Treating Customers Fairly An overview of the challenges and approaches to embedding TCF

1. ACOI Compliance Plus Seminar Dublin Treating Customers Fairly An overview of the challenges and approaches to embedding TCF Andrew Wheeler 29 June 2011

2. TCF – Where did it come from?

3. You can break a principle without breaking a rule... • Prin 1.1.9G – 1 December 2001 • “Some of the other rules and guidance in the Handbook deal with the bearing of the Principles upon particular circumstances. However, since the Principles are also designed as a general statement of regulatory requirements applicable in new or unforeseen situations, and in situations in which there is no need for guidance, the FSA's other rules and guidance should not be viewed as exhausting the implications of the Principles themselves.”

4. How did TCF rise up the regulatory agenda ?

5. TCF Timeline FSA report that only 13% of firms have met the MI deadline FSA set 2 new deadlines – March 2008 for MI and December 2008 for embedded TCF culture Hector Sants: “TCF ... failed to gain the traction... a reactive strategy ... conduct regime will lean more towards rules than principles” Cluster reports • FSA Principle 6 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 PBR/TCF Agenda High X X X X X X PBR/TCF Agenda Low 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 • PBR • MPBR Mr Justice Ouseley: “I have accepted the lawfulness of the way in which the FSA seeks to use the Principles as the ever-present substrate to the overlay of specific rules.” The FSA’s 6 Consumer Outcomes and March 2007 implementation and December 2007 cultural embedding deadlines set FSA says it will not conduct a thematic review of TCF culture – this will be done through the Arrow process

6. FSA Annual Report – June 2011

7. Why was/is it so hard?

8. Fairness – ‘slipperier than a buttered escargot’ • Fair on unfair? • The Bank of England raises the base rate by 0.25%. ABC Bank raises its variable mortgage rate by 0.35% and interest rates on its ‘Super Savings Account’ by 0.15%.

9. Fairness – ‘slipperier than a buttered escargot’ Fair on unfair? Customers seeking to buy an annuity over the phone are told the call should only take 10 minutes. During this call, customers will have explained to them the key features of both the With Profits Annuity and the conventional Pension Annuity Contract. The customer is subsequently sent a pack containing a range of annuity quotes to reflect their choice of options, an application form and relevant key features documents. The customer is told they will receive a follow up call after the pack has arrived to answer questions and complete the forms.

10. Fairness – ‘slipperier than a buttered escargot’ • Fair on unfair? • Due to a data entry error by a bank, two customers receive higher interest on their savings account than they are entitled to and each is asked to return the over paid money. • Customer ‘A’ repays the money as requested. Customer ‘B’ claims he cannot afford to repay the money as he has already spent it. The bank accepts both outcomes and the money owed by customer B is written off.

11. Horst Rittel – the father of modern problem solving • Horst Rittel’s ‘Wicked Problem’ • Ill-defined and ambiguous • Solutions to wicked problems are not true-or-false, but better or worse • Strongly stakeholder dependent • Management unwilling to tackle the problem

12. Why has TCF been much harder to embed than expected? – the ‘big 4’ reasons

13. Attitude • Don’t tell me to treat our customers fairly - it’s in our DNA! • Senior executive buy-in low • Ownership in the business unclear • It’s a compliance thing right? TCF is a journey not a destination. The question is therefore not just ‘do we treat our customers fairly?’, but ‘do we have in place a good system for continuously improving TCF performance?’

14. Motivation • Why bother?: • I do TCF because I have to not because it is in my personal interests to do so • It’s about profitable customer retention but we’re geared around customer acquisition • So what’s in it for me?

15. Understanding • What does ‘fairness’ really mean?

16. Approach • Reactive not proactive • There are 18 outcomes not 6! • MI is disconnected and hard to analyse • Difficult to link cause and effect and therefore ... • Hard to ‘demonstrate’ TCF

17. So how did the industry score against the ‘big 4’

18. Industry performance TCF seen as central to business success TCF Mindset (Attitude & Motivation) Driver > Regulatory imperative Danger Zone – not embedded Danger Zone – risk of never embedding TCF Execution (Understanding & Approach) No real TCF activity TCF embedded in BAU Embedded TCF MI

19. Industry performance TCF seen as central to business success Proactive Top 5 Bank Major Life & Pensions Firm Leading Credit & Credit Card Provider FSA definition of good UK Life & Pensions Firm Major Mutual Major Insurance Firm Major Bank TCF Mindset (Attitude & Motivation) Driver > Regulatory imperative Reactive Top 5 Bank Major GI Firm Top 5 Bank Non-UK Bank Major Global GI Firm Life & Pensions Firm Danger Zone – not embedded Danger Zone – risk of never embedding TCF Execution (Understanding & Approach) No real TCF activity TCF embedded in BAU Embedded TCF MI

20. Industry performance TCF seen as central to business success Proactive Top 5 Bank Major Life & Pensions Firm Leading Credit & Credit Card Provider Unconsciously TCF Consciously TCF FSA definition of good UK Life & Pensions Firm Major Mutual Major Insurance Firm Major Bank TCF Mindset (Attitude & Motivation) Driver > Regulatory imperative Reactive Top 5 Bank Major GI Firm Top 5 Bank Unconsciously non-TCF Consciously non-TCF Non-UK Bank Major Global GI Firm Life & Pensions Firm Danger Zone – not embedded Danger Zone – risk of never embedding TCF Execution (Understanding & Approach) No real TCF activity TCF embedded in BAU Embedded TCF MI

21. The 4 steps to embedding

22. Step 1 - Define ‘Fairness’ (Not so slippery now!)

23. Step 1 - Define ‘Fairness’ (Not so slippery now!)

24. Step 2 - set out a high level embedding plan Corporate Vision with TCF Definition Embedded DistributeSuitability/ Appropriate/ Eligibility/ ServiceServicing that meets pre-sale expectations ManufactureProducts that are valuable and designed and marketed fairly

25. Step 2 - set out a high level embedding plan Corporate Vision with TCF Definition Embedded Business direct change Business assessment of fairness DistributeSuitability/ Appropriate/ Eligibility/ ServiceServicing that meets pre-sale expectations ManufactureProducts that are designed and marketed fairly Continuous TCF Improvement Management Information based on Key Fairness Indicators

26. Step 2 - set out a high level embedding plan Corporate Vision with TCF Definition Embedded Business direct change Business assessment of fairness DistributeSuitability/ Appropriate/ Eligibility/ ServiceServicing that meets pre-sale expectations ManufactureProducts that are designed and marketed fairly Communication Plan Training Continuous TCF Improvement Management Information based on Key Fairness Indicators

27. Step 2 - set out a high level embedding plan Corporate Vision with TCF Definition Embedded Business direct change Business assessment of fairness DistributeSuitability/ Appropriate/ Eligibility/ ServiceServicing that meets pre-sale expectations ManufactureProducts that are designed and marketed fairly Communication Plan Training Continuous TCF Improvement Management Information based on Key Fairness Indicators Performance Management and Pay & Reward Culture and Values Fair Customer Outcomes + Customer Retention + Commercial Benefit Page 27

28. Step 3 – communicate a clear and simple message Best Place to Bank Business direct change Business assessment of fairness Sell Them Properly Keep Them Sold Make Better Products Communication Plan Training Continuous TCF Improvement Management Information based on Key Fairness Indicators Performance Management and Pay & Reward Culture and Values Fair Customer Outcomes + Customer Retention + Commercial Benefit Page 28

29. Step 4 - focus embedding around 3 lifecycles of continuous improvement Define Fairness Decide, action, improve Decision lifecycle TCF MI drives strategic and operational decision making In order to demonstrate embedded TCF, a programme of activity coordinated towards agreed critical success factors with clear deliverables and milestones is needed to drive and evidence continuous TCF performance improvement in the product, decision making and employee lifecycles. Define TCF risks and measures Analyse Identify MI sources and owners Gather and report Recruit Design prioritisation and assessment tools Drive operational continuous improvement Reward Product lifecycle Products and processes are assessed for fairness and remediated Employee lifecycle Staff understand and can articulate what TCF means to their role and adopt TCF behaviour Induct Prioritise products and processes Remediate as you go Develop Train Embed product and process change into BAU Performance manage Assess products and processes

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