The FSA has published a speech by Sarah Wilson (Director, Treating Customers Fairly, FSA) entitled Treating customers fairly - issues at board level.  

At the beginning of her speech Ms Wilson mentions that the treating customers fairly (TCF) initiative has moved into the FSA’s supervisory work. This means that it is now a key aspect of ARROW reviews. It is also key to the FSA’s small firms supervisory strategy and it will continue to be reflected in the FSA’s thematic work and enforcement action.  

Ms Wilson reminds firms that their senior management must be able to demonstrate to themselves and the FSA that they are delivering fair outcomes to customers. Ms Wilson’s speech then covers:  

  • Culture. Ms Wilson states that above all else, the Board affects a firm’s ability to deliver the fair treatment of customers through the culture that it supports or allows to persist throughout a firm. She then reminds firms that the FSA explained what it meant by culture in 2007 when it published a culture tool. She also states that there is a strong overlap between the factors that create a firm's culture and the responsibilities of a Board. Where there is strong leadership with a clear vision of what TCF means for a firm, it is more likely to have a culture which is geared to deliver fair outcomes to consumers.
  • Business strategy and its governance. Here Ms Wilson states that a firm’s business strategy needs to be compatible with the fair treatment of customers and to encourage it. She also mentions two further points:
  • A growing number of firms feel that TCF is positively good for them commercially and that even if consumers cannot identify what is unfair when it happens to them, the firm can nevertheless retain and grow their customer base through fair treatment.
  • Over time the FSA expects its financial capability work to increase the extent to which customers understand what is happening to them, and therefore to increase the degree of customer-based challenge directed at firms that treat them unfairly.  

She then discusses some of the factors that might cause a firm to revisit its TCF strategy and these include market conditions and the Retail Distribution Review.  

In relation to governance Ms Wilson focuses on Boards with with-profits funds and their need to take advice from a with-profits committee or similar arrangement. She makes it clear that it is the Board’s responsibility to ensure that with-profits policyholders are treated fairly. However, she also states that given the conflicts that can arise between shareholders and policyholders and between generations of policyholders there must be some independent judgement in assessing the appropriateness of the management of the with-profits fund and compliance with the Principles and Practices of Financial Management (PPFM). Ms Wilson states that the FSA accepts that independent judgment can be provided in different ways. The FSA also agrees that the Board can take a different view to any independent input it receives. Whatever the arrangements, with-profits governance is an important input into the running of a firm and to TCF. This will be a key area of focus in ARROW reviews.

  • Risk management and oversight. Here Ms Wilson states that in the context of the TCF initiative, the FSA has focused on the creation and use of appropriate management information (MI). The FSA sees the receipt and challenge of that MI as key to senior management oversight of the treatment of customers. The FSA expects the Board to be challenging executives. However, MI that measures fairness (as against TCF outcomes) is not the whole story. The Board also needs to take an interest in whether it is driving action and (to an appropriate extent) what that action is. Any firm that continues to have a material outstanding issue in any area where the FSA has previously highlighted poor practice is particularly likely to be deemed to be at significant risk of not treating its customers fairly overall, and the FSA will take appropriate regulatory action as a result.
  • Reward and incentives. Here Ms Wilson looked at two points:
  • Senior management reward. Ms Wilson mentions the Dear CEO letter that the FSA published in 2008 on the impact that reward has on individual’s behaviour. Whilst that letter was of particular relevance to banks, the general principles are more broadly applicable.
  • Remuneration post Retail Distribution Review. Ms Wilson mentions that in June the FSA will consult on rules that require adviser firms to set their own charges and will bring to an end the current practice in the UK of product providers offering adviser firms amounts of commission for selling their products. This change is important because the FSA believes that the way firms are managed when the commission model is applied is the root cause of many quality of advice problems.  

View FSA speech - Treating customers fairly - issues at board level, 5 February