06 Feb 2020

How regulations are transforming to treat customers fairly 

By Matteo Spadacini, Head of Compliance Asia

The rise of consumer protection and the principles of Treating Customers Fairly (TCF) has had a significant impact on the financial services industry. Recently, there have been many reported cases of financial institutions from around the world being heavily fined by regulators for not treating their customers fairly. As more insurers embed customer centric models into their processes, there are developments in the area of TCF and its implications on managing risks that they need to be aware of and apply.

South Africa’s Financial Sector Conduct Authority defines TCF as “an outcomes based regulatory and supervisory approach designed to ensure that regulated financial institutions deliver specific, clearly set out fairness outcomes for financial customers”[1]. While the UK’s Financial Conduct Authority (FCA) states that TCF is when “all firms are able to show consistently that fair treatment of customers is at the heart of their business model”[2].  

Post the financial crisis, regulators such as the FCA along with new regulations, were created to maintain the integrity of the financial markets. Now, more than a decade later, that spotlight is even more on protecting consumers, enhancing market integrity and promoting effective competition.

The FCA has been leading the global charge to shape the financial services industry’s regulatory framework by working with other national regulators and international bodies to ensure financial markets offer customers a fair deal.

Conduct risk in Hong Kong

Regulations on protecting the interest of customers and ensuring they are treated fairly have made their way into common law countries in Asia, such as Hong Kong. From September 2019, the Hong Kong Insurance Authority (HKIA) increased its powers on the regulation of insurance intermediaries and it will continue to monitor effective systems and controls across organisations.

A conduct risk policy, for example, is an essential TCF requirement for insurers as part of their approach to enterprise risk management. Conduct risk has been defined by the HKIA as the risk to customers that arise from insurers and/or intermediaries conducting their business in a way that does not ensure fair treatment of customers or results in harm to customers.

Conduct risk goes beyond what has been expected of insurance firms in the past in relation to TCF. It now focuses on the essence of a firm from product design to handling customer complaints and it drives to the heart of the behaviours, culture, morals and ethics of people at all levels.

Common examples of conduct risk to be managed, monitored and reported include mis-selling resulting from misleading information to customers or other unfair practices, such as inappropriate advice, as well as, mis-selling resulting from unsuitable products and transactions with sanctioned counterparties.

Implications for insurers in Asia

In recent years, TCF has become an area of significant regulatory focus, with an increasing onus on firms to define and manage it formally as part of their risk management framework.

In November 2019, Bank Negara Malaysia issued a policy document on “Fair Treatment of Financial Customers” [3] which is applicable to insurers. The document aims to create a system of financial service providers with a corporate culture that focuses on the fair treatment of customers, so they are more likely to have high customer satisfaction, retention and sustained business performance over the long term.

In October 2019, the China Banking and Insurance Regulatory Commission launched a new consumer protection campaign stepping up its scrutiny of the insurance sector’s products, claims and online operations[4].

A key driver has been technological change. Digital innovation is upscaling traditional business models as insurers strive to deliver on the customer experience and stay ahead of the competition. At the same time, regulators are keen to create an environment that promotes economic development based on new technologies while ensuring customers and society are protected. 

There is also increasing scrutiny and security in the areas of cyber security, data privacy and governance. They form the core aspects of ensuring customer’s data is used and managed properly, as well as updated considerations around anti-money laundering, counter terrorism financing, international sanctions and other financial crimes in general.

Considerations

Given the increasing focus and the importance of handling misconduct risks in the financial services industry, some key considerations for insurers should include:

• Does your organisation place TCF as a core strategic and business issue?
• Are your TCF goals clear and well defined?
• Has your organisation set aside budget and resources to implement the key TCF standards?
• Have you considered how your company’s TCF initiatives are impacting your customers and employees?
• Are your TCF considerations part of the day-to-day management of the business, or are they an afterthought?

A final word

Overall, compliance in Asia is keeping-up at a rapid pace with global standards and financial institutions in the region need to respond accordingly, ensuring they align.

At Generali, inspired by our ambition to become a Lifetime Partner for our clients and distributors we recognise that TCF initiatives need to be incorporated into the strategic direction of all business functions. This means ensuring there is a formal and holistic process in place, so that it becomes everyone’s responsibility (and not the sole of Risk Management and Compliance departments) to keeping abreast with the regulations for TCF as they develop.

 

[1] https://www.fsca.co.za/Regulatory%20Frameworks/Pages/Treating-customers-fairly.aspx

[2] https://www.fca.org.uk/firms/fair-treatment-customers

[3] https://www.bnm.gov.my/index.php?ch=en_announcement&pg=en_announcement&ac=750

[4] http://www.chinabankingnews.com/2019/10/11/chinas-banking-regulator-launches-campaign-for-protection-of-financial-consumer-rights/