CML news & views

Like any other organisation, the Financial Services Authority (FSA) is continually evolving and refining what it does, based on experience. It is, of course, important for the firms it regulates to keep up with these developments, and to understand what they mean for their businesses.

The treating customers fairly (TCF) initiative, launched in 2004, was part of the FSA’s move towards principles-based regulation. It emerged from sixth of its key principles. However, as time went by, the FSA realised that to focus on one principle in isolation did not make much sense. It was difficult to justify when, in 2008, the organisation was thinly stretched in dealing with the banking crisis.

Perhaps more importantly, it also became clear that the fair treatment of customers was affected by several of its principles, not just the sixth one. So, at the end of 2008, TCF became part of "business as usual" and will now take its place in a broader assessment of conduct risk.

As a result, firms may see and hear less of TCF and more of 'fair treatment of customers' in the context of how the firm is run overall.

In the meantime, the FSA’s approach to principles-based regulation has also been evolving. It has begun to refer to “outcomes-focused regulation” instead. This means that the regulator looks less at the processes a firm employs and more at the final outcomes it delivers, including outcomes for customers. However, recent speeches by Hector Sants, and the FSA’s 2010/11 Business Plan and Risk Outlook, signify an important change.

From now on, the FSA intends to act in anticipation of poor outcomes. It will carry out risk assessments of firms and where, for example, it considers a product to be potentially toxic, or if it believes it is likely to be mis-sold, the FSA intends to take action before actual customer detriment occurs.

The FSA is currently developing the tools that will enable it to carry out risk assessments focusing particularly on governance, controls, business culture, products and product distribution. One of the tools, namely the Culture Framework, already exists. However, it is understood that this is being beefed up in some areas, including reward, training and competence, and professional standards and ethics.

The FSA continues to expect firms to assess themselves. And, against a background of pre-emptive strikes by the FSA, it makes even more sense for firms to do it. So, for example, it is probably wise for firms to apply the Culture Framework as they assess for themselves where what they do might pose a risk of poor outcomes. That will enable them to address potential areas of risk before the FSA shines a light on them.

To help firms in this work, we have formed a partnership with Intouch Consulting Ltd. The firm supports lenders looking to apply the Culture Framework by providing an audit to assess the risks posed by their patterns of behaviour. Intouch also regularly runs TCF workshops on behalf of the CML.