Taking Consumer Protection to the Next Level: The Treating Customers Fairly Approach

Mary Griffin sat with CFI to discuss “Treating Customers Fairly” (TCF) – a customer-centric approach to consumer protection regulation that’s gaining traction.

Griffin is a long-time consumer protection expert in financial services. She advised CGAP on outcomes-driven market conduct approaches, focusing on jurisdictions incorporating TCF concepts into their regulatory system. Griffin is currently a senior advisor with the Consumer Financial Protection Bureau. This blog post is the result of the author’s independent research and does not necessarily represent the views of the Consumer Financial Protection Bureau or the United States.

What is “Treating Customers Fairly?”

TCF is an emerging outcomes-based regulatory and supervisory approach that shifts the responsibility for protecting consumers somewhat from the regulator to the financial services provider. The UK developed the TCF approach to market conduct regulation, implemented through its Financial Conduct Authority. Under the UK’s approach, also adopted by South Africa, firms are expected to demonstrate that they deliver the 6 TCF outcomes to their customers throughout the product life cycle, from product design and promotion, through advice and servicing, to complaints and claims handling. Other jurisdictions have taken on the approach, customizing it to fit their regulatory framework and capacity.

TCF shifts responsibility for protecting consumers from the regulator to the financial services provider.

Under this approach, regulators are challenging financial service providers to demonstrate the value of their products. They’re saying, “You’re selling products to consumers. You’re telling consumers these products are going to help them achieve their financial goals. So show us!”

Why is TCF important right now?

In the past 10 years, we’ve experienced a global financial crisis, and we continue to experience round-the-world mis-selling and overselling of financial services and products. More and more countries are realizing the connection between financial services and the ability of consumers – particularly vulnerable consumers – to achieve key financial goals. Whether it is moving out of poverty or achieving a milestone such as purchasing an asset, having access to appropriate financial services is critical.

You mention that TCF is often outcomes driven. Could you elaborate on this?

Rather than focusing only on compliance or firm behavior, an outcomes-driven approach looks at results: how have consumers fared in the marketplace and are they being treated fairly. The six outcomes assess whether or not firms are treating their customers fairly, and whether the products they sell meet the needs of the consumers for whom the products were developed. Companies are marketing their products more and more by linking them to improved financial and other outcomes for their customers. TCF is asking to see some proof.

Could you tell us more about the difference between various levels at which customer suitability for a product is addressed: ability to repay, affordability, and suitability?

In financial services markets characterized by information asymmetry – where consumers do not have the relevant information, they need to make decisions – caveat emptor (buyer beware) has been the norm. As stronger protections are put in place, the situation moves from companies being required to “do no harm” to consumers to placing the consumer’s interest ahead of their own. Between those two standards lies different levels of protection – from selling products that are affordable, to selling products that are not unsuitable, and on up to selling products that are suitable to the needs of the particular consumer (see illustration below).

 

Levels of customer protection begin with a basic ability to make regular payments on a product. The next level is affordability over the life of the product. Not unsuitable means that the product, while perhaps not perfectly fit for a customer's needs, isn't unfit either. A suitable product  "requires that the seller determine whether the product or service recommended is suitable given the individual’s circumstances." Best interest includes not just suitability, but ensures  "consumers will benefit from the sale of the product," even if that means a lower commission.
Levels of customer protection begin with a basic ability to make regular payments on a product. The next level is affordability over the life of the product. Not unsuitable means that the product, while perhaps not perfectly fit for a customer's needs, isn't unfit either. A suitable product "requires that the seller determine whether the product or service recommended is suitable given the individual’s circumstances." Best interest includes not just suitability, but ensures "consumers will benefit from the sale of the product," even if that means a lower commission.

Several countries have had suitability requirements in place for some time for investment and insurance products. The concept is now being applied to more types of financial products and services. Suitability generally requires that the seller determine whether the product or service recommended is suitable given the individual’s circumstances. What that means in practice depends on the approach of the provider or the approach that the regulator requires the provider to take.

What’s the difference between “suitability” and “best interest,” the highest level of meeting a customer’s needs?

The best interest standard helps ensure that consumers will benefit from the sale of the product, and that the seller works in the client’s best interest. Depending on whether the regulator imposes a fiduciary duty, this may mean that the seller must put the client’s interest ahead of their own. For example, one product may pay a higher commission than another. The product may be suitable for the client and pass muster under that standard. But under the higher level fiduciary standard, the seller would sell the lower commission product.

This sounds great to us; we work at an organization that advances consumer protection. But what would you say to an industry player who says “look, can’t consumers do their own homework? Why is the onus on us?”

The need for increasing levels of consumer protection came out of the financial crisis. TCF is a recognition that financial services have become more and more complicated over the years, that inappropriate sales can wreak havoc on an economy, and that caveat emptor doesn’t help advance goals for consumers or for the country. There’s a lack of transparency that makes it hard for people to ascertain whether or not a product is what it says it is, or will help the consumer.

For example, a product may advertise a low price up front, but over the long term it may become unaffordable. It’s very hard for customers to make that determination when they often don’t have access to or the even the capacity to understand the information.

You’ve said that regulators may not have enough data analysts or data scientists. How do we attract these folks to work in and for regulation? How do we make sure regulators have the proper skills to evaluate the products on offer?

That is a challenge for regulators all around this data-driven world. We have to figure out how consumers can control where and how their data is used, what data providers can and should have, and what data regulators need to monitor the market and protect consumers. Regulators are going to have to look at the skill sets we are going to need to determine the rules around data access and control, and identify and analyze the data that is needed to monitor the market. If a regulator wants a more collaborative approach, thy will have to be confident about the type and accuracy of the data they use to monitor the market.

What other factors influence how TCF can be implemented?

It depends on the country, its markets and regulatory capacity, and what the ultimate goals for their consumers or economy are. In one country there may be a deep and immediate need to improve savings rates. Another country may be facing credit capacity or access issues for micro businesses. Within a country, there may be different needs for a particular market segment. So it’s important to research and understand the particular consumer group’s needs, and develop products that fit those needs.

TCF is not a one size fits all approach nor is it a demonstrated panacea. Some express concerns about moving to a more principles-based approach where clear rules may be needed to address fraud and mis-selling. But TCF doesn’t preclude specific market conduct rules. It does, however, acknowledge that regulators and providers need to focus more on outcomes and accountability to help make sure consumers get what they need.

Learn more about Treating Customers Fairly from the UK’s Financial Conduct Authority.

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