CML news & views

There has been no let-up by the Financial Services Authority (FSA) in its pursuit of the treating customers fairly (TCF) agenda. At the end of last month, the regulator reported on progress towards a deadline it had actually set for March this year, by when firms were expected to have in place sufficient management information to be able to demonstrate that they treat their customers fairly. 

To assess how effectively that deadline had been met, the FSA looked at 96 larger firms, including “most large retail groups.” Its progress report, published at the end of June, was based on those assessments. And while the FSA concluded that only 13% of firms had made enough progress to meet the deadline fully, it also acknowledged that many had invested significant time and energy in working to measure TCF. 

The FSA also stressed that while firms may not have made as much progress as hoped for in fulfilling all the TCF requirements, that did not mean that they were treating their customers unfairly.

Despite the relatively small proportion of firms meeting the March deadline in full, the FSA estimated that around 80% of the firms it studied were still capable – “with a substantial, continuing effort” – of meeting the next deadline in the TCF timetable. 

It therefore expected firms to maintain their momentum and undertake a significant amount of work in the coming months. By the end of December, firms are expected to be able to show that they are consistently treating their customers fairly.

The FSA says it will intervene in cases where firms have not met the March deadline and are thought unlikely to be able to meet the December one. But to help firms to consolidate their progress so far and to meet the timetable, the FSA published new material illustrating good and poor practice, using real examples it had come across during its assessments.

The reality is, however, that the December deadline remains challenging for lenders for a number of reasons:

• Because the FSA only published its feedback at the end of June – a month later than expected – there are now less than six months for firms to act on the findings before the end of December. 
• Conditions in which lenders are currently operating remain extremely challenging. The FSA has repeatedly made it clear that the TCF agenda is unaffected by market developments, but the fact is that firms are currently juggling an unusually large number of pressing priorities. 
• Perceptions of what “fair treatment” of customers looks like may be changing as a result of market conditions. Lenders are, in fact, showing a high degree of commitment to continuing fair treatment as their customers struggle to adjust to new challenges presented by market conditions.

Timing and communication

Even though the FSA has only delayed publication of its feedback by a month, the reality is that even if the recent report had been published at the end of May – as expected – there would only have been a seven-month window for firms to address any shortcomings on management information, and progress from there to being able to show that they are meeting the TCF requirements in full. 

Of course, the March and December deadlines were originally announced at a TCF conference last November. So, firms have actually been given 14 months to work towards the goal of being able to show that they treat customers fairly. Nonetheless, feedback on how firms are doing is a vital part of the process. The reality is that firms will continue to think they are doing the right things until they are told otherwise by the regulator. 

There is also the issue of how the FSA communicates to firms that they are not doing what is expected of them. Prior to its June announcement, the FSA had already published generalised guidance for firms. But if firms have not been getting it right on the basis of that guidance, how much will it assist them for the FSA to publish more of the same? What would, in fact, be much more helpful is specific, one-to-one feedback on what firms individually need to do.

To meet the December deadline, firms must:

• show that senior managers have instilled a culture within their firms in which it is understood what fair treatment of the customer means; where staff are expected to achieve this at all times; and where a “small number” of errors in treating customers fairly are detected promptly by firms, put right and learned from;
• be able to measure, appropriately and accurately, performance against all customer fairness issues relevant to their firms, and act on the results;
• be able to show that they are delivering “fairness”; and
• have no serious failings.

To help firms meet those challenges, the FSA says it will use every opportunity – including those presented by supervisory visits to firms and through its existing programme of thematic work (the results of which have not been published but are now expected soon) – to remind firms of what is required. It also promised “tough action” on the worst of those firms that fail to deliver the TCF requirements.

In the first half of next year, the FSA again plans to assess progress in a sample of larger firms. It will also continue to monitor how smaller firms are progressing. It is planning to publish the results of its assessment of progress against the December deadline in September next year.

Market conditions

The FSA has made it perfectly clear that market conditions will not deflect it from the TCF agenda and cannot be an excuse for firms that fail to fulfil their regulatory requirements. The fact is that the operating environment for firms will always present challenges for firms as they implement regulatory change. But market conditions are proving much more difficult than most commentators would have predicted, even a few months ago. 

The credit crunch is continuing to severely disrupt lenders’ businesses, both strategically and on a day-to-day basis. Different firms are being affected in different ways, but most are having to adjust to a combination of disrupted funding sources, significantly lower volumes of business, and the need to make more frequent and unpredictable adjustments to the availability and pricing of products. 

‘Fair’ treatment in the current market

While lenders progress towards fulfilling their TCF and other statutory requirements, they have also been working on a series of specific, practical measures that will help reinforce fair treatment for customers facing new threats as a result of changing market conditions. In particular, they have been looking at ways they can help the growing number of borrowers who may face difficulty in paying their mortgages.

There has been increasing political scrutiny of this problem, and we have been helping lenders to respond to government concerns. At the same time, however, we have been stressing that lenders will not treat customers who won’t pay in the same way as those who can’t pay. 

While lenders continue to work more generally on TCF – and respond to current market disruption – we have therefore helped them develop a series of targeted measures, including commitments to:

• analyse their existing policies for managing arrears, and implement any changes as a result of industry guidance we are preparing (some of which will be shaped by the outcome of the FSA’s thematic work on arrears management);
• provide consumer information to borrowers in arrears to help them understand what to do and what to expect, and to set out how their lender will treat them fairly;
• introduce a ‘pre-action protocol’ for dealing with cases of arrears – essentially, a checklist of all the actions lenders will go through before seeking possession of the property, thereby reinforcing that court action remains the last resort; and
• ensure they have a strategy for contacting borrowers coming out of initial deals, to inform them in good time of their new payment, and encouraging them to contact the lender if they are likely to have problems in continuing to pay their mortgage. 

But while all this work is, in effect, driven by a desire to ensure that borrowers in arrears are “treated fairly,” it is running alongside the more general TCF requirements, with lenders also working to refine their management information systems and to embed fair treatment of customers across their businesses.

Conclusion

Firms are taking the regulator’s TCF obligations seriously and want to meet the FSA’s deadlines. In the early days, some firms felt there was a lack of clarity about what the FSA expected. More recently, however, that has improved.  And we have been seeking to reinforce a key message from the regulator – that TCF needs to applied across lenders’ businesses, not pigeon-holed and treated as a separate exercise.

How firms use management information about TCF will be critical to their success.  Those that are simply measuring what’s happening in their businesses are missing the real point. What the FSA is looking for is analysis based on having the right sort of management information, followed by concerted action to address any shortcomings.

Lenders have invested considerable time and resources in their work on TCF, but there is still work to do. For those that are not yet getting it right, the timetable is challenging. Moreover, those firms will have to make progress within an operating environment that is presenting significant challenges and threats of its own. We will continue to help members – and the regulator – as firms progress towards the December deadline.