Treating Customers FairlyMyhendri Govender November 2011

Background

Why?

• Knowledge gap between Financial institutions and consumers

• Close the gaps in consumer protection regulations

• Financial institutions expertise in design, distribution and servicing Products Versus Consumer’s decision making

• Consumer exploitation, unfair/inequitable treatment of consumers, poor decision making on part of the consumer

Background /cont

• A holistic and coordinated consumer protection regulatory

framework that

• applies consistently across the financial services sector has

been lacking

• National Treasury published a policy document in which

SA is moving toward a “twin peaks” model of financial

regulation

• SARB as the macro prudential regulator and the FSB as

the market conduct regulator

Source: Leeanne Jackson - FSB

TCF and the Product Life Cycle

• Financial institutions will need 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

TCF and Product Life Cycle Continued…..

• Product and service design: Must be based on a clear understanding of the likely needs and financial capability of each customer group

• Promotion and marketing: Marketing communications to specific target groups must be clear, fair, not misleading and appropriate for the target group

• Advice: Ensure that 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:• Provide clear and fair information to enable customers to make informed

decisions including transparency on product risks, commitments, limitations and charges

• Disclosure around bundled products must enable customers to understand the different components of the bundle

TCF and Product Life Cycle Continued…..

Information after point-of-sale:

• Provide customers with ongoing relevant information to enable them to monitor whether the product or service continues to meet their needs and expectations

• Provide acceptable levels of service for post-sale transactions or enquiries

• Monitor and respond to changes in the wider environment that may affect products and impact on particular groups of customers

Complaints and claims handling:

• Honor representations, assurances and promises that lead to legitimate customer expectations

• No unreasonable post-sale barriers

• Fairness and consistency

• Timeous resolution

• Actions to eliminate of the root cause of the Complaints

Final Outcome

Intermediate Outcomes

Immediate Outcomes

Customers’ financial services needs are appropriately met through a sustainable industry

1. Improved customer

confidence

2. Appropriate

products and services

3. Enhanced transparency and discipline

4. Where customers receive advice, it

is suitable and takes account of their circum-

stances.

2. Products perform as firms have

led customers to expect; Service is

of an acceptable standard.

1. Customers

are confident that they

are dealing with firms where the

fair treatment of customers

is central to the firm culture.

3. Products and

services are designed to

meet the needs of identified customer

groups and are targeted accordingly.

6. Customers do not face unreasonable post-sale barriers to

change product, switch

provider, submit a claim or make a

complaint.

5. Customers are given

clear information

and kept appropriately informed

before, during and

after contracting.

Source: Leanne Jackson - FSB

Desired Outcomes

The six outcomes of TCF explained

Outcome 1

Customers are confident that they are dealing with firms where the fair treatment of customers is central to the firm culture

Incorporation of TCF into firm’s values, culture and standards

Awareness and understanding of TCF among Board members and senior management

Transmission of the Board and senior management’s commitment to TCF to staff,

intermediaries and business partners

Incorporation of TCF outcomes into strategic planning process, business

cases, projects or material expenditure

Encouragement of staff and management to evaluate TCF impact on Ops and

decision making

Forums for debating TCF

Assignment of TCF responsibilities in the Organisation

Reporting process for TCF

Changes to business operations

MI for the above

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

Design of product to meet requirements of target group

Testing of product to meet the needs of target group

Assess suitability of the advertising and promotional material for the product

Product approval process and promotions approval process

Selection of appropriate distribution channel to ensure appropriateness for target market taking into account risk and complexity

Suitability of related or optional products

Measures to ensure understanding of product and type of client it is suitable for

Measures to evaluate customer’s financial capability and understanding of product

Processes to ensure fair treatment of customers wrt bundled products and loyalty programs

Tracking of sales to ensure products sold to target client group and process to address mismatch

Alignment of incentives with TCF objectives

Measuring success of product

Feedback of complaints to product design phase

MI for the above

Outcome 3

Customers are given clear information and are kept appropriately informed before, during and after the time of contracting

Process for evaluating clarity and fairness of product information

Approach to ensure client is aware of key product features and risks

Process to ensure complaints about promotion or quality of information is fed to ensure improvement of information quality or to stop the promotion

Process to ensure accuracy and quality of once off or non standard product information

Record keeping of discussion and communication with customers

Processes to review communications to the customer

Processes to consider redress for financial prejudice caused by misleading information

Monitoring and acting on feedback, complaints and suggestions from clients on products

Notification of changes in products

MI Measures

Outcome 4

Where customers receive advice, the advice is suitable and takes account of their circumstances

Mystery shopping by product supplier processes to determine

whether advice appropriate

Processes by product supplier to ensure intermediaries have

adequate knowledge

Monitoring and mitigation of risks with regard to lapses in quality

of advice, conflict and sales incentives and targets

Addressing feedback or complaints relating to quality of advice

Process to compensate clients where inappropriately advised

Changes to business practises as a result of TCF

MI for the above

Outcome 5

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

Evaluation of customer expectations met

Mechanisms to ensure that products are supported after launch

Process to alert customers to the risks of action or non-action

Monitoring of ongoing developments that impact on customer’s benefit expectations

Assessment of service standards of agents and staff toward customers

Monitor and act on feedback, complaints and suggestions received

for improvement in types of services or service standards

Process to mitigate risks to customer where products not performing

Where 3rd parties part of value chain measure in ensure adequate

standard for fair treatment of the client

Mitigation of risks where 3rd party product not performing

Outcome 6

Customers do not face unreasonable post-sale barriers to change product, switch provider, submit a claim or make a complaint Incorporation of product flexibility and product switching incorporated

into design phase of product

Communication of product flexibility and product switching information during marketing, sales and after sales

Service standards to product switching reflective of TCF outcomes

Claims /complaints handling ensure that customers expectations are met

Monitoring of the above

Complaints/Claims processes

Use of complaints data, claims data and lapse/early termination

data to evaluate success of product or service and firm’s fairness to clients

Pillar 1:TCF Framework

Pillar 2: Implementing TCF

Pillar 3: Incentives & deterrence

Firms Regulatory FrameworkWill be developed within which firms must conduct their business. Combination of market conduct principals and explicit rules

Culture & governanceFirms must demonstrably embed a TCF culture, supported by controls, governance structures, management information and self-assessment

Disclosure & reportingFirms will be required to publicly disclose identified TCF performance measures and submit non-public TCF reports as required by the FSB

FSB Supervisory frameworkThe FSB will develop a framework for effective, intensive and intrusive supervision of firms’ adherence to the market conduct regulatory framework. The framework will comprise monitoring, reporting, off-site analysis and on-site components

Proactive supervisionThe 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 mechanismsThe FSB will enforce the TCF framework through a combination of pre-emptive intervention for identified industry and firm-specific conduct risks, regulatory sanctions (incl. “naming and shaming”) for firms in breach and prosecution of individual wrongdoers

A structural model to deliver TCF

Supporting Structures

Ultimate Fairness - Ombudsman with jurisdiction

Regulatory co-ordination and information sharing – FSB to take the lead on market conduct initiatives

Consumer education and awareness – TCF included in FSB and national consumer education strategies

Ultimate Fairness - Ombudsman with jurisdiction

What does this mean for the Financial Adviser?

FAIS imposes obligations on FSPs

• FAIS imposes obligations on FSPs and reps which are relevant to TCF outcomes

• Outcomes 3 (clear information) and 4 (suitable advice) are driven by the disclosure, advice, conflict of interest and licensing requirements under the FAIS Act

• Intermediaries’ adherence to FAIS must be complemented by demonstrating that they have embedded the broader TCF culture framework within their organisation (TCF fairness outcome 1)

• Intermediaries will also be expected to consider their role in delivering TCF fairness outcomes 2, 5 and 6 (the outcomes related to appropriate product and service design, product performance and service levels, and post-sale barriers)

• Duty on Product supplier in ensuring a product is appropriate for a particular target market but on financial adviser to ensure the product is suitable for the particular customer concerned

• However, an appropriate level of product “due diligence” is expected from financial advisers

• TCF will require product suppliers and intermediaries to share accountability for fair treatment of their mutual customers

• Note the product cycle

Regulatory alignment analysis will start in January 2011

Draft and publishing of the legislative proposal document will start in

Q1 2012

Development of the internal FSB framework will start in

May 2011

Developing and publishing the TCF supervisory framework will start

During November 2011 and will be finalised during Q4 2012

Pilot participants submit completed questionnaires during

June 2011

Interview pilot participants should be finalised during July 2011

July 2011

Stakeholder input should be finalised during August 2011

Timelines

Publish final self-assessment tool for industry use by

August 2011

Provide feedback to pilot participants by September 2011

Identify benchmark participants & distribute self-assessment tool by

August 2011

Publish benchmark exercise findings by Q1 2012

FSB publishes guidance notes during Q1 2012 and should be finalised during

Q4 2013

Include TCF in 2011 FSB Annual Report and annually thereafter

Q3 2012

Develop initial non-public and public reporting requirements will commence during October 2011 and should be finalised by

Q1 & Q2 2012

FSB begins pro-active intervention for identified TCF conduct risks will commence

Q1 2012

Formal TCF enforcement Jan 2014

• Momentum participated in a self assessment in July/August

• 20 firms participated

• Results will be published by December 2011

Implementation of the TCF principals in Momentum Sales

• Leadership: The Board, senior and middle management need to provide direction and monitor the delivery of the TCF behaviours and outcomes

• Strategy: The TCF aims should form part of Momentum’s stated vision, values and broader business strategy

• Decision-making: Decision-making procedures should ensure that decisions are tested for customer impact

• Governance and controls: Governance processes around product approval, distribution models, service standards, claims reviews and complaint escalations should cater for TCF. We will need to focus on TCF outcomes at all stages of product life cycle

• Performance management: TCF deliverables should form part of staff performance appraisals where appropriate

• Reward: Remuneration, incentive and reward policies must take into consideration fair customer outcomes and entail consequences for TCF successes and failures

Source

• The Road Map – Leanne Jackson (FSB)

Thank youMyhendri Govender November 2011

Questions?