Treating Customers Fairly

Guidance Notes

Purpose

Members of the Chartered Insurance Institute (CII) will have identified with the Financial Services Authority (FSA)’s focus on the importance of the fair treatment of customers and recognise elements which are also reflected in the requirements of the CII Code of Ethics and Conduct.

Background to the FSA’s requirements

The FSA have identified that detailed rules would not be the suitable way for them to deal with the issue of ‘fairness’, and will therefore be relying on a Principles based approach.

The key Principle in this regard is No 6: ‘A firm must pay due regard to the interests of its customers and treat them fairly.’

Other FSA Principles also impact on a firm’s dealings with its customers.

Principle 1: A firm must conduct its business with integrity.

Principle 7: A firm must pay due regard to the information needs of its clients, and communicate information to them in a way that is clear, fair and not misleading.

Principle 8: A firm must manage conflicts of interests fairly, both between itself and its customers and between a customer and another client.

Principle 9: A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgement.

The FSA 2004/5 Business Plan also emphasised that the Principle must be adopted and supported by the leadership of regulated firms and embedded throughout a firm’s operations and within its culture.

The FSA have emphasised that Treating Customers Fairly (TCF) should serve both customers and other stakeholders’ interests.

In a consultation paper dated July 2004, it is stressed that as part of their approach to the subject the FSA will place significant reliance upon the responsibility of the senior management of the firm and will be looking to see that TCF is effectively embedded into the firm’s values, culture, and the way in which it conducts business. They will expect to find that the principle of TCF has been considered and delivered at every level in the firm and that performance is regularly reviewed against the TCF obligation.

For Society of Mortgage Professionals (SMP)/CII members who by definition have agreed to operate in accordance with the Code of Ethics and Conduct there will be many areas of commonality between the requirements, and it is fundamental that whilst the FSA requirements apply only to authorised firms and approved persons the CII Code applies to all members whatever their business.

Key factors for firms

The basis for the FSA’s focus on TCF is principle-based with as yet little reference to specific rules. Principles relating to integrity, communications – clear, fair and not misleading, the management of conflicts of interest, and suitability of advice, need to be addressed. It is also important that other factors such as:

• poor customer understanding of financial products
• literacy levels
• numeric understanding
• the complexity of a product
• the quality and amount of documentation
• customer focus and priorities are all taken into consideration.

The FSA have commented that:

1. Product development frequently does not take into account risks to target customer
2. Incentivisation of sellers favours volume over suitability or quality
3. Impact of TCF over entire product cycle
4. Charging is not often transparent/clear
5. Firms to place great reliance on customer loyalty to firm/advisor.

For any regulated business the prime responsibility for the delivery of TCF in all aspects of the business must lie with senior management.

To assist and guide members the CII has produced a series of ‘Fact sheets’:

1. Relevance for senior management
2. Management information SYSC
3. Product design
4. Relevance for HR – including remuneration
5. Advertising
6. Sales process
7. Customer service
8. Complaint handling

The CII have also reviewed all Learning and Assess material to ensure that the required standards are properly reflected.