As referred to in our separate Financial Regulation Update yesterday, last week the FMA released its Annual Corporate Plan (ACP) and a refreshed Strategic Risk Outlook (SRO).
Unsurprisingly following the FMA and RBNZ's Conduct and Culture Reviews in the retail banking and life insurance sectors last year, the FMA's five new strategic priorities include a focus on governance, culture, systems and controls.
However, for banks and insurers there is one notable shift in the FMA's lexicon in that strategic priority – a move away from references to ensuring "good customer outcomes" to new references to "serving the needs of customers". While this shift does not appear to alter the FMA's expectations in respect of good conduct, for those who continue to grapple with defining "good customer outcomes", the FMA's definition of "serving the needs of customers" will be of interest.
Other publications last week relevant to conduct risk and good customer outcomes worthy of note are:
Each of these publications are discussed further below.
The emergence of "Serving the Needs of Customers"
In both the ACP and SRO, the FMA refers to its main statutory objective being to "promote and facilitate the development of fair, efficient and transparent financial markets". The FMA describes:
- "Fair" in this context to mean: providers and participants acting fairly and professionally, and focusing on serving the needs of customers."; and
- "Serving the needs of customers" as meaning that financial service providers focus on:
- treating customers fairly in all interactions
- recognising and prioritising the interests of customers and effectively managing the conflicts that arise
- giving customers clear, concise and effective information
- designing and distributing products that are suitable, work as expected and as represented, and are targeted at appropriate customer groups
- ensuring adequate after-sales care, including complaints and claims-handling, and not imposing unnecessary barriers to switching or exiting a product or service
- effectively monitoring their own conduct, and where relevant the conduct of suppliers and distributors, to ensure that they can identify, rectify and learn from mistakes
The FMA's expectation that all financial service providers "serve the needs of customers" is reflected in the governance, culture, systems and controls strategic priority within the SRO. For those in the banking and insurance sector, the ACP then also includes as a targeted outcome that banks and insurers be able to demonstrate how they "serve customer needs" through:
- appropriate governance, systems and controls for managing conduct risk;
- design and management of incentive schemes that promote good customer outcomes;
- appropriate prioritisation of remediation when things go wrong; and
- effective implementation of any new conduct regime.
In relation to the last bullet point, it will be especially interesting to see how the FMA's definition of "serving customer needs" ultimately fits with where MBIE lands in its revision of the overarching duties initially proposed in its Conduct of Financial Institutions review options paper. In the meantime, for all market participants, the FMA has urged that they should not wait for legislative change or the regulator to come knocking to "do the right thing".
What do good banking outcomes look like to consumers?
A lot of the FMA's thinking is informed by overseas thinking. To this end, we note that the UK Banking Standards Board1 (BSB) has now published the final version of its Consumer Framework. That Framework sets out an outline of what good banking outcomes might look like to consumers of retail financial services. It comprises:
- five high level consumer principles (Access; Clarity and Transparency; Safety and Security, Responsiveness; and Fairness);
- outcome statements for each of these principles; and
- examples of what those outcomes might look like in practice to consumers.
The examples in the Framework are particularly helpful, including to provide market participants with ideas of potential areas to monitor and report on in relation to good customer outcomes.
The slightly broader nature of the concept of good outcomes in the Framework is discussed further in the last section of this update.
Duty of care – Financial Conduct Authority (FCA) Draft Vulnerable Customer Guidance
The FMA's SRO identifies the treatment of vulnerable customers as a long-term opportunity and challenge for banks and insurers. Of relevance to this, the UK FCA has now released for consultation its much awaited draft guidance on the treatment of vulnerable customers. The FCA's view being that the treatment of vulnerable customers is a key part of UK financial service providers' obligations to treat customers fairly, particularly given the risk that vulnerable customers may not experience good customer outcomes because of their circumstances.
The paper includes a thoughtful discussion on the drivers of actual and potential vulnerability, the consequences on customers of that vulnerability, and how those consequences may impact on their engagements with financial services providers. It also includes a range of examples and ideas for practical steps that firms can take and guidance that firms can use to further develop their vulnerable customer strategies. The guidance includes that financial services providers should:
(i) take a proactive approach to understand the nature and extent of vulnerabilities present in their target market and customer base, and the potential needs that therefore arise;
(ii) ensure staff have the skills and capability to: understand the indicators of vulnerability, recognise a customer's vulnerability; consider and address their needs; or adapt the service to be provided in the interests of the customer;
(iii) consider the positive and negative impacts of a product or service on vulnerable customers at all stages of product and design;
(iv) put processes in place that enable staff to continually deliver service that is effective and appropriate to the needs of their customers, including for vulnerable customers delivering service that can take a flexible approach to their needs and providing specialist services where appropriate;
(v) ensure that communications with vulnerable customers meet their needs, including that information is clear and understandable, that checks are undertaken to ensure customers understand at the point of sale; and that multiple channels are available to ensure that, where appropriate, vulnerable customers have choice; and
(vi) develop an ongoing process of continuous action involving learning and improvement through effective monitoring. For example, firms should implement appropriate processes at key points in the customer journey to identify instances where the needs of vulnerable customers are not met, so that they are able to address the causes and issues identified; and firms should produce, and regularly review, management information regarding the outcomes for vulnerable customers.
Safeguarding customer data a conduct issue
While not yet a theme developed by the FMA, UK financial services providers are increasingly viewing the protection and proper treatment of client's personal information as a crucial good customer outcome and a plank of treating customers fairly. This is reflected in the "Safety and Security" principle within the BSB Consumer Framework and in the FCA's draft guidance on vulnerable customers, including the reference in the draft guidance to the challenges firms face when considering what information can be recorded and shared about vulnerable customers.
We regularly advise clients in the financial services sector on both conduct risk and privacy related issues in the New Zealand context, including with the overlay of the General Data Protection Regulation. Please get in touch if you would like to arrange a catch up with one of our experts on this or any other conduct related area.