By Jonathan Howland, Compliance Officer/MLRO at Church House Investments
Treating customers fairly. This is a reasonable expectation. Whenever you go to a bank, a clothes shop, a mobile phone website or an energy supplier, you would hope that this is the minimum standard set by that provider. Indeed, you would expect it from any provider of goods and services.
However, this can be frequently overlooked, by both providers and the customers themselves. British consumers have had a tendency to accept their lot and take whatever is given to them at whatever level provided and often be ignorant of better offers provided to other customers by the same provider. They may believe there is an additional cost involved. More often than not, customers may well be satisfied with the product and/or service and have no reason to complain except they are failing to realise that they are not being treated fairly.
If a telecom company offers you a discounted rate to sign up to their services, giving you six or twelve months of service at two-thirds of the normal cost, you would elect to sign up with the knowledge that you were obtaining value for money. However, should that same telecom company then proceed to offer the same service one month later but at fifty-percent of the standard price, with the caveat that it was only open to new customers, would you consider this to be fair?
Increasingly, with the assistance of consumer groups and supermarkets related to money, customers are being made aware of the ability to obtain better offers, generally through haggling, threatening to leave or quoting the right phrases. But should it be the obligation of the customer to demand the best treatment? Surely it is the duty of the provider to give the best possible service to each and every client.
Financial services companies are subject to considerable rules and regulations to meet specific obligations, part of which includes treating customers fairly, or TCF. It is one of the key areas of focus by the financial regulator, the Financial Conduct Authority. All financial institutions are obliged to demonstrate that they treat their customers fairly to ensure that their focus is not driven for profitability alone, with scant regard for their customers’ needs. The regulator has set six required outcomes that firms must meet to ensure that they comply with TCF:
Outcome 1 – Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to corporate culture.
This is an expectation that every customer should have. But it does not always seem to be clear that companies necessarily interpret this the same way in which an average consumer would.
Much like the telecom example, if your bank offered a special deal in which they offer a high-interest savings account, earning interest at a rate significantly higher than the general market, you could be inclined to complete the application and send off hard-earned cash to benefit from the good rates. However, it is frequently the case that, "Unfortunately sir / madam, this offer is only available to new clients / clients with our premium account / one-legged trans-genders from Hartlepool". How does this demonstrate fair?
Outcome 2 – Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and targeted accordingly.
Products and services are frequently mass-marketed with little regard to the actual needs of the individual customer. Think of the loan company that used to use puppets to promote itself; whilst it quoted the astronomical APRs regarding its lending (which was listed in the thousands), the FCA found that it was not taking adequate steps to assess customers’ ability to meet repayments in a sustainable manner. "Of course we can lend you £5,000, irrespective of the fact you have no job, a dreadful credit history and a liking for expensive shoes. Our simple terms and conditions will highlight the right for us to send in the bailiffs should you fail to repay the capital plus the £250 cumulative interest per month within 28 days". KYC? What’s that? Fair?
Outcome 3 – Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale.
Too long has the financial services industry relied on small-print. Any terms and conditions associated with an investment service are generally lengthy and some compress it into a small leaflet, which is likely to be ignored or overlooked by the customer. The sales of funds require the provision of either a simplified prospectus, which does little to make the information simple, or a Key Investor Information Document, or KIID, which may provide key information from the view of EU Commission representatives but baffling information from the perspective of a simple investor. The greater development of financial products has made risk warnings and information disclosures more extensive and lengthy to the extent that many of the statements are meaningless to the average investor. “Mr Smith, I trust you have read the key investor information document about the Absolute Strategic Moribund Hexagonal Black Watch UCITS Index Series 3 Fund, which is guaranteed to generate upper echelon beta returns over a consistently inflated hyper period of synthetic capital performance.” If Mr Smith invested in such a fund, would he actually know what he has bought and why? Did the adviser or product provider give him enough information as to what the investment was? If it is not understood, is it fair?
Outcome 4 – Where customers receive advice, the advice is suitable and takes account of their circumstances.
Advice needs to be suitable and take account of customers’ circumstances. “Ah Mr Smith, your investment within the Fintoxican Double Helix Income Genesis Octagon Fund will guarantee you an income well above whatever any annuity could generate and all at a deeply discounted fee of just 5% of your total pension investment, despite your risk objectives being geared towards capital growth. It will protect your pension from any tax increases over the past five years”. Of course, within financial services, RDR has appeared to ensure that the level of advice is appropriate and suitable but at what cost? There are fewer providers giving advice to investors, especially if they haven’t got a minimum of half a million pounds to invest. Is this treating customers fairly?
Outcome 5 – Consumers are provided with products that perform as firms have led them to expect and the associated service is both of an acceptable standard and as they have been led to expect.
In this current climate of almost invisible interest rates, do investing customers have low expectations in order to not be disappointed? The average investor cannot earn significant returns on cash products and will need to consider riskier stocks and shares over a medium to long term to obtain any worthwhile return. But for an average investor, who may have little or no understanding of what investing in shares involves, particularly the risks, what are their expectations? "Miss Beacham, invest your hard-earned savings into a Property Relocation East African Syrian UCITS ISA Fund, whose high volatility demonstrates high capital growth prospects." Once her money is invested, Miss Beacham's hard-earned savings will probably begin to quickly shrink into a vacuum; will the investment have performed as she had expected? Did she know what to expect?
As the ability of average investors to get any affordable advice has disappeared, especially where they have just £500 or £5,000 to invest, they may just prefer to keep their savings in the security of their bank account to earn insulting interest (if any at all), but at least their expectations have been met. Is this fair?
Outcome 6 – Consumers do not face unreasonable post sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint.
Whilst the switching of bank accounts and energy suppliers has finally become more achievable, some providers still miss the TCF element and make it difficult for customers to leave or switch without incurring costs. Some mobile phone providers will bend over backwards to keep your account active and offer special rates to stay; why are these not automatically available on renewal? Some providers will include in their small print the penalties of switching/transferring away from the service by imposing cancellation fees that can often outweigh the original investment. “I’m afraid Mrs Simpkins, you cannot switch your investment within the Domino Ultra Flexible Saver until you have completed the minimum five year investment period. This was detailed in our terms. If you do switch, there is an early redemption fee of 10%.” Fair?
Treating customers fairly can be subject to interpretation, but more and more companies have embraced the philosophy within their culture for the benefit of the customer. There is still a long way to go for many providers across a number of industries, not just financial services, and the growing awareness and accessibility of information by consumers will make it harder for companies to not treat customers fairly; it should be one of the primary drivers of all business. It can foster reputational benefits and strengthen competitiveness. Treating customers fairly is an attitude and a way of thinking that needs to be embedded within the corporate culture of firms, led from senior management. It should be second nature. After all, what do you expect when you go shopping?
Please note that the comments and opinions in this article are of the author alone and do not reflect those of Church House Investments or Industry Events Online.