Treating Customers Fairly

The Financial Services Authority has given firms until the end of the year to ensure that they treat customers fairly but how fair is fair?

The story so far.  Back in 2006 the FSA announced that it was going to tear up chunks of its 8000 page rulebook and replace it with a handful of high level principles, based around fairness. 

Consumer representatives said, “That’s good.  We don’t understand all that APR, AER stuff but we understand Fairness”. 

The industry was outraged; how could the FSA suggest they weren’t treating their customers fairly already?  But then misselling of endowments, pensions and split caps were pointed out to them and they said, “Well what do you mean by fairness exactly?” 

To which the Regulator replied, “We don’t want to say what it is exactly but we’ll know it when we see it.  And we expect you to recognise it too.” 

So with the December deadline fast approaching, banks, insurance and investment companies the length of the land are trying to ‘embed’ Treating Customers Fairly’.

The FSA has given good and bad examples of what is fair practice but the industry continues to bemoan the fact that the regulator won't define it.  However as one senior FSA executive said, “We deliberately don't offer a definition of fairness. Fairness means different things to different people.”  At which point you start to have some sympathy with firms. 

So what is ‘fair’? To illustrate how tricky this can be how would you answer this non financial services example?  You have purchased a first class train ticket. The carriage is half empty (this is hypothetical you understand)…

1. The guard discovers another passenger in the first class compartment has a standard class ticket and asks that passenger to leave.  Is this fair?

2. It then transpires that there are no seats in standard class.  Is it still fair to ask the passenger to leave?

3. The train company has just announced £1 billion profits and is refusing to put on extra carriages. Is it still fair?

4. The passenger being asked to leave is an 80 year old lady who is infirm and nobody in standard class has given up their seat for her.  Is it still fair to eject her from first class or do you just hide behind your laptop?

I recently put this to a seminar and the responses were 100% to question one, and progressed down to one person who rather sheepishly insisted ejecting the elderly lady was fair.  So fairness depends on the surrounding circumstances and crucially on your own attitude to train companies, first class travel and elderly people, which is why fairness is so hard to define and presumably why many firms have found it difficult to acknowledge that their practices might be unfair.  Their attitude to fairness has been based on what they think is fair rather than a more objective view of fairness.

It also illustrates the certainty that rules give; no first class ticket, no seat in first class. And the uncertainty, but potential for greater fairness, of principles; an elderly person with no ticket ought perhaps to be allowed to stay.

Treating Customers Fairly has the potential to deliver substantial improvements for consumers as long as firms understand ‘fairness’. The FSA thinks it will know it when it sees it and firms will just have to hope that the FSA sees it the same way they do.