As advisers get to grips with the principles-led legislation of TCF Kristen Paech takes a look at the challenges they have to face
The financial services market has become ever more complex for retail investors and their advisers. Advisers are now faced with a plethora of options to articulate and fit around the client's evolving needs and as a result, the margin for error is growing.
Through its principles-based regulation Treating Customers Fairly (TCF), the Financial Services Authority (FSA) is seeking to reduce the risk of mis-selling and improve the standard of service provided to clients.
Firms were set a March deadline for implementing TCF into their business. By this point senior management were expected to have conducted a thorough review of strategies and adviser performance, identified any shortcomings, and implemented appropriate working practices.
A report published in May showed that 93% of major retail firms, 87% of medium sized retail firms, 74% of wholesale firms (where TCF is relevant) and 41% of small firms met this deadline. A new deadline of the end of December 2008 has been issued by which time all firms should have completed their work in TCF.
The FSA will expand the range of online tools to help small firms get to grips with TCF and a series of regional workshops will be rolled out.
The FSA has indicated it will come down hard on those firms who are not complying, monitoring industry implementation of TCF through its risk-assessment process for relationship-managed firms. However, it remains to be seen how easy it will be to penalise a firm based on principles-based regulation.
"There is a bit of dichotomy in terms of what the regulator is trying to achieve," says Gary Appleton, risk and compliance director at Alexander Forbes Financial Services.
"The FSA and lawyers recognise that principles-based regulation makes it more difficult to come to enforcement than purely rules-based regulation because at the end of the day, if enforcement action is taken against a firm today, principles will be mentioned but underlying that is a clear number of rule breaches as well."
Ongoing adherence to the TCF principles will demand a significant amount of time and resources from IFA practices, meaning smaller firms have been hardest hit by the increased burden.
"Simplification is one of the biggest misnomers that the financial industry has endured," explains Frank Morton, business development manager at Prudential. "TCF as your core principle necessitates a full explanation for each client of the options he has, deciding which one is a best fit and then reviewing that. You can mix and match, buy different types of retirement solutions with different time scales to achieve different ends.
"That is a real challenge for both providers and advisers; to be able to cover TCF at a client level within the commercial considerations and pressures that advisers are under at the moment."
However, industry pundits agree that in the long run, the reward for getting TCF right will be huge on the retirement side.
Greg Carter, risk management and compliance director at Origen, claims TCF will potentially have more benefit in the retirement market than in the commoditised early lifecycle stage, or on the mortgage protection and limited investment side.
"The wrong retirement provision, especially around annuities, can permanently cause the customer real financial hardship and similarly to us as a distributor, if we give the wrong advice the cost of recompense will be astronomical," he says.
"It's an area where the benefits will be greatest to the distributor as well as the customer to ensure customers are treated fairly and obviously where benefits are greatest, more concentration is put into getting it right."
Jeanette Cook, compliance manager at Hargreaves Lansdown agrees: "The FSA wants consumers to understand what they are buying - that's really important in the retirement market place. One of the concepts we've adopted when we're explaining something to clients, whether through advisers or via our financial promotion, is 'would your grandma understand it?' That general concept should be adopted by most of the industry if they're looking at TCF from the FSA's perspective."
Martin Slater, marketing director at Standard Life, believes anything that puts customers at the heart of what firms do can only stimulate the market and lead to more confident consumers.
"To the extent that it improves customer fairness and emphasises the importance of companies clearly designing products which have customers in mind, that can only be a good thing in making financial services clearer to consumers and therefore giving a boost to all savings markets, not least of which retirement planning," he says.
Obviously it is not just advisers that fall under TCF's reach. Providers too have had to overhaul their business practices to ensure they are compliant.
Under TCF, providers are required to regularly review their portfolio of products to ensure they continue to do what they were originally intended to do, despite legislative or demographic change.
"If a product stops doing what it was set up to do then fair treatment would say that we would communicate that initially through advisers but if necessary direct to the end customer so they can ensure the product they have continues to meet their needs and if not they can look for an alternative approach," says Steven Cameron, head of business regulation at Aegon.
Providers claim they have taken a number of steps to embed TCF into their business practices.
Initiatives include computer-based staff training systems which comprise a TCF module, improving management information, appointing an independent non-executive director to be a customer in the board room and incorporating the principles as part of a wider customer strategy.
"We've focused on the six customer outcomes," says Slater. "Sometimes with rules you can lose sight of the overall objective whereas if you've got these high level outcomes it is clear that it is about what you are doing for the customer."
One thing is for sure, once fully embedded into firms' businesses; the regulations should make for a smoother running and more accountable financial services market.
Cameron says: "We're aiming to have a two-way flow of information on what each of us, the IFA firm and the provider, are doing and very importantly how we can work together because at the end of the day, the customer is a customer of both firms and we want to treat these customers fairly and make sure we can work together to do so."
Kristen Paech is a freelance journalist
Showing care and forethought
Prudential is close to launching a new web-based support tool that IFAs will be able to use when providing advice on with-profit funds to retail investors. The modelling tool would allow advisers to conduct a detailed independent analysis of a client's legacy with-profit requirements to ensure ongoing suitability of the fund they are investing in.
"Years ago, the funds looked very different to the way they look now," says Frank Morton, business development manager at Prudential.
"How do you continue to ensure that the expectation you originally established for the client is going to be delivered?
You need a regular review which is expensive and detail-intensive and you need a lot of resources to do that.
"We've been investigating the options open to us to support advisers, one being an independent tool on a web-based platform which would allow advisers to input information and very quickly get a robust report which would give them a status report of 'yes, this is absolutely fine and we expect it to deliver what you originally expected it to' or 'no, there are better alternatives out there'.
"We feel that is a key part of TCF, particularly around the client review process which the FSA is making very clear it expects to see in place."
The FSA's TCF regulations place greater onus on both providers and advisers to ensure that the products they are selling or advising continue to be appropriate for their clients.
"I think there will be more pro-activity in reviewing the existing book of business at a high level and helping advisers identify customers who need advice on changing their approach towards saving for retirement," comments Steven Cameron, head of business regulation at Aegon.
Morton says Prudential has gone to "extreme lengths" in terms of governance while investigating the web-based tool.
"If we are to host such a service, even though we're not actually generating the report, we feel there is very much a duty of care to make sure the figures are robust and that the outcomes are going to stand up," he adds.
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