TCF: Fair game

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
TCF: Fair game

The issue of fairness is regularly under scrutiny in the financial sector, with mis-selling scandals such as payment protection insurance (PPI), endowments and most recently the failure to properly ascertain attitude to risk. The impact of these was so severe that many banks were forced to withdraw from the advice sector, at least until now.

After a short exodus, banks are re-entering the market. Confident that previous misdemeanours have been addressed and now the so called ‘advice-gap’ can be plugged. But how can anyone be sure that the same issues will not re-surface, further tarnishing the reputation of an already battle-weary industry?

So how is treating customers fairly defined? According to the FCA, “A firm must pay due regard to the interests of its customers.” The six consumer outcomes are detailed in Box 1.

Misunderstood

Danny Cox, chartered financial planner and head of advice at Hargreaves Lansdown, explains TCF is widely misunderstood and does not necessarily mean equal treatment. “You can segment the services you offer clients and charge them differently, or clients can choose services themselves, without either being a TCF problem. Fair treatment in this case is to ensure the client understands the service they are getting (or not getting) and the cost of that service,” he says.

In March 2014 Santander UK was fined £12.4m by the regulator for widespread investment advice failings and the fine was followed by a number of branch closures and temporary abandonment of financial advice.

The FCA at the time said there was “a significant risk of Santander UK giving unsuitable advice to its customers, its approach to considering investors’ risk appetites was inadequate, and for some people it failed to regularly check that investments continued to meet their needs despite promising to do so.”

Earlier this year, Santander announced plans to return to the advice sector, with 225 investment advisers expected to be in place by the end of March.

However, it will only offer advice to customers with more than £50,000 to invest, which has led some to question whether its objective to fill the advice gap is convincing.

Matthew Bird, financial adviser at Newport-based Seer Green, says, “I think it is narrow-sighted and unfair to neglect clients with pots under £50,000. Obviously the advice process must be worthwhile to the bank and they would be prudent to operate a minimum fee structure to ensure it is profitable.’’

However, Kim Barrett, chartered financial planner and fellow of the Personal Finance Society, believes firms have as much right as consumers to select who they deal with, “When you’re entering into a contract, it has got to be fair to both sides. I don’t think there is anything wrong with choosing not to take on business.”

Santander says using appropriate controls, governance and technology will help to bridge the advice gap. Alan Mathewson, managing director, wealth management at Santander UK, expects 25 per cent of investment transactions to be conducted online over the next couple of years.

Here and now

“To a large extent it is why robo-advice is happening now,’’ says Benjamin Sear, financial adviser at Martin-Redman partners in Bury St Edmunds. “Low value clients will be penalised by fees and charges which may seem high in comparison to what they are investing. Some IFA firms are working on a similar basis so why should banks not be allowed to reach similar conclusions and target clients and markets where they feel they can add value and generate return?”

The RDR was introduced to achieve transparency for adviser charging and better qualified advisers. Although it seems universally accepted that professionalism has improved, many consumers feel priced out of the advice market as part of the RDR fall-out.

“The RDR has been a failure on almost every level,” says Simon Webster, chartered financial planner at Facts and Figures. He continues, “Banning commission was completely unnecessary. All they needed to do was put in a maximum commission cap on single premiums of, say, 3 or 4 per cent. That would have been the end of it.”

And John Stirling, chartered financial planner at Walden Capital in Saffron Walden, feels that, although professionalism has increased since the RDR, the advice gap remains a clear obstacle. He says “I do not believe the RDR has driven fairness for the majority of consumers and retail investors. I believe it has driven exclusion.”

Tracey McDermott, acting chief executive of the FCA, recently announced that the regulator would not rule out the reintroduction of commission for certain products, although this would be in addition to the RDR, rather than part of an overhaul. This sparked confusion in the industry and Mr Barrett feels a return to commission would cause further repetitional damage. “It will impact the credibility of the financial services marketplace – for the very reason they took commission off the table in the first place,” he says.

A spokesperson for the FCA confirmed TCF is at the heart of the RDR changes, in particular through the removal of commission bias and improving adviser competence for the benefit of consumers.

She confirmed the scope of RDR is here to stay. “These comments do not mean that we are looking to return to a pre-RDR world where advice could be tainted by commission bias. The RDR post-implementation review found that the RDR changes had resulted in a significant reduction in product bias, as demonstrated by a decline in the sale of products which had higher commissions pre-RDR and an increase in the sale of those which paid lower or no commission pre-RDR. However, we are absolutely clear that we want to avoid a return to the pre-RDR situation where the market was not functioning in the interests of consumers.”

‘Fair value’

Mr Stirling feels that there is still a place in the advice sector for commission, but that product regulation is key to ensuring ‘fair value.’ He adds, “In particular, if early encashment values were less loaded by the effects of commission, so more of the early cancellation risk sits with providers, this provides the economic incentives required to sell ethically because unethical sales will drop off, costing the provider a lot of money.

“This is the answer, but regulators are scared of it as they have not been ready to regulate products. We will see whether this time they are courageous enough to grasp the nettle, and deliver a workable solution.”

The outcome of the Financial Advice Market Review (FAMR) is expected this month and will look to address the regulatory barriers faced by advisers and consumers in order to deliver accessible advice.

Mr Webster, says the FAMR should be used to give the industry a break. “What I really want is for the regulator to stop making silly bureaucratic rule changes that achieve very little and cost a lot of time and effort for practitioners.

“I’d actually like it to do nothing. I expect to be disappointed.”

FCA’s consumer outcomes

There are six consumer outcomes that firms should strive to achieve to ensure fair treatment of customers.

1) Consumers can be confident they are dealing with firms where the fair treatment of customers is central to the corporate culture.

2) Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly.

3) Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale.

4) Where consumers receive advice, the advice is suitable and takes account of their circumstances.

5) Where consumers are provided with products that perform as firms have led them to expect, and the associated service is of an acceptable standard and as they have been led to expect.

6) Consumers do not face unreasonable post-sale barriers imposed by firms to change products, switch provider, submit a claim or make a complaint.

Source: FCA