Rosanna Bryant considers the customer fairness obligations of financial services organisations
"Fairness" is firmly on the agenda of the Financial Services Authority (FSA) and the Office of Fair Trading (OFT). The FSA has explicitly made it clear within its Financial Risk Outlook for 2008 that despite the more difficult economic and financial conditions, firms must not divert attention away from the high level principles and in particular Treating Customers Fairly (TCF) and the December TCF deadline is looming. In addition, the Consumer Protection from Unfair Trading Regulations 2008 (CRPs) have been brought into force in
Within the context of the FSA's treating customers fairly initative and various strands of new regulation looking to define what is and what is not fair in customer dealings, what do the different regulatory approaches mean for lenders and can a common denominator of "fairness" or "unfairness" be established?
What is TCF?
As embodied in Principle 6 of the FSA's Principles of Business, TCF is the requirement for firms to "pay due regard to the interests of its customers and treat them fairly". TCF is an overarching principle which applies to all FSA authorised firms. It is the epitome of principles-based regulation, focusing on the outcomes of regulation and not the wording of regulation itself. It does not have specific rules and regulations sitting behind it and defining what it is. Clearly many of the rules and guidance underpinning the FSA Handbook carry a fairness theme. However, the TCF principle provides an overarching fairness requirement. It provides the FSA with a form of redress where no specific FSA Handbook rule breach can be established.
Firms should now be at an advanced stage of embedding TCF so that by the end of December 2008 they are able to demonstrate to themselves, and to the FSA, that they are consistently treating their customers fairly.
TCF does not apply purely to retail customers. Its potential application is wider than this. However, in accordance with the FSA's risk-based approach to regulation, as the retail market poses the greatest regulatory risk, it is this area which has received the greatest amount of regulatory comment and attention from the FSA to date.
If firms are looking for a test or definition of "fairness" to be provided by the FSA within the Financial Services and Markets Act 2000 or the FSA Handbook it is lacking. TCF and "fairness" are intentionally not defined by the FSA. Instead, the FSA requires "fairness" to be established by looking at the six TCF outcomes (Outcomes). It is for each individual firm to assess which of the Outcomes carry what weight and importance for the nature of the firm's business to ensure that Principle 6 is being met. It is, to an extent, left to the firm itself to define what "fairness" means for its business and its customers within the context of these Outcomes.
The six Outcomes
The Outcomes look at fairness in the treatment of customers throughout the customer journey and from within the firm impacting on every aspect of a firm's business.
· 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 both 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.
Central to the Outcomes is the fairness culture of the firm (Outcome 1). This is the requirement that the senior management of a firm are able to demonstrate that they have instilled a culture within the firm whereby the fair treatment of customers is integral to the operation of the business; where they expect staff to achieve the fair treatment of customers at all times, looking at "fairness" from within the firm itself.
In setting the parameters of TCF the FSA has highlighted good and bad TCF behaviours in its feedback to firms. These examples provide an insight into what is and what is not "fair" behaviour by firms:
Good and bad behaviours
Good practice:
· Strong TCF leadership - senior management accountability for TCF where senior management undertake a regular and thorough internal TCF audit to assess the delivery of the Outcomes.
· Reward as a TCF incentive – firms looking at the remuneration of sales staff to drive TCF initiatives.
· Customer satisfaction surveys - surveys undertaken by firms to measure customer satisfaction aiming to understand the customer's experience, that the customer understands a product's benefit and risks, the sales process and whether they feel they have been treated fairly or unfairly. The FSA is clear however that although customer satisfaction may be indicative of fairness it does not necessarily demonstrate fair treatment.
· Firms undertaking their own mystery shopping exercises for particular customer enquiries.
Poor practice:
· Delegating TCF responsibilities to a third party without monitoring the outcomes – there are very strong messages coming out of the FSA in terms of the ongoing TCF commitments of firms where third party service providers are used by the firm.
· Inappropriate decision in complaint handling – the FSA sees complaint handling as a good indicator of a firm's inclination to be fair and objective in its dealings with customers.
· Confusing the customer – provision of information to the customer but without thought and attention being given to the customer understanding of the information.
Unfair Terms in Consumer Contract Regulations 1999 (Unfair Terms Regs)
The Unfair Terms Regulations still take a central role in the definition of what "fairness" means for consumers. They relate to the terms of contracts between businesses and consumers which have been contracted on the business' standard terms. Unlike the TCF approach, the CRPs and the unfair relationships test (discussed below), the Unfair Terms Regs do provide a definition of an "unfair term". An unfair term is a term which, contrary to the requirement of good faith, causes a significant imbalance in the parties' rights and obligations under the contract to the detriment of the consumer. The FSA and OFT have published various guidance for firms in relation to the interpretation of the Regulations.
The FSA has recently published a paper: Fairness of terms in consumer contracts: a visible factor in firms treating their customers fairly. Within this they see the fairness of consumer terms as being a key and visible factor in treating customers fairly.
The paper encourages firms to have the systems and controls in place to ensure they have fair terms in their standard consumer contracts by undertaking regular reviews of their contract terms and ensuring the firm is up to speed with developments in relation to unfair contract terms.
CRPs
On 26 May 2008 a new piece of legislation was implemented in
In stark contrast to the TCF initiative, the bad news is that the CRPs are very detailed (primarily due to their European heritage). They represent the biggest change to consumer protection law for 40 years and follow 20 years campaigning by support groups.
The CRPs apply to commercial practices before, during and after a contract is made. They introduce a general prohibition on unfair commercial practices. Again, anyone looking for a definition of "fair" or "unfair" will not find one within the CRPs. Similar to the FSA approach to TCF, "fairness" itself is not defined. However, that is where the similarity in the regulatory approach between the principles-based approach of TCF and the intricate provisions of the CRPs ends.
Instead the approach of the CRPs is to provide very detailed rules which place a duty on companies not to trade unfairly and to avoid misleading statements or omissions. There are prohibitions on misleading and aggressive practices (such as undue influence and harassment) and 31 "blacklisted" practices which are considered unfair in all circumstances. These "blacklisted" practices include:
· advertising products knowing that there is insufficient stock to meet demand
· falsely stating that a product will only be available for a very limited time in order to elicit an immediate decision
· presenting rights given to consumers in law as a distinctive feature of a product
· falsely claiming that customers could get a better deal if they signed up immediately.
The CRPs look to define what is not fair through these concepts of misleading and aggressive practices.
If the bad news is their detail, the good news is that to the extent firms are complying with Principle 6 and the rules of the FSA Handbook the real effect of the CRPs is likely to be relatively minimal. As the OFT provides in its interim guidance on the CRPs: "If consumers are treated fairly, then traders are likely to be complying with the CRPs. This means that fair-dealing businesses should not have to make major changes to their practices."
Unfair Relationships
New provisions were introduced into the Consumer Credit Act 1974 under the Consumer Credit Act 2006 (CCA 2006) which allow borrowers to challenge "unfair" credit agreements in court and obtain redress. The new provisions provide a right of challenge if the overall relationship between the lender and the borrower is "unfair" to the borrower. The provisions do not apply to regulated mortgage contracts, but they do have a retrospective effect so that they have applied to pre mortgage regulation mortgages (i.e. mortgages pre dating 31 October 2004) since April 2008. They also apply to mortgages which are not regulated by the FSA, such as buy-to-let mortgages and second charge mortgages.
This unfair relationships test replaces the extortionate credit bargains test which was in place previously. The previous extortionate credit bargains test was not widely used as a form of redress for consumers and where it was there was inconsistency in its application. This was principally because the test which needed to be satisfied by consumers to prove the agreement as "extortionate" was very high.
The replacement test is intended to be much wider in its application allowing a court to consider all the relevant circumstances of a credit relationship (including matters relating to the creditor and the debtor) to determine its fairness including:
· any of the terms of the credit agreement;
· the way in which the creditor has exercised or enforced its rights under the credit agreement;
· any other thing done (or not done) by the creditor either before or after the making of the credit agreement.
In deciding whether to make a determination the court can also consider "all matters it thinks relevant".
Again, there is no definition of "fairness" given which leaves considerable uncertainty as to the impact of the test leaving the court itself to consider all aspects of the customer relationship with the business. If a customer alleges that his relationship with a lender is unfair, it is for the lender to prove the contrary. It is early days for the unfair relationships test but the wide scope of the test attracts the allegation that it lacks clarity. It will be the county courts which will hear and determine these cases, which is likely to lead to conflicting judgments further enhancing the uncertain application of the test.
If we are looking for a definition of "fair" or "unfair", the only regulatory definition of "unfair" remains the definition contained within the Unfair Terms Regs. The TCF initiative of the FSA looks at "fairness" in terms of the consumer Outcomes, looking for firms to embed fairness within their culture. The CRPs look to specify what is not fair with very detailed rules over the type of conduct which may be considered unfair and the potentially far reaching unfair relationships test introduced by the CCA 2006 looks at all relevant circumstances of a credit relationship to establish whether it is "unfair".
In itself the lack of a definition of "fairness" should not be a cause of concern for firms. Indeed the principles, outcome based approach of the FSA to TCF is seen as a beneficial move away from a strict legalistic approach to regulation. Where concern arises is where, as a result of the different themes of regulation, the different regulatory approaches and wide discretion being given to the courts and Financial Ombudsman Service to define fairness themes, there is a lack of clarity for firms in the relationships they are entering into with consumers and what they need to do to satisfy "fairness".
Rosanna Bryant is a managing associate in the financial services group at Addleshaw Goddard
Date: 4th, September, 2008
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