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Quality control

Weekly, the FSA bangs on about principle-based regulation. It did the same with risk-based monitoring five years ago.

These mantras each responded to the failure of its predecessor. “Risk-based” stemmed from the failure of the PIA’s “universal visiting” approach. Principles emerged from the inability of risk-based monitoring to raise standards. Before they fail, it seemed a good idea to raise a new regulatory buzzword – quality.

Quality is about doing everything moral to meet stated goals. The FSA has its statutory objectives. Effective managers do not manage by mantra. They set achievable goals and use a variety of techniques to achieve them. Quality is a state of mind. Quality individuals do not talk about how good they are. Everyone makes mistakes. Classy performers admit and correct them. Quality involves constantly learning. It avoids benchmarking. The inadequacies of others provide no comfort.

Quality applies to firms of all financial services players – firms, regulators, ombudsman, even compliance consultants. It involves treating customers fairly without the fatuous name. It is about treating all interested parties properly.

It starts with the FSA. The regulator rightly wants a shorter rulebook. Each rule must be justified by its contribution towards a goal. The best way to achieve this is by open forum discussions with people who know the relevant fields. They can identify the superfluous provisions and recommend necessary replacements.

Rule changes appear to be put together by the FSA, which consults with various trade and consumer bodies. Each has its own lobby. The result is political compromise or a preference for whichever group has most power. Everyone else just reads the consultation.

Bring together people selected by their expertise in the field, regardless of their affiliations. Ask them to prepare changes to rules and approaches with alternatives. The FSA cannot know enough about what it is regulating to do this without front-line help.

Its consultation process needs improving. Documents of 200 pages do not constitute consultations. An expert group would highlight the significant changes and avoid the lengthy repetitions common to many papers.

The other problem with the FSA is its attitude. It cannot criticise firms for mishandling complaints when its Complaints Commissioner was hammering it for the way it was behaving to complainants in 2004.

The FSA responded by downgrading its own comp-laint procedures. It should comply with dispute-resolution rules. It needs to own up to its mistakes. Recent Final Notices contain a plague of grammatical and technical errors. They are never corrected. This does not help the regulator improve its standards.

The Financial Ombudsman Service has similar issues. It appears to be terrified to admit that it may have made a mistake.

Two recent judicial review defeats have never been mentioned in Ombudsman News. It almost never discusses changes of tack from previous published views and its refusal to provide copies of its now suppressed mortgage endowment decision trees is almost funny. If the FOS were less afraid of external scrutiny and welcomed more help from specialists in the relevant fields, it would make fewer mistakes.

Quality applies equally to advisers. Understanding the six ways in which a customer may have an attitude to risk – approach to capital reduction, differing areas of finance, failure to meet objective, total default, range of investment types and attitude to the money actually being invested – is part of this. Increasingly, this needs to be complemented by an understanding of the product.

Quality advisers know what is in it, the wrapper, the leverage involved, who is holding it and the future plans of its managers. They can describe the risks involved, note the customer’s circumstances, feelings and aspirations and explain why these make their recommendation appropriate.

Top advisers understand that what they suggest must be objectively sensible as well as meeting their customers’ aspirations. They throw away clients who want them to do inappropriate things. They do not put transactions through if they are not satisfied that they are suitable. They charge properly for quality work.

As with treating customers fairly, quality involves setting expectations and meeting them. Marketing is balanced. Warnings do not put customers off because suitable clients know the risks involved. Client agreements describe a service which is then delivered. Classy advisers know about the need to seek advice before making mistakes. They know that they cannot be all-seeing. They do not take on work beyond their skill base unless they can introduce it to someone who can do it.

Providers have to describe their offerings clearly and deliver them. That involves efficient administration and compensating IFAs for time wasted when it fails. Claims must be handled with an eye towards delivering what the customer was promised, not what the company wishes it had undertaken.

Quality insurers do not decline claims on the basis of obscure proposal questions or exclusions buried in conditions. When saying no to clients or advisers, the provider has a good reason to do so, not a problem with its computer system.

In handling complaints, firms and regulators of quality stand back and look at what they have done or ask an outsider to do it for them. They learn from mistakes. They trust front-line case handlers to tell them what the problem was and respond to it.

Quality firms do not copy competitors. They ask staff for early warnings. In compliance and business, there are no sacred cows. Everything can and should be challenged – apart from the law. Talented junior staff save companies. No message should be unwelcome.

Here we have it – quality, the new regulatory buzzword. It incorporates large chunks of TCF but goes much further, insisting that whatever interest is involved in the financial services process, the participants do their best to deliver the right answer.


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