Waiting for some real answers

The FSA's Treating Customers Fairly (TCF) initiative has left some financial advisers rather confused finds Peter Davy

In essence, treating customers fairly (TCF) is simple, says the FSA: Firms just have to focus on delivering the TCF outcomes and give evidence that they are doing so. In practice, it seems to be a little more complicated.

The FSA's TCF update, which was published last month, didn't make encouraging reading. It found that just 13 per cent of firms had met the March interim deadline to collect the management information necessary which would enable them to measure the outcomes. And, while some work on improving the situation has been done in the last three months, the update suggested one in five are still likely to miss the current December deadline to demonstrate compliance.

And it's probably worse than that among smaller firms, which are likely to have the most trouble meeting the requirements. The IFA industry, particularly, with its preponderance of one and two-man bands faces a real challenge, and many doubt they will meet the deadline.

A survey in May by financial intermediary software and services specialists 1st and sister company The Exchange, found that just over half of IFAs were confident they could fulfil the TCF requirements.

Following that, Mark Rothery, the former chairman of the FSA's Smaller Businesses Practitioner Panel, has written that TCF, along with the principles-based approach to regulation, is helping to overwhelm SMEs in the industry.

Uncertainty reigns
Much of this is down to uncertainty over exactly what's required. As Clive Pugh, a partner at law firm Burges Salmon, explains, it's hard to say exactly how a firm can be sure it's fulfilling its obligations. "Both the TCF requirements and the evidence that's needed to prove they're being met are poorly defined," he says. "It's hard to say exactly what treating customers fairly actually means." That presents firms with a problem. "After all," says Pugh, "if you have to provide evidence you're meeting the duties, you need to know what they are."

Misunderstandings are therefore widespread. According to the FSA itself, for instance, many firms are concentrating too much on whether customers are satisfied, despite the fact that this is no guarantee that they have been fairly treated.

In fact, this confusion is probably inevitable with a principles-based approach. On the one hand, it's difficult to find anyone who's not in favour of such an approach in theory; it makes sense given the diversity within the financial services industry. On the other hand, clarity invariably suffers, as there are no prescribed rules.

"The approach leaves a lot to the regulated firm when it comes to deciding how to apply the principle to their business," explains Duncan Howorth, managing director at Jardine Lloyd Thompson, whose company spent last year assessing which parts of its business TCF was most applicable to, which types of products it worked with were most likely to be affected by TCF, and where it needed to improve its practice. "It was a serious piece of work," he remarks.

There is also, undoubtedly, an IT issue. According to Chris Baigent-Reed, head of business services at 1st and The Exchange, only a handful of companies are using their technology to the best effect when it comes to providing evidence that they are meeting the requirements. Many fail to take account of the information they already have and instead think they need to collect an entirely new set of data for TCF, creating more work
for themselves. Others expect the software to do it all for them, yet the FSA wants to see not just that the information is being collected, but also that it's being acted on.

"You can't just push a button and expect the software to give you a report that will satisfy them," warns Baigent-Reed. "Someone has to be analysing the information to see what changes need to happen."

A more fundamental problem
All this, however, assumes that firms are in fact generally treating customers fairly. They only struggle with how to prove it. And, indeed, this interpretation finds some support from the FSA. Its report last month stated that many had failed to collect the management information required, but Sarah Wilson, director of TCF, also noted: "This does not mean that they are treating their customers unfairly."

Others go further, and suggest that at least some of the doubts financial advisors have about meeting the requirements are probably unfounded. "Parts of the financial services industry can be very self critical," remarks Mark Roberts, head of financial regulation at financial services trainers the IFS School of Finance. "I think many advisors are probably further forward than they think they are."

But not everyone is so convinced
Andy Cowan at financial planners Towry Law argues that not only are many IFAs not currently meeting the requirements but that they never will. "The TCF requirements aren't just burdensome; they're virtually impossible for many IFAs to implement," he says. Together with the Retail Distribution Review, TCF will see a major structural overhaul in the industry. "TCF isn't another piece of annoying regulation. It's the apocalypse for IFAs," he argues.

The reason is all those small IFAs, many of whom are still – one way or another – highly reliant on commissions. If you take the move we've seen away from initial commissions to recurring trail commissions, for instance, that means a two man IFA business over the years could have built up 2,000 clients producing perhaps £200,000 of trail commission, says Cowan. "That's great for your turnover, but how can you possibly service 2,000 clients?" he asks.

It can't be treating customers fairly to take hundreds in trail commission each year while only seeing the client at the outset, he concludes. Similarly, too many small firms lack the resources to do appropriate due diligence when it comes to issues like fund selection. "They just look in Money Management," he says. "They're doing what you could do in WH Smiths." The FSA's long-term strategy, he argues, is to see significant consolidation in the industry.

Some reckon Cowan is overstating it, but others also recognise the argument. As Pugh notes, it goes to the heart of the financial services industry in the UK. "The underlying structure remains the front-loaded fee," he says. "One has to ask how a TCF culture will become embedded throughout firms while there is little incentive for junior staff to look after customers in the long-term."

However, as Pugh notes, it's a question that many would reckon is best addressed by legislation from central government, and whether the FSA really intends to tackle this itself and prompt a structural overhaul of the industry will only start to become a little clearer sometime after the December deadline for TCF. In the meantime, firms – large and small – have little choice but to do their best to meet it.

- Pensions Age July 2008