A new rulebook for complaint handling

Independent consultant Martin Shaw gives a preemptive evaluation of what the highly anticipated new FSA regulations might look like and speaks to Respond CEO James Heavey about the potential implications for industry.

In a speech given on 15 September at a British Bankers' Association Complaints Oversight Seminar, FSA Director of Retail Themes Vernon Everitt explained that a new complaints rulebook is soon to emerge as part of a shift towards principle-based regulation and a rewrite of the FSA’s Conduct of Business rules. Based on all the available information I see two compelling reasons for change:

Firstly, the FSA determined a couple of years ago that it would move to principle-based regulation: instead of writing more rules it would rely on its principles for business to explain how it expects companies to behave. This would in turn pave the way for replacing the current Conduct of Business regime with a more limited rulebook, together with explanatory guidance. The focus is therefore shifting towards defining good outcomes for customers rather than prescribing the way companies achieve them.

Furthermore, the complaints rules are five years old. Over that time the rules have supported a move towards significantly improved complaints handling processes. But the July paper on Treating Customers Fairly indicated there are still concerns about whether some firms deal with complaints effectively and treat customers fairly.

Everitt’s speech served to remind the industry that the FSA are working to a deadline for a substantive implementation of TCF by March 2007. But there is also the general issue about whether firms are doing enough to avoid complaints being escalated to FOS, or to co-operate and learn lessons when cases do go to the Ombudsman. This rather indicates that the FSA’s imperative will be to create a new complaints sourcebook that fosters best practice complaint handling.

The second motive for change is a timing one, which is largely out of the hands of the FSA. MiFID (Markets in Financial Instruments Directive) introduces new requirements for investment products within its scope with a deadline of 1 November 2007. Article 10 of MiFID outlines requirements for the processing of complaints:
"Member States shall require investment firms to maintain effective and transparent procedures for the reasonable and prompt handling of complaints received from retail clients or potential retail clients, and to keep a record of each complaint and the measures taken for its resolution."

Many regulated firms have some or all of their activities captured by MiFID, including retail banks, stockbrokers, life insurers and portfolio managers. Additionally, as this is a maximum harmonisation directive, the FSA will need to remove any more onerous requirements in those areas covered by the Directive. So you can well imagine that principles like timeliness of complaint handling will no longer be defined by an eight week rule, but instead companies will have to determine given the circumstances of the case how to interpret principles such as 'reasonable' and 'prompt'.

This suggests a new landscape for complaints will evolve, such that MiFID provides a small central core that creates a common international floor. And while the FSA will elaborate on this with rules that do not fall foul of harmonisation requirements, they will continue to make use of case studies and FOS rulings to help translate principle into practice, as well as industry defined good practice to add reinforcement. The ABI has been redeveloping its own good practice guide over the last few months, and no doubt the FSA will be keen to see that it meshes with the new rulebook.

Implications for industry

In the past the financial services industry has been a little schizophrenic about principle-based regulation. Detailed rulebooks do after all give some certainty, and principles leave more open to interpretation and the absence of detailed standards means the FOS has less regulatory guidance to 'have regard to'.

However, companies that are keen to develop a cultural rather than compliance-driven approach to complaints should welcome the freedom. I spoke to James Heavey, CEO of Respond, the UK's leading provider of complaints and feedback management software to the financial services sector about how he felt Respond customers would react to a move towards principle-based regulation.

"A more principle-based approach will enable businesses to comply with regulations while still pursuing their commercial strategy. Many of our customers will welcome this flexible approach as it gives businesses the freedom to focus on strategic objectives while taking into account the needs of the consumer."

But this freedom does come at a price: a shift to principle-based regulation will put more onus on companies to consider how best to handle complaints well, and to act on issues that affect the timeliness, fairness or effectiveness of their processes. By the same token, the increasing influence of FOS in articulating fairness means companies need to focus on fair outcomes for their customers and to get better at learning lessons.

"Putting customers' interests at the heart of business trategy is what a principle-based approach is all about," said Heavey. "By carefully managing and analysing complaints businesses can identify the root cause of problems and discover where products and services can be improved. This enables a more customer-centric approach but at the same time helps businesses identify possible gaps and opportunities that can lead to new product development."

The road ahead

In all likelihood the new rulebook will need careful interpretation by companies and the very short timescales for consultation and implementation will also be a challenge. Companies are hardly bereft of regulatory initiatives at the moment and there are already many calls on resources for other parts of MiFID. So industry should test how well the FSA’s implementation of MiFID avoids disproportionate new demands on companies, outside the scope of the directive.

And at an operational level the shift in style of regulation calls for companies to have better intelligence on how well they are handling complaints. This includes ensuring procedures and culture support fair decisions and clear communication, having more adaptable and effective systems and controls, giving more focus to root cause analysis, listening to customers’ experiences of making a complaint, enhancing the capability of management information, looking to the trade bodies to provide the leadership and interpretation of good practice, and using trusted vendors, like Respond, who understand the market and are proven in delivering strategic value to companies.

In weighing all this up, the process of change has been with the industry for some time already and continues to be guided rather more by TCF than it does by European harmonisation. There will be new challenges, but the shift to principle-based regulation presents new opportunities for the industry to raise its game and demonstrate a commitment to handling complaints well. But let us wait to see the new rules before we get too enthusiastic!

By Martin Shaw

About the author

Martin Shaw is an independent consultant and respected commentator on the financial services industry.

Martin left the Association of British Insurers in June 2006, where he worked for three years as Director, Raising Standards. He led a number of projects designed to improve confidence in the industry. Before that he worked for the Consumer Protection department of the FSA, working on a range of policy issues, and was previously employed by Bradford & Bingley Group for 15 years, mainly in sales and planning functions.

Martin holds an MBA and is a Fellow of the Chartered Institute of Bankers.