial. Clients have different needs, and can afford to pay for different services.

What can we do? The key word is ‘Suitable’. That leads us to the answer is that we must focus on treating clients in accordance with their expectations; and that imposes a responsibility in that it implies that we have some means of judging what their expectations actually are.

In real life, that involves us in helping consumers understand what their legitimate expectations can and should be. In short, do we have a clear Client proposition? Do our clients understand what we can and cannot do, and what we are likely to do for them and with their Investments?

For financial planners, one of the clearest ways we can express the value we add to our clients’ lives is to focus on our role of Fiduciary Duty.

We need clients and consumers to understand that part of our role is to work on behalf of our Clients to help protect them against Toxic products. We must help them to understand that, if it looks too good to be true, it is too good to be true!

That does lead us on to one of the main areas of concern for financial advisors and planners. That is the area of Conflicts of Interest. In particular, the TCF initiative has led many firms to look at their remuneration strategy. In short, if we have a duty to offer ongoing service to clients, then a remuneration strategy that rewards ‘new sales’, and does not fairly reward ongoing service is always going to create a problem.

It is clear that the outcome of much of the above is a continued move of financial services business models towards relationships rather than product sales, and that is good for consumers, as long as there is not a matching withdrawal of advice from the poorer sections of society.

Disclosure is part of the regulator’s concern. It will always be the case that there is an asymmetry of knowledge between us and our clients. That is partially what they pay us for. After all, as the cliché says, “They don’t care what we know, as long as they know that we care”. A proper policy of disclosure of relevant facts and information remains crucial. The standard here is ‘informed choice’. Does the client have sufficient information and understanding to make an informed decision about a recommended course of action?

For some firms, this entails a review of how the consumer accesses information and advice. This means that information needs to be written to be as clearly as possible, in simple language. Taking a practical approach, as we are often dealing with older clients, should we be looking at larger font on websites and in documents?

There will always be a potential conflict between looking after a client and making a profit – all businesses have this conflict. But do we have a process in place to properly manage this fairly?

That means we need to have measurements in place to manage and monitor the process. After all, what gets measured gets managed. The jargon in the UK is ‘embedding’ TCF within the firm. In real life, that means setting out measurements by which we will be accountable – client retention, for example – and then measuring our performance against that standard. For some firms, moving away from only measuring ‘sales’ type measures, to trying to find client focussed measures has proved to be a challenge.

The word here is ‘Evidence’. In the UK, we are at a point where many FSA fines on firms are because of TCF failings, rather than individual rule breaches. So it is vital that firms set out their TCF policy, and collect evidence that they are implementing and monitoring that policy.

This has been a very quick overview, but I do want to leave you with a final observation. For many firms, the implementation of TCF has proved to be a commercial advantage. It has helped them to challenge and define their Client Proposition, which in turn has made them more visible to their target clients, driving up profits along the way. Other firms have found that a refocus on client retention and the remuneration strategies required, has, in fact, driven up client retention. As ever, the earliest adopters have gained the most advantage.

So, in TCF, we have that unusual animal. A regulatory initiative which goes to the heart of improving consumer outcomes, whilst at the same time having the potential within it to improve the sustainability and profitability of the advice and planning profession.

That is a prize worth planning for.