As part of our series of posts on Consumer Protection, this post looks at the ‘Treating Customers Fairly’ (TCF) initiative which is being implemented in South Africa to ensure stronger market conduct regulation.
Issues concerning the fair treatment of customers arise out of the problem of asymmetric information between the financial services providers and the consumers. The ‘Treating Customers Fairly’ programme is a regulatory initiative (first implemented by the FSA in the UK) aimed at helping customers fully understand the features, benefits, risks and costs of the financial products they buy and minimising the sale of unsuitable products by encouraging best practice before, during and after a sale.
South Africa sees the ‘Treating Customers Fairly’ initiative as a framework to ensure tougher market conduct oversight and is on route to implementing it, based on the UK version, for the financial services industry. This will apply to all financial services that fall under the regulatory ambit of the Financial Services Board (FSB), which will soon be the market conduct regulator for both banking and non-banking services in line with the proposed twin peaks regulatory model.
TCF is a regulatory approach that seeks to ensure that specific, clearly articulated fairness outcomes for financial services customers are demonstrably delivered by regulated financial institutions. The TCF fairness outcomes, positioned from the perspective of the customer, are the following:
Outcome 1: Customers are confident that they are dealing with firms where the fair treatment of customers is central to the firm culture.
Outcome 2: Products and services marketed and sold in the retail market are designed to meet the needs of identified customer groups and are targeted accordingly.
Outcome 3: Customers are given clear information and are kept appropriately informed before, during and after the time of contracting.
Outcome 4: Where customers receive advice, the advice is suitable and takes account of their circumstances.
Outcome 5: Customers are provided with products that perform as firms have led them to expect, and the associated service is both of an acceptable standard and what they have been led to expect.
Outcome 6: Customers do not face unreasonable post-sale barriers to change product, switch provider, submit a claim or make a complaint.
These outcomes are to be demonstrably delivered at every organisational level and at every stage of the product life cycle, from product design and promotion, through advice and servicing, to complaints and claims handling. The primary responsibility of firms in implementing TCF will be to demonstrate that the first outcome (fair treatment of customers is central to the firm’s culture) is achieved. The other outcomes are seen as a consequence to achieving the first outcome. The following points are recommended in order to help firms foster a good TCF culture framework:
– Right Leadership
– Right Strategies
– Right Decision Making
– Right Controls
– Right Recruitment, Training & Competence
– Right Rewards and Recognition
Firms will be required to provide evidence that they are treating customers fairly and have embedded TCF in their organisational culture. This will require Management Information (MI) mechanisms designed to monitor and measure the firm’s performance in delivering the six outcomes and the elements of the TCF culture mentioned above. This may require both quantitative as well as qualitative management information. Firms will also be required to use their MI mechanisms to assess their own success and failures in delivering the outcomes. A self-audit checklist is also available which could form part of the firms TCF MI. This checklist helps to identify gaps in the following areas:
• Staff training/awareness of TCF
• Sales and marketing material
• Product understanding
• Advice and sales process
• Fact find and flow of information to the client (including after-sales)
• Complaint handling
• Risk assessment of TCF non-compliance
• Record keeping and Management Information
With regard to reporting, The FSB suggests that it would like to have both non-public reporting (e.g. regulatory returns, compliance reports) and public reporting (e.g. claims statistics, complaints volumes and investment performance against benchmarks).In terms of enforcement, The FSB would first negotiate any corrective action by engaging with the firm’s senior management. Where this fails or where the FSB considers that there is a serious risk to consumers or unacceptable conduct on behalf of the firm, it would take formal action against the firm. The FSB’s current enforcement powers include:
• Administrative fines and penalties
• Declaration of business practices to be undesirable, with associated powers to order cessation or amendment of the practices concerned
• Suspension or withdrawal of regulatory licenses
• Termination or withdrawal of the approval of certain individuals to act in certain capacities
• Damages and compensation awards (including punitive damages)
• Referral of certain matters to the High Court
• Referral to the National Prosecuting Authority for criminal prosecution of individual wrongdoers, where a statutory or common law criminal offence is committed
South Africa’s TCF policy is expected to be fully implemented by 2014 and it is hoped that the initiative will lead to more optimal outcomes from the perspective of the regulators, consumers and ultimately, firms.