Regulatory Priorities and Challenges for Financial Services

A move towards a customer-focused agenda was the major theme of the 2008 Financial Services Discussion Club (FSDC) member survey, carried out in conjunction with Grant Thornton. The survey of the regulatory priorities and challenges for 75 senior managers in UK financial services firms showed that treating customers fairly (TCF) was by far the most important regulatory priority.

In a time of market volatility and the regulatory landscape evolving towards a more principled-based regime, a move away from rule-based compliance was also identified as a priority by firms for 2008. This was followed by issues such as financial crime, data security, Payment Protection Insurance (PPI), fraud and financial promotions.

Many of these issues have been driven by the regulator, but the influence of the media and increased consumer knowledge and awareness have also played an important role in shaping firms’ priorities.

Key Survey Findings

Treating customers fairly

TCF is one of the UK Financial Services Authority’s (FSA’s) high-level principles and has always been a regulatory requirement for firms. However, in the last few years it has moved towards the top of the regulator’s agenda, forming one of the cornerstones of the move towards principles-based regulation.

The 2004 FSA paper’Treating customers fairly – progress and next steps’¹ was the start of a series of FSA initiatives that has included deadlines and key milestones for firms. For example, from the end of March 2008, firms should have appropriate management information (MI) in place to test whether they are treating customers fairly and by December of this year firms must be able to demonstrate that they are consistently treating their customers fairly.² Figure 1 shows the top risk and regulatory priorities identified by respondents in the survey.

Figure 1: Major Risk and Regulatory Priorities

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Although a variety of regulatory issues were identified by respondents, TCF was by some way the most important regulatory priority. For example, 80% of those surveyed said that TCF was a key priority for the coming year, with 66% saying that it was their top priority. 91% of firms stated that they were either on or ahead of schedule to meet the March MI deadline. This focus on TCF was consistent with meeting agenda topics set by FSDC members during 2007 and for those scheduled in 2008.

Despite the progress that surveyed firms are making, a range of continuing TCF challenges remain for firms including enhancing MI, maintaining a robust audit trail that can stand up to FSA scrutiny, collating customer feedback and thoroughly embedding cultural change. Furthermore, firms will need to regularly review TCF management information to ensure it continues to demonstrate that customers are being treated fairly. It is here that a key challenge lies in differentiating between measuring customer fairness rather than customer satisfaction. Firms should also consider benchmarking their work undertaken on TCF with other similar firms in their sector.

Other regulatory priorities

PPI was the next most important priority for firms, mentioned by 50% of respondents as a key area of regulatory focus in the coming year. Tackling poor PPI sales practices remains a priority for the FSA in 2008 and the authority is currently moving into phase three of a thematic review for this product.³

PPI has increasingly featured in FSDC meeting agendas in recent months and those surveyed predicted that increased media scrutiny would continue to keep PPI at the forefront of the regulator’s supervisory activity. PPI has also been subject to considerable recent media attention and other areas of scrutiny, such as data security and financial crime, were also pressing concerns for those firms surveyed, with 35% of firms stating that financial crime was a key priority for 2008 and 33% citing data security. Figure 2 shows the areas identified as attracting most regulatory scrutiny in 2008.

Figure 2: 2008 Regulatory Scrutiny by Area

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Outside of firms’ TCF programmes, enhancing existing management information was identified as one of the key challenges in a move towards principles-based regulation. The FSA’s focus on MI has been consistent for some time and, apart from being a key feature of its TCF expectations, it has featured prominently in the FSA’s thematic work.

Despite a clear awareness of the key areas of regulatory focus for the coming year, some firms noted a lack of clarity from the FSA on key issues (particularly principles-based regulation and TCF), which makes regulatory compliance an increasingly challenging and inexact science. Furthermore, other challenges include turning principles into internal rules for operational staff, embedding this cultural change and ensuring a consistent approach across the business.

Media influence and consumer impact

As the financial climate changes in the UK, customer communication and relations have become increasingly important to firms, featuring regularly on FSDC agendas. Correspondingly, the influence of the press and increased consumer awareness were repeatedly identified as drivers for change by firms.

The influence of the media is considered a key driver in rising complaint levels, and is also leading to increased customer awareness of complaints procedures. Product performance is the most common influence on complaint levels, followed by bank charges, PPI and the media. Figure 3 shows key complaint drivers identified by firms in our survey.

Figure 3: Key Drivers for Complaint Levels

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Conclusion

Our survey has shown that TCF has dominated the agendas of financial services firms and represents a wider shift towards a more customer-centric approach across all elements of the business. Similarly, data security, PPI and financial crime that have been areas of recent media and customer interest have also been identified as key challenges for firms in 2008.

The line between regulatory and customer relations challenges is becoming less distinct for firms and the two areas are likely to converge further in the future, as the FSA and firms takes greater steps towards a more principles-based approach.