PRESENTATION ON TREATING THE CUSTOMER FAIRLY [TCF] AT THE IIR INSURANCE REGULATION SEMINAR; APRIL 2013.
THE IMPLEMENTATION OF TCF IN THE BROKER FRATERNITY AND THE ADVANTAGES OF A PARTNERSHIP BETWEEN SMALL INSURERS AND BROKERS IN ESTABLISHING A COMMON TCF CULTURE.
Good day Prof. Millard, fellow speakers and not least all our delegates.
Due to the change in the original program the focus of this presentation will differ somewhat from what Johan Ferreira was to present to you. This presentation will focus more on implementation of the TCF guidelines and requirements by the independent broker fraternity and how interaction between brokers and especially smaller insurance companies can help such insurers to implement TCF.
This presentation will first and foremost concentrate on my understanding of the psyche of compliance.
The meaning of compliance.
Compliance simply means obedience to, or to do what is expected from you by one’s elders, rulers, authorities, peer groups and in our case, especially what one’s clients expect from you.
Compliance is a question of ethics and moral values. It is something that one as a provider of services, and for that matter a product should always keep in mind. Ideally, it should not be necessary to have laws or regulatory supervision to enforce this but then we all know that this is Utopia.
The fact is that there are always people and entities that are inherently unethical or put own interest above all else and do not necessarily subscribe to acceptable moral values and ethical behavior. It is because of this that it is sometimes necessary for a statutory or even community body to lay down such values and even sanction persons or entities if they do not comply.
My experience since 2004 is that all of my broker clients strive to be compliant in the sense that they need to comply with moral values and ethical conduct to keep their clients which is essential to their own continued existence.
Compliance is a “how to do” issue.
As with all best practice requirements compliance simply is about doing the right thing at the right timefor the right reason in the most efficient manner. It therefore entails not only what one does but also the manner in which one does something. It therefore focuses on processes, procedure, methods, workflow, equipment and quality assurance arrangements. I dare say that all my clients have adopted this approach to compliance and that wanting to be compliant is not the issue!
What often does present a problem are the lack of skills and resources to implement optimum arrangements to “demonstrably” show evidence that they do live a culture of compliance.
Regulatory supervision: – Treating the customer fairly.
National Treasury has identified “expanding access through financial inclusion” as a priority for the financial sector and tasked the Financial Services Board [FSB] to develop and implement a system that will ensure this. Whether the FSB’s subsequent regulatory model, directives and supervisory arrangements on treating customers fairly (taken over from the FSA in the UK) is realistic or “over the top” is debatable. The fact remains however that it is now reality and must be complied with.
Although I am personally very critical of the extent to which regulatory arrangements regarding TCF has developed, especially as it would affect different sectors of the financial services industry, the point remains that compliance therewith is not negotionable.
And to a certain extent I am quite in agreement with it. I have been a customer of a certain commercial bank for over fourty years, with my spouse having worked for them for fifteen years and has now been retired, and still I am just a number to them. No wonder that TCF became an issue!
What needs to be complied with under TFC?
The following is not an extensive analysis of what exactly is required in terms of FTC but it does give a broad overview for the purpose of this presentation. The intention with TCF is that delivery of these specific outcomes will in turn ensure the supply of appropriate financial products and services to customers and enhanced transparency and discipline in financial institutions, resulting in improved customer confidence. The final desired outcome is that customers “financial services needs are appropriately met through a sustainable industry”.
The desired outcomes of TCF.
- Customers are confident that they are dealing with firms where the fair treatment of customers is central to the firm’s culture.
- Products and services marketed and sold in the retail market are designed to meet the needs of identified customer groups and are targeted accordingly.
- Customers are given clear information and are kept appropriately informed before, during and after the time of contracting.
- Where customers receive advice, the advice is suitable and takes account of their circumstances.
- Customers 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.
- Customers do not face unreasonable post-sale barriers to change product, switch provider, submit a claim or make a complaint.
When one looks at these outcomes one thing is abundantly clear! Most small insurers never really deal with customers directly through the whole process from initial contact to after sales service and support.
Except for outcome 2 and 6, which primarily falls within the insurer’s domain and must also be complied with under the L/T Insurance Act regarding the actuarial soundness of their products, the outcomes are a reflection of what happens primarily in the broker space.
The TCF regulatory approach.
TCF is a regulatory approach that seeks to ensure that very specific and clearly articulated outcomes for financial services customers are demonstrably delivered by regulated financial institutions.
TCF will require regulated firms to consider their treatment of customers at all stages of their relationship with the customer, from product design and marketing, through to the advice, point-of-sale and after-sale stages.
Firms will ultimately be required to demonstrate – through management behaviors and monitoring – that they are consistently treating customers fairly throughout the stages of the product / transaction cycle that they may be involved in.
In addition the intention is also that delivery of these specific outcomes will ensure the supply of appropriate financial products and services to customers and enhanced transparency and discipline in financial institutions that must result in improved customer confidence.
Another important TCF requirements is that “Fairness outcomes must be delivered throughout the product life cycle!”
This requirement is both interesting and significant in terms of implementing TCF in that from what follows, it is clear to what extent small insurers will have to rely on the broker fraternity for their own TCF delivery. . The broker is after all much more intimately involved in the product life cycle
For the purpose of TCF the product life cycle is seen as inclusive of all of the following:
- Product and service design:Products and services – and the distribution strategies chosen to bring them to market – are designed and developed for specific target markets, based on a clear understanding of the likely needs and financial capability of each customer group.
- Promotion and marketing:Products are marketed to specific target groups, through clear and fair communications that are not misleading and are appropriate to the target group.
- Advice:Firms need to ensure that, where advice is provided, advisers are fully equipped to provide advice that is suitable to the needs of the customer concerned, balancing the commercial objective of increasing sales with the objectives of TCF and avoiding conflicts of interest.
- Point-of-sale:Firms need to provide clear and fair information to enable customers to make informed decisions about transacting with the firm, its products and services. This means that product risks, commitments, limitations and charges must be transparent. Disclosure around bundled products must enable customers to understand the different components of the bundle.
- Information after point-of-sale:Firms need to provide customers with ongoing relevant information to enable them to monitor whether the product or service continues to meet their needs and expectations, and provide acceptable levels of service for post-sale transactions or enquiries. Firms must also monitor and respond to changes in the wider environment that may affect products and impact on particular groups of customers.
- Complaints and claims handling:Firms need to honour representations, assurances and promises that lead to legitimate customer expectations. Legitimate expectations must not be frustrated by unreasonable post-sale barriers. There is a requirement for fair and consistent handling of claims and a mechanism to deal with complaints timeously and fairly. Firms should undertake to identify common underlying causes of complaints and take action to eliminate the root cause.
Just looking at the above I am hard pressed to believe that insurers or product providers, especially those that are not actively involved in the whole of the product life cycle will be able to design and implement the desired ‘checks & balances’ without intimate involvement of the broker fraternity.
Let’s now take a closer look at the proposed regulatory framework as proposed by the FSB.
Ultimate desired outcomes of TCF
The TCF program is intended to contribute to the final, desired outcome for the sector, by delivering the following intermediate outcomes:
- Improved customer confidence
- The supply of appropriate products and services and
- Enhanced transparency and discipline in the industry.
These intermediate outcomes can be mapped back to the six specific fairness outcomes as listed above. To summarize:
Final Outcome:
- Customers’ financial services needs are appropriately met through a sustainable industry
Intermediate Outcomes (Presentation note: Point out role of broker to each.)
- Improved customer confidence.
Immediate outcomes.
- Customers are confident that they are dealing with firms where the fair treatment of customers is central to the firm culture.(Totally the domain of the broker as first service provider!)
- Products perform as firms have led customers to expect; Service is of an acceptable standard
- Appropriate products and services
Immediate outcomes
- Products and services are designed to meet the needs of identified customer groups and are targeted accordingly. (What role does the broker play in this other than by choosing the most appropriate of what is available?)
- Where customers receive advice, it is suitable and takes account of their circum-stances.(FAIS General Code as the main driver)
- Enhanced transparency and discipline
Immediate outcomes.
- Customers do not face unreasonable post-sale barriers to change product, switch provider, submit a claim or make a complaint.
- Customers are given clear information and kept appropriately informed before, during and after contracting.
Delivering TCF – the FSB’s structural model.
| PILLAR 1:
The TCF framework |
PILLAR 2:
Implementing TCF |
PILLAR 3:
Incentives & deterrence |
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| Firms | Regulatory framework
A regulatory framework will be developed, within which firms must conduct their business. The framework will comprise a combination of market conduct principles and explicit rules. |
Culture and governance
Firms must demonstrably embed a TCF culture, supported by controls, governance structures, management information and self-assessment. |
Disclosure and reporting
Firms will be required to publicly disclose identified TCF performance measures and submit non-public TCF reports as required by the FSB. |
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| Financial Services Board | Supervisory framework
The FSB will develop a framework for effective, intensive and intrusive supervision of firms’ adherence to the market conduct regulatory framework. The framework will comprise appropriate monitoring, reporting, off-site analysis and on-site visit components. |
Proactive supervision
The FSB must implement the supervisory framework to enable proactive monitoring of and response to industry (macro) and firm-specific (micro) TCF risks and outcomes. |
Enforcement mechanisms
The FSB will enforce the TCF framework through a combination of pre-emptive intervention for identified industry and firm-specific conduct risks, regulatory sanctions (with “naming and shaming” ) for firms in breach, and prosecution of individual wrongdoers. |
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| Support structures | Ultimate fairness –
Ombuds with jurisdiction will ensure resolution of TCF failings for specific customers, and share information with the FSB to identify industry conduct risks. |
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| Regulatory co-ordination and information sharing
The FSB will take the lead on market conduct initiatives in the sector and co-ordinate with other market conduct regulators. Market conduct regulation will complement prudential regulation to maximize consumer protection under this financial sector regulatory model. |
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| Consumer education and awareness –
TCF will be taken into account in FSB and national consumer education strategies |
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The FSB’ approach to TCF regulatory supervision
The fairness outcomes as discussed above no doubt underpins what I consider is the essence of compliance with reference to my definition of the “psyche of compliance”, but one needs to take notice of the FSB’s view that although TCF will be guided by the six broad fairness outcomes, clear, enforceable rules and regulations must also be in place to ensure that these outcomes are achieved.
According to their firmly held believe (not altogether unfair) that experience has shown that relying on firms to “do the right thing” is not on its own sufficient to drive the behavioral and culture change required to deliver consistently fair outcomes for customers, delivery of TCF therefore requires the development of a regulatory framework that will effectively balance principles-based and rules-based regulation to ensure that regulated firms deliver the desired outcomes of discipline and transparency in a consistent manner.
I believe that herein lays the most important aspect that concerns all financial institutions and that is:
Not to primarily focus on the concept of treating customers fairly but to develop a holistic culture of compliance in the sense of my definition of the “psyche of compliance”. To understand that a healthy approach to and acceptance of a compliance culture in fact will ensure fair treatment of one’s customers.
This approach is evident from my experience in the broker / advisor market where they realise probably more than anybody else that when they don’t, they will loose their clients!
Implementing the TCF in the broker / advisor space
As all my clients are independent brokers, often with limited resources and for that matter not experts in developing formal risk mitigation programs, they had to be taught how to conduct themselves in such a manner that they could demonstrate their compliance. And to be quite honest, it was not that difficult as they were all doing the basics right!
There is also a significant difference between brokers and insurers / product providers in that the broker is in fact the agent of his customer. As such the broker has a fiduciary duty towards the customer in terms of agency law. In this lays a unique opportunity for implementing TCF.
Agency is based on mutual agreement, whether explicit or implied that by nature entails that the principal clearly states his / her expectations, outcomes, standards etc. It is for this reason that I have always insisted that the broker enter into a service-level agreement with the client.
The service-level agreement.
Such an agreement is much more than merely a broker appointment. In the beginning of FAIS a service level agreement was the ideal tool to provide most of the statutory disclosures as required. In the same vein one could include aspects like support that the broker will provide its client in the event of a loss and / or claim, support provided at point-of-sale, assessing risk factors on-site and so on.
A “fair treatment manifesto”.
As part of, or in addition to the service-level agreement I would like to see my clients draft a document based on the TCF outcomes and best-practice requirements contained in the General Code to the FAIS Act.. It should further describe how and to whom the client can direct any complaint related to the broker’s service delivery. Any incidence thereof would then be recorded in the complaints register. This could easily form the basis of the broker’s quality assurance regime and evaluation of employee performance.
Market conduct principles and best practice.
Something else that I would like (my) brokers to do is to shift their focus from client files to transaction files. Where under FAIS the focus was very much on analysis and recording of advice it should change to transactional analysis. With this is meant that each transaction, or interaction with the client where no transaction was completed, is recorded per activity in the transaction cycle with an evaluation of the result / outcome thereof. The evaluation should focus on how it was done, whether it could have been done differently, whether it should have been done at all and so on.
Know your client!
TCF will give the “know your client” a complete new meaning. Under TCF one will have to know much more about the client in order to pitch one’s service delivery at the right level. This is essential to ensure that the client is comfortable with the service provided, rather than relying on the client to raise any issue he may not understand. Very important would be to profile one’s client in terms of language proficiency, education levels, product knowledge and experience and other factors directly related to the product or service,
Funeral insurance specifically comes to mind. A funeral is an event that is steeped in the socio-cultural background of the customer creating different expectations and satisfaction levels.
Implementing TCF by smaller insurers / product providers.
The discussion above also applies to smaller insurers / product providers. It also provides the reasons why they should utilize the knowledge and skills of brokers / advisors to their advantage. Implementing their own TCF programs should preferably be based on a close working relationship and even a TCF partnership where both support and assist each other.
- First it is essential that they actively obtain the co-operation and inputs from their broker force. This could be vital in understanding the customer’s socio – cultural background, financial awareness and levels of development that is crucial to providing an appropriate product or service.
- From the above it will be much easier to define their market and customer-base and specific needs and priorities inherent to customer groups.
- This again will help greatly in getting clarity on what the customers expectations are that can then be built into their product offering and service delivery processes and procedures.
The regulatory framework
According to the FSB the framework will consist of an appropriate mix of legislation, subordinate legislation and specific guidance for firms, to ensure that firms clearly understand the FSB’s regulatory expectations. Firms will be required to develop processes and controls to manage their compliance with the rules-based components of TCF.
The FSB has also warned that firms should not treat their TCF delivery strategy as a “compliance project”, to the extent that TCF will require compliance with specific rules. It must also entail that compliance and risk management functions within firms will need to form part of the firm’s overall TCF strategy.
This basically means that firms must be able to show evidence that they are in fact focused on fair treatment and have the dynamics to identify when something goes wrong and to implement corrective steps immediately.
With this in mind it rather follows that insurers / product providers who do not themselves deal with their clients directly, may have a difficult time in recording transactional information as required.
Smaller insurers / product providers would therefore need to develop a way of uploading this information from their broker network.
It should further be understood and accepted that for most small insurers the broker / advisor fraternity is in fact the extension of the entity’s marketing function.
It should therefore ensure that sales material, brochures and process information provided to the broker fraternity is correct, clear and not misleading. Development of such is best done with constructive input from the broker fraternity.
Insurers making use of the broker / advisor fraternity do incur an added liability in that they will be held equally responsible for fair treatment of customers and must therefore have systems and procedures in place to obtain and assess information on the broker’s service delivery. It is suggested that such procedures and systems are developed together with brokers to ensure that it can easily be implemented, it provides the information timeously and can be acted on promptly.
In this environment it is also essential for industry bodies to be actively involved in establishing TCF requirements across the operational boundaries of different entities and markets to which products are presented.
Evaluation of an entity’s compliance.
TCF is a regulatory approach that seeks to ensure that very specific and clearly articulated outcomes for financial services customers are demonstrably delivered by regulated financial institutions. The limitation in the FSB’s directives is that it does not state clearly when submitted evidence of compliance will be sufficient and / or acceptable.
Notwithstanding all of what was thus far discussed, the only instrument we have to measure our compliance with TCF is the ‘self-assessment tool”. Whilst this gives a clear indication of what is needed / needs to be complied with, it still does not give definitive indicators of what is good enough or not, and this is really what brokers / advisors need!
Lets look at specific at the specific outcomes that entities must implement or be judged against. (Presentation note: Conclude the presentation with an inter active discussion of the outcomes as per the “self assessment tool”!