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Treating Customers Fairly...the limitations of principles-based regulation

Wednesday, 19th November 2008 15:26 - by Resident IFA

Out of memory, it has been a couple of years now since the Financial Services Authority (FSA) introduced the concept of Treating Customers Fairly, aka TCF. The grand plan was to set down a framework of principles around which financial services firms, especially Independent Financial Advisers (IFAs) should treat their Customers (I prefer Clients). Putting aside the basic arguments of ‘I already treat my customers fairly’ and ‘How else would I treat customers?’, I am all for this focus on the demonstration of how an Adviser treats their customers fairly. I fear this all got lost in translation, however, with firms running off down dark alleys and possibly dedicating time and resources chasing what they thought the FSA wanted of them. Granted, the FSA gave some helpful pointers, such as the need for increased Management Information (MI) with which to assess TCF, perhaps writing a TCF plan and sending service evaluation questionnaires to customers. The problem arises in the difference between ‘Principles-based’ and ‘Rules-based’ regulation. At least with rules-based regulation, you know where you stand. I can attest to IFAs being simple souls (!), the grey area that is principles-based regulation having the potential to drive them to distraction. I now hear that the FSA is potentially back-tracking on this approach, after 2 years of preparation, implementation and expense to the aforementioned financial services companies, because they are finding it hard to justify the cost to Treasury Select Committee. Unbelievably, it appears that no costings of the TCF project have been undertaken! This could finish TCF before it is even bedded-in. It is hardly surprising, though, that the FSA would possibly ‘return to a rule-driven approach’, given the recent Banking sector chaos. The quote in the previous sentence was from none other than the FSA Chairman, Lord Adair Turner. I think a lot of IFA’s would welcome this, the phrase ‘If you give someone enough rope...’ seemingly being on their minds. At least with rules, you break them or keep within them, not arguing the toss with someone who may interpret words and actions differently to you. There is no empirical research available to suggest that IFAs do not treat their customers fairly, so I happily assume – having met quite a few conscientious IFAs – that the majority do. I wait with interest to see how TCF is swept under the carpet or immersed within file-based checks. TCF was a good idea in principle and concept, but not thought through very well as to how it would be put into practice. IFAs need to be left to do what they do best...advise. Clear rules and a lack of potential (rope) for large amounts of time and resource being wasted (hanging ourselves) are the way forward. Starting with the banks, FSA please set some rules based on clear principles. Until next time...

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