A FAIR BIT OF CONFUSION: TREATING CUSTOMERS FAIRLY IN SOUTH AFRICA
Last year, the Financial Services Board (FSB) announced that it would be implementing a Treating Customers Fairly (TCF) policy for the financial services industry in South Africa. The TCF policy is based on the UK version and is a consumer protection policy designed to address the problem of asymmetric information in the financial services industry where financials service providers possess certain information that the consumers do not. The TCF policy framework was followed by a pilot self-assessment project completed by 20 financial services companies with over 200 different FSB licenses. The results of this pilot project were recently published and they revealed that most of the financial services companies did not understand the concept of TCF nor did they have any idea of the impact of such a policy. The TCF policy is based on six defined outcomes:
- Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture.
- Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly.
- Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale.
- Where consumers receive advice, the advice is suitable and takes account of their circumstances.
- Consumers 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.
- Consumers do not face unreasonable post-sale barriers to changing product, switching provider, submitting a claim or making a complaint.
These six outcomes are cut-and-pasted from the UK’s Financial Services Authority’s (FSA) own TCF policy. Although the UK’s TCF policy took 12 years to implement, the FSB’s projected timeline for full implementation of our TCF policy is by 2014. Therefore, it is crucial that financial services companies understand what TCF means and seek to align their current business practices with the policy as soon as possible.
The pilot self-assessment project revealed that the financial services companies’ understanding of TCF was that it involved consumer satisfaction and a consumer-centric approach but that they did not appreciate the full scope of TCF. In addition to the six outcomes described above, the UK’s FSA has explained TCF by focusing on two key principles, namely, ensuring that consumers understand the risks and benefits of the financial products they are investing in and that the sale of unsuitable products is minimised by maintaining ongoing TCF best practices.
The other major misconceptions revealed by the pilot self-assessment project was that the financial services companies assumed that their current practices generally conformed to the TCF policy and that implementation would be minimal requiring: (i) the adoption of a TCF policy document and (ii) including TCF as an additional function of compliance. The FSB has responded by stating that a TCF policy cannot be ring-fenced in compliance and must be incorporated throughout the company including the directors (and even the non-executive directors) so that everyone understands what TCF is and can apply it. Furthermore, the FSB has stated that the TCF policy is not limited to the company itself but the company is responsible for ensuring that the entire financial services supply chain, including financial product designers and distributors, apply the TCF best practices.
The TCF policy seeks to regulate financial product design, the marketing of financial products, the information provided to consumers, aspects of financial advice, the after-sale support of consumers and the complaint procedure. In addition, the TCF policy may place limits on the practice of bundling of financial products and on charging high switching fees. A TCF policy would also recommend certain corporate governance policies including the structuring of the incentives for employees so that achieving the TCF outcomes are part of the reward programme. The TCF policy will thus be enforced through self-assessment and compliance reporting by companies, on-site inspections and the imposition of penalties by the FSB and the potential establishment of a TCF ombudsman for consumer complaints.
To formally implement and enforce the TCF policy, the FSB will be required to make a number of regulatory amendments to legislation such as the Financial Advisory and Intermediary Services Act, 2002 (FAIS Act) that regulates the provision of financial services (advice and intermediary services) in South Africa. Although the FAIS Act currently has elements of TCF policy within its regulations, including financial product marketing guidelines and disclosure requirements to consumers, it is anticipated that the TCF requirements will be more extensive. The TCF policy will also be implemented across all of the financial sectors and therefore may require amendments to retirement fund, insurance and collective investment schemes legislation. The pilot self-assessment project indicated that the financial services companies were waiting until such regulations were introduced to perform a gap-analysis on their current business practices but the FSB has recommended that the TCF assessment is conducted at an earlier stage.
The first step for a company to adopt the TCF policy is the implementation of an awareness programme so that all employees are introduced to TCF on a big picture level and also undergo specific TCF training programmes whether in-house or externally. The level of TCF awareness in a company is recorded by the completion of training logs and may be assessed by the FSB at an on-site inspection where the employees are questioned to ascertain their understanding of TCF. The next step would be the production of a broad TCF policy document to ensure that there are formal policy and procedures in place for proper implementation of TCF. These steps can occur before any TCF regulations are introduced.
The TCF policy may have a more onerous impact on the financial services industry in South Africa, given our pool of consumers, than the TCF policy has in the UK. The FSB has referred to certain challenges in implementing a TCF policy in South Africa such as the fact that a number of consumers may be in rural areas and may not have access to adequate after-sale consumer services and support. Although we can refer to the FSA’s TCF approach for guidance, a financial services company in South Africa will have to consider the particular challenges facing South African consumers and design creative solutions in order to resolve these issues to the satisfaction of the FSB. Therefore the earlier that a financial services company understands TCF and seeks to adopt a TCF policy, the easier the transition period and ultimate compliance will be.