Are financial services companies Treating Customers Fairly?

Despite the FSA’s attempts to implement its Treating Customers Fairly programme, complaints about the way banks, building societies and other lenders treat their mortgage customers, rose by 40 per cent in the six month period from April to October ’09.  In light of such figures, GoodCorporation’s most recent debate at the House of Lords asked ‘How much progress have financial institutions made in implementing the FSA’s Treating Customers Fairly programme?’

To begin the debate, it was suggested that although the FSA has pushed the TCF agenda, it has not had sufficient will and pressure to really enforce it.  The FSA should not be waiting for problems to come to its door, but should be implementing a rigorous and speedy enforcement programme to ensure that TCF is properly embedded.  It was suggested that the banking crisis has meant that TCF has slipped down the agenda, but hoped that post the forthcoming election, consumer issues would once again come to the fore.  It was felt that products were still not properly understood, that communication was still far from clear and that the FSA was standing on the sidelines rather than driving reform.

Although the FSA deliberately moved away from rules-based regulation, it was suggested that the principles-based approach of TCF still gave too much flexibility and wriggle room to the financial institutions.

A show of hands at the start of the debate revealed that most of the delegates felt that little or no progress had been made in implementing TCF.

Opinions over the impact of TCF on behaviour were often polarised. Some felt that TCF had allowed companies to document evidence, but do nothing. Others felt that it had provided a reference point for staff who could use it to challenge senior management about products and processes.  Some felt that it had made product literature much clearer, while others believed that successfully embedding TCF was fundamental and should be the responsibility of the business as a whole, not the compliance department.

The issue of compliance was discussed at length.  Treating Customers Fairly should be about doing business properly and ethically, not about metrics, statistics and box-ticking. There is a difference between ethics and compliance that the FSA’s regulation does not recognise. Some felt that only greater openness and more emphasis on corporate responsibility would lead to the fairer treatment of customers.

This led to a discussion on the definition of ethics and fairness.  It was suggested that although fairness was hard to define, everyone knows when they have been treated unfairly.  With this in mind a financial Hippocratic Oath was suggested.  If all businesses operated ethically, compliance would not be an issue.  Some went as far as to suggest that legislation rather than regulation was the answer: that a law should be in place to prevent a business from trading unfairly.

However, it was felt that sales targets and short-term profitability are still the overwhelming drivers.  Transactions are not calibrated according to the risk profile of a business, but in terms of the potential for a return on investment.  The lack of corporate governance combined with excessive risk taking drove the banking collapse.  This was perceived to be a systemic problem; that without a fundamental change to the financial architecture, it would not change.  The problems surrounding the implementation of TCF were felt to be symptomatic of this wider problem.

‘Profitability at all costs’ was perceived to be an industry-wide issue.  Products are developed with addictive profit streams and ‘ownerless’ corporations have a tendency to prize returns above responsibility. It also takes a long time for the full impact of ill-conceived products to unravel – endowment mortgages were discussed at length.  This presents the industry with a genuine problem, institutions can operate ethically, but if unethical organisations choose to sell (or mis-sell) products at a perceived better deal, they are likely to win business at the expense of more principled organisations.

Without a genuinely authoritative industry regulator, or indeed legislation, to impose uniform ethical standards, it will be hard for the industry to raise the bar.  Unless ethical and responsible practice is embedded across all institutions, the consumer is unlikely to be treated any more fairly.

GoodCorporation Business Ethics debate January 2010