Back to the drawing board on TCF

15 June 2011 2:00 pm

There has been so much written on treating customers fairly, in particular the voluminous documentation produced by the FSA over the years, that one can

be forgiven for despairing whenever TCF is mentioned or wondering whether it is still topical at all.

However, with the FSA’s Arrow inspection season looming in September, and with recent fines from the regulator, it is worth revisiting what TCF means as it remains a key supervisory focus for the FSA and for its successor, the Financial Conduct Authority.

When the FSA first introduced TCF, it was criticised as a nebulous concept that was not grounded in what firms have to do, the assertion being that we all treat customers fairly. In response, the FSA published the TCF outcomes.

However, along with its principle-based approach, the FSA would not map out how it expected firms to arrive at the outcomes and so the supervisory focus has been on firms using appropriate TCF management information to be able to demonstrate they are TCF-compliant.

Whenever the FSA is considering TCF, it first looks at the level of customer detriment because this ties into one of the principles of good regulation, namely that a regulator’s focus must be proportionate.

The increased focus on consumer detriment is reflected in the FSA enforcement and financial crime division’s new habit of requiring consumer redress in many of the cases it now deals with, together with the first use of consumer redress powers under section 404 of the Financial Services and Markets Act.

One of the key areas in which firms can demonstrate their commitment to TCF is the way they handle complaints.

Complaint-handling has been of key importance for the FSA over the last two years, highlighted by its thematic work with banking groups in 2009 and 2010, its recent battle with the British Bankers’ Association over the handling of PPI complaints and recent final notices.

Complaint data can be useful but only where complaints are adequately reported and the data is assembled in a meaningful format so it is valuable to those reviewing it.

Examining complaints upheld by the Financial Ombudsman Service, who and where complaints are coming from, about what or about who,
is all useful management information and should help senior management spot trends and identify root causes that can then be fed back into product or service development and sales processes.

As an all-encompassing principle, TCF is undoubtedly something most firms try, and always have tried, to achieve as a matter of good business sense. However, with the FSA’s more interventionist stance and its anticipated micro-management or quasi-approval of retail
products through its product intervention proposals, is the principlebased approach still the cornerstone of FSA policy?

Indeed, one wonders if the FSA’s product intervention proposals could themselves undermine one of the objectives the FSA is required to achieve, namely, confidence in the financial system.

Confidence in the financial system has to start with confidence in the regulator, so what would happen if a mainstream financial product passed the ’FSA test’ but went on to cause unexpected consumer detriment?

Confidence in the regulator would be irreparably damaged and, with it, confidence in the financial system.

Nevertheless, firms are well advised to reconsider their TCF procedures and processes objectively and ask themselves if they are able to extract findings from our processes to ensure there is a perpetual model of development against customer detriment - something the FSA should also be considering for itself.

Suzanne MacDonald is partner and head of financial services regulation and Mark Pritchard is a solicitor specialising in finance services
regulation at TLT

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