A brief history of UK Regulation

1. Treating Customers FairlyLessons from the UK including FSA and FOS – Ombud – Rulings and how Advisors are Managing the ProcessPhil BillinghamACII CFP Chartered Financial Planner

2. A brief history of UK Regulation • 1988Polarisation – Independent or Tied • 1990 Training and Competence rules • 1995 ‘Hard’ disclosure of Commission • 1997 Minimum qualifications imposed • 2003 ‘Depolarisation’ – but has no real effect • 2006 The TCF journey starts • 2007 The RDR journey starts • 2012 Level 4 Qualifications are mandatory for all • 2013 ‘Advisor Charging’ rules come into effect • 2013 Independent and Restricted models in place 2

3. The Six TCF Outcomes • Outcome 1: • Customers are confident they are dealing with firms where TCF is central to the corporate culture • Outcome 2: • Products/services are designed to meet the needs of identified consumer groups and targeted accordingly • Outcome 3: • Consumers are provided with clear information and kept appropriately informed before, during and after point of sale 3

4. The Six TCF Outcomes • Outcome 4 • Where consumers receive advice, is it suitable and does it take account of their circumstances • Outcome 5: • Consumers are provided with products that perform as firms have led them to expect and is the associated service of an acceptable standard and as they expect • Outcome 6: • Unreasonable post-sale barriers imposed by firms when consumers want to change product, switch provider, submit a claim or make a complaint 4

5. The Regulatory Drivers • After 24 years of Direct Regulation, the UK Regulators (FSA) view is that: • Many Consumers get an ‘Unfair’ outcome – but don’t complain • That there are still many complaints going to the FOS – Ombud – that should never do so, and are then upheld • That a significant amount of written business is ‘Compliant but C**p’ • Their choices were: • Prescriptive regulation • Principle based regulation – TCF 5

6. The Consumers view • That much of their interaction with Financial Services is unfair • They feel they do not win whatever happens • This is a function of disparity of information as much as anything • More experience of Advice lessens this view of Financial Services • The commission system generates distrust • Even when we think we have disclosed fully • They don’t understand why ‘we’ win, whilst their investment fall • Charges have risen overall in the last decade 6

7. The Consumers view • What is Fair? • Never lose money? • Always get ahead of the Market? • Or that the outcome / behavior of the fund / product is in line with expectations? 7

8. Is ‘Fair’ the same as ‘Equal’? • There is nothing so Unequal as the equal treatment of Unequal's • Ken Blanchard – the One Minute Manager meets the Monkey 8

9. Our Evolving Interaction with Consumers • Caveat Emptor – Buyer Beware • Don’t sign unless you (think) you understand it • Clarity of disclosure and education of the client • Patronizing – the top down approach • ‘Trust me – I know what is best for you • Do you really want all this paperwork? • Informed Consent – the role of the Trusted / Fiduciary Adviser • Products and services are DESIGNED to be ‘Fair’ – for those clients • Working WITH the client – seeing the world through their eyes 9

10. Recap on TCF – The UK Experience • The FSA sees TCF as a pioneering example of the move towards more principles-based regulation ‘TCF is about placing responsibility on firms' management to deliver fair outcomes for consumers whilst offering you the flexibility to deliver these outcomes in the way which best suits your business.’ 10

11. Effect on Firms • Culture and language • More ‘Client’ focussed • TCF is everyday language • Assumptions • Satisfied and Fair are not the same • Someone else will judge ‘Fair’ • Business Planning and Marketing • Be in business on purpose • Know who your clients are • Know where you add value – and where you don’t 11

12. Effect on Firms • Risk • Risk is not just volatility • Informed consent – engage the client in the process • Costs • Many funds have high costs which degrade returns • These costs are not always transparent or fully declared • Due Diligence • Not to justify a sale……. • . . . But to protect clients from Toxic products 12

13. Risk Group 1 2 3 4 5 6 7 Score Range 0 - 24 25 - 34 35 - 44 45 - 54 55 - 64 65 - 74 75 - 100 No. in Group 1% 6% 24% 38% 24% 6% 1% Risk Tolerance – the normal distribution pattern (Source – FinaMetrica) 13

14. The Adviser View of Risk v Reward 14

15. The theoretical view of Risk v Reward 15

16. The Clients experience of Risk v Reward? 16

17. Impacts on UK market • Remuneration • Standard commission on all products – usually by levelling down • The move to an Adviser Charging model – “Because I’m worth it” • Separation of Advice from Implementation and Review now more common • Client segmentation and propositions • Clarity of service – written promises about delivery • Care needed about the interaction of increasing costs and limited capacity • Marketing • Increased clarity of target market and product / service • Niche is critical – an ‘Avatar’ approach 17

18. Impacts on UK market • Management Controls and Business information • What gets Measured gets Managed • Complaints / FOS • ‘Goalkeeper’ / Fullback function • TCF is used as a touchstone • Product design • Bells / Whistles are what every marketer wants…… • . . . but do they add value? • ‘Confusion’ marketing? 18

19. What’s happening in the Market? • Greater complexity of products: • Asset Classes / Construction • Jurisdictions • Increased separation of Production and Liabilities • Increased debate about: • Role of Providers • Investment process and costs – Passive v Active, for example • Chasing returns in a low inflation environment? • Are clients lifestyles now our main competition? • Do we ‘pander to clients’ – in the words of Lord Turner – or educate them – just say NO? 19

20. The (official) stance of the UK Ombudsman • How are ombudsman service decisions affected by the FSA’s “treating customers fairly” programme? • The ombudsman service decides, in the circumstances of a particular complaint, whether an individual consumer has been treated fairly – taking into account the law, relevant rules and good industry practice. • The FSA’s “treating customers fairly” programme encourages the senior management of an FSA-regulated firm to create systems that support fair treatment of all customers. But it does not impose any new rules. • So “treating customers fairly” should improve the way businesses treat their customers. But it does not affect how we decide individual complaints. 20

21. Implementation • Create a TCF Policy Statement (with Advisers and Staff) • carry out TCF Gap Analysis and feed into a TCF Plan • Measure progress against the Plan • Gain feedback from management, advisers, staff and customers in respect of the key aspects of TCF • Document these findings • Modify your TCF Plan. 21

22. Measuring Customer Outcomes • MI is the key factor in securing and monitoring TCF progress • TCF should not require creation of substantial new MI • But it may! • Senior management should be assessing and reviewing their MI to ensure the customer “outcomes” are being met • ‘Client Satisfaction’ can be a useful input – but be careful! • This is a continuous process – it is not something you put in place then forget about 22

23. Key Drivers – Management Controls • Are you aware of how your customers are being treated? • Or at least how they feel they are being treated? • Do you have a robust monitoring process? • Do you have relevant controls in place? • Is your MI relevant and being used in real life to measure whether fair treatment of customers is taking place? • Are you reviewing the controls you have in place to ensure they are relevant? 23

24. Strategies used to Implement TCF • Gap analysis • What does ‘Good’ look like? • Where are we now? • What are the steps on the way? • MI and Benchmarking • What gets measured, gets managed • Are we really as good as we think we are? • What makes our firm special? 24

25. An SA Insiders view of costs – TCF? “Although the Financial Services Board’s Treating Customers Fairly programme is a step in the right direction, Nti’s concern that it will not be far-reaching enough is a real one, because serious profits are made from product design and the industry will not walk away from them easily. As one industry insider said” “If one day South Africans woke up and saw a fully transparent financial services industry, they would scream.” 25

26. An SA insiders view of Costs – TCF? “The fees on this product, which is created through an endowment structure, essentially result in the underlying investment having to perform at about 11% just to match a cash return after costs.” 26

27. An SA insiders view of Outcomes – TCF? “One can tick all the boxes as having followed the process for giving advice as defined in the Act, but still end up with shocking advice.” 27

28. Where are we? • Client needs have remained the same . . . • . . . But the potential solutions have become more complicated • This requires a proper ‘TCF’ led process • Client take on • Planning and analysis • Due Diligence • Implementation • On-going reviews 28

29. Conclusion TCF is coming – the timeline is set out This will have an affect on your business and process Risk and cost to consumers is a critical part of the process Remuneration policy will be one of biggest drivers for change and remuneration structures will change – think this through Target Markets and Client Segmentation are key to understanding ‘Client Expectations’ You will need a project plan 29