What do TCF and Doctor Who have in common? And who, in this case, are the Daleks? Terry Russell of Intouch Consulting discusses the FSA’s Treating Customers Fairly campaign
For over four years, from July 2004 to the end of 2008, the Financial Services Authority pursued an initiative called Treating Customers Fairly, or TCF as it became known to the whole of the retail financial services sector. A massive effort went into educating, cajoling, coaxing and threatening the industry to encourage fairer treatment of customers. And yet progress, from the FSA’s perspective, was disappointing. I say that because what the FSA had made clear from the outset was that it wanted to see a cultural shift within firms, and the truth is that it didn’t see that, or at least not very often.
So given that lack of progress, it was perhaps somewhat surprising when towards the end of 2008 the FSA suddenly announced that it was jettisoning the separate TCF initiative. And that in future it would treat TCF as part of “business as usual” (BAU) during its ARROW visits. A planned formal review of progress post the December 2008 deadline by which firms were to have successfully implemented TCF was abandoned.
To many people TCF seemed ‘dead’ (and a number drew a heartfelt sigh of relief).
However, in practice, the shift in FSA policy was less pronounced than first appears. It had always been the intention that TCF would become part of BAU; the decision in November 2008 was just an acceleration of that policy. And if one looks at the circumstances at the time, it made perfect sense. After all, they were pretty extreme. The FSA was working flat out to hold the banking and building society sectors together in the immediate aftermath of the infamous ‘credit crunch’. Firms were literally going to the wall and needing to be rescued, and others were in intensive care. Not surprisingly TCF didn’t seem to be at the top of the FSA’s list of priorities, despite the fact that the December deadline was fast approaching.
Moreover, the recent events had demonstrated that it is wrong to consider TCF in isolation. It is clear that other principles are just as important. So it was sensible for the FSA to decide to adopt a more holistic approach. Moreover, the FSA would have been foolish not to reconsider, at a time when its resources were massively stretched, whether it should embark on a major review of that one regulatory issue.
TCF is dead – long live conduct risk
There is no question that the priorities had changed but in my view it was only a question of a change in priorities at the time, and of a change of approach by the FSA. TCF is not ‘dead’. How could it be? Are we seriously to suggest that the FSA isn’t bothered anymore whether financial services customers are treated fairly? The idea is laughable; the fair treatment of customers (Principle 6) is one of the FSA’s 11 key principles.
And therein lies an important point; TCF is only one of the principles, so to isolate it and give it special treatment was to risk distorting the FSA’s overall agenda. Moreover, the FSA appears to see TCF less as a stand-alone issue, i.e. Principle 6, and instead recognises that TCF can manifest itself in breaches of several other principles, as this extract from a speech by Nausicaa Delfas, head of department in retail policy and conduct risk division, FSA (26 March 2009) illustrates:
“Fair treatment of customers is firmly rooted in our Principles – not just Principle 6 ('a firm must pay due regard to the interests of its customers and treat them fairly') but is also related to Principle 2 (on conducting business with due skill, care and diligence); Principle 3 (taking reasonable care to organise and control affairs responsibly and effectively with adequate risk management systems); Principle 7 (on client information needs); and Principle 9 (on suitability of its advice and discretionary decisions for customers).”
So where is this all taking us? My conclusion, shaped by other FSA speeches and conversations over the last year or so, is that FSA still perceives TCF to be important but that it will be de-emphasised as a separate strand. Those three initials will be used less and less and will come to be replaced by the expression “fair treatment of customers”, which will occur in reports as the FSA feeds back to firms its findings from ARROW visits; visits that examine conduct risk as a whole, not just the TCF elements.
And if there are any doubts as to whether the FSA remains focused on conduct risk (having perhaps been distracted by the prudential issues in banking), I think they can be quickly dispelled. The first thing to note is that there now exists within the FSA an entire division dedicated to identifying and mitigating conduct risk. The second is the sheer number of recent Final Notices (notification of enforcement activity) connected with conduct issues. I also know from the work that my firm does within the sector that a number of firms are finding ARROW visits have an increasingly uncomfortable focus on conduct risk, including risks associated with the fair treatment of customers. The so-called ‘intensive supervision’ the FSA has been promising is increasingly a reality.
There are two other important themes that I wish to draw from the FSA’s recent pronouncements.
Physician, heal thyself
The first is a point that has been made, to be fair mostly in passing, in several speeches and papers but which seems to have been missed by many firms. It is captured by the following comment made in a speech by Sarah Wilson, director, Treating Customers Fairly, FSA, in February 2009.
“Firms are expected – and by that I mean senior management, including the board – to be able to demonstrate to themselves and to us that they deliver fair outcomes to their customers.”
The point is actually two-fold. Firms should “demonstrate to themselves”, i.e. they should carry out some form of self-assessment, and “senior management, including the board” should consider the outcomes. The first point was reinforced by Ms Delfas in her speech when she referred to the fact that:
“We have also published tools and materials to help firms to self audit their performance on TCF...”
And the second has been reinforced by both Sir David Walker and the FSA proposing a board level risk committee and a chief risk officer reporting to the board.
Assessing your culture
The second important theme was a continuous thread running throughout the original TCF initiative, and that is the role of a firm’s culture in delivering fair outcomes for customers. So strongly did the FSA feel on this point, that it developed a tool, the Culture Framework, in order to be able to assess the risks that a firm’s culture poses towards TCF. The framework enables supervisors to explore the factors that influence behaviour within a firm and to identify which, if any, presents a risk of creating detrimental behaviour.
The full framework examines six behavioural drivers, made up of 27 sub-drivers. For example, one of the sub-drivers is Reward and it has become abundantly clear recently how reward (in the form of poorly designed bank bonus structures) can lead to detrimental behaviour. Incidentally, one of the FSA’s main behavioural drivers is Leadership and in keeping with the comments noted above, the FSA views leadership as an overarching driver. If you’ve got that wrong, you’re in trouble
The way the framework is used is for the supervisors, via desk research and interviews, to explore what is happening within a firm, right down to the grass roots. They will interview people at all levels within a company and in a range of departments; they will not confine their attention to senior figures or the compliance department.
Once again, let me link that back to that earlier point; the FSA expects firms to “demonstrate to themselves”. So my reading of that is that the FSA expects firms to do something to assess their own culture and to understand where their behavioural drivers pose risks to desired outcomes. Certainly, if you don’t do it, you run the risk of only finding out that issues exist when the FSA tells you what it has found following a visit. That hardly seems ideal.
But since the change in approach to TCF that took place in November 2008, is the FSA interested in culture anymore?
To answer that I would direct you to recent comments made by Hector Sants, CEO, FSA in a speech delivered on 9 November 2009.
“It would be a mistake not to recognise that some of the failures which have occurred have their roots in issues of culture and behaviour.
... real reform requires both change to the regulatory rules and change to the industry's culture.
... The problem is not so much about defining the ethical framework but rather the issue of identifying and encouraging the right cultures which ensure their application.
The FSA believes that such issues are potentially so important to improving governance that we, as the regulator, should try to take them into account.
We recognise that there is no single ideal culture across the financial services industry, and that all cultures are likely to have good and bad aspects.
Our aim would, therefore, be to seek to facilitate the creation of good cultures and intervene when bad ones seem to be creating unacceptable outcomes.”
Incidentally, if you haven’t read Sants’s 9 November speech, I urge you to do so. It covered a number of important themes connected with “intensive supervision” and the FSA’s focus on “outcomes”. It also highlighted the growing use of the FSA’s “credible deterrence strategy", i.e. enforcement, and in that context Sants said the following.
“Our enforcement regime can also be used where we find cultures that are driving inappropriate behaviours. As I mentioned earlier, our credible deterrence strategy is an important part of securing the outcomes we desire.
... I have made clear that when the firms do not adjust their behaviours they can expect tough action from the FSA...
And yes, that does mean people go to jail.”
So the answer would seem to be ‘yes’, the FSA is very interested in culture.
What then should firms do in response?
Start with the end in mind
I guess my view will be clear from what I have written above. I think firms should be using the Culture Framework, or something like it, to assess the behavioural drivers in their business and to judge whether they are likely to pose a regulatory risk. And I think they should be doing that before the FSA comes knocking on their door; it may then be too late.
As a starting place, I think firms should be clear about the other outcomes they want. The six consumer outcomes specified by the FSA seem a good starting point. Having clear outcomes - for example, being clear about what a firm wants its customer experience to be – can lead to a decision about what behaviours are necessary to create those outcomes, and knowing what behaviours are needed can shape the drivers a firm needs to put in place.
The diagram helps make this clearer and also illustrates the use of ‘feedback loops’ to shape the drivers, to change behaviour and thus to improve outcomes. Finally, being clear about this process helps firms to decide what evidence they need at each stage, i.e. both traditional, quantitative management information but also qualitative data.
I make no bones about it; many firms will need help from external consultants in order to be able to do this. For example, the questioning techniques required to assess the drivers within a firm are not rocket science but unless or until somebody has learned them, they are not obvious either.
Intouch is one of a number of firms that will provide an external audit service (in the case of mortgage lenders we are endorsed by the CML), i.e. we will carry out an assessment for firms, probably focused on one aspect of their business. Obviously that brings an objective, expert view but one downside of an external audit is that it provides limited learning to the business apart from the results it throws up. Our preferred approach is to work with an internal team to carry out an audit so they are able to replicate the approach in other parts of the business and to repeat the exercise in the future. This seems to us a much more sustainable solution.
Hidden benefits?
But is there anything in all of this for firms other than to keep the FSA off their backs? Is there any payback for all the hard work and soul-searching that a culture audit implies?
Well I think there is. Most obviously it will help firms consistently treat their customers fairly; and surely treating customers well is important to a firm’s long term success? But it also goes beyond that to provide a firm with the potential to improve almost any aspect of its business.
If a business can define its desired outcomes and the behaviours it needs in order to deliver them, it can shape the behavioural drivers it needs to have in place. And that process can be applied to any desired outcomes, not just those intended to satisfy regulation. In other words, the firm will have developed the capability to be successful in delivering any of its key aims, whether that’s growing sales, improving customer service, increasing employee engagement, or cutting costs. Embraced positively the Culture Framework could be a stepping stone towards greater commercial success.
So how is TCF like Doctor Who?
Well instead of dying, like Doctor Who it has undergone a transmutation into a different form - but we know the same old Doctor is in there somewhere. And who are the Daleks? Who fills the role of cold, heartless visitors with evil intent? I shall leave it to you to decide!
Terry Russell is director at Intouch Consulting Ltd, email terry.russell@intouchconsulting.co.uk
Date: 5th, March, 2010
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