FSA Annual Report 2006/07 - Better Regulation Ltd

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108 Section six – Appendices Appendix 2 Retail strategy Our overall retail strategy is to help consumers achieve a fair deal. To fulfil this aim, we operate a risk-based approach and focus on achieving capable and confident consumers; clear, simple and understandable information for, and used by consumers; soundly-managed and well-capitalised firms who treat their customers fairly; and risk-based and principles-based regulation, through firm-specific and thematic supervision and policy. The retail market is characterised by many problems that make it difficult for us to meet our consumer protection, market confidence and consumer understanding objectives. Some of these relate to poor practices by firms across a wide range of sectors and types of business. These we aim to identify and address through our policy, firm-specific supervision and thematic reviews. Others relate to low levels of financial capability on the part of consumers. These factors underpin our particular focus on treating customers fairly and on financial capability. We recognise that there is more we need to do to improve our communication of what we are doing and why. We have been working with our stakeholders and building on the feedback we have received to make further progress in this area. Treating customers fairly (TCF) As the Panel acknowledges, we have published a range of materials, including case studies and examples of good and poor practice, to help firms understand what TCF means in practice. We also provide training for firms on TCF, and for small firms we have produced a simple self-assessment tool and published new TCF web pages. Firms’ progress on TCF has been mixed; over 90% of major retail firms, 87% of medium sized retail firms, 74% of wholesale firms (where TCF is relevant) and just over 40% of small firms sampled were implementing necessary changes in a substantial part of their business by 31 March 2007. To encourage small firms to engage with this initiative we are increasing the help available to them, including expanding the range of TCF online tools and beginning the roll out of regional workshops. We recognise that some in the industry are concerned about the costs associated with the need for firms to prove that they treat their customers fairly. However, we do not believe that evidencing TCF need be as onerous as some have suggested. In accordance with existing regulatory arrangements firms already collect large amounts of management information (MI) that can be used to measure performance against TCF outcomes. To further support firms in meeting the March 2008 deadline for MI, we will continue to work with the industry to help develop and share good practice. We have already promised the industry that where a firm can demonstrate good performance against the TCF outcomes through its MI it will be subject to less regulatory scrutiny. This will mean that such firms should incur lower costs in managing their dealings with us, benefiting from a ‘regulatory dividend’. To help us measure and report on our effectiveness in delivering regulatory outcomes we have developed an outcomes performance report (OPR), which we published in outline in April 2007. As part of this we will measure the extent to which financial services firms treat their customers fairly.
Section six – Appendices Appendix 2 109 Retail distribution review Until the root causes of the problems in the retail distribution markets are resolved only limited progress can be made towards improved outcomes for consumers. The purpose of our retail distribution review is to deepen our understanding of the root causes of the problems in the retail investment market and then to help address them. We are working with industry-chaired groups and consumer representatives to find solutions that are attractive both to consumers and firms. There is an encouraging degree of consensus emerging on the possible future shape of retail distribution. Our Discussion Paper, to be published on 27 June, will set out the ideas that have been put to us and will seek feedback on how far these can address the problems that have been identified. We are giving a six-month period for discussion so that we can undertake further work to assess the costs and benefits of the options for change and the impact on different parts of the market. This will help us decide whether any regulatory change is needed to deliver the proposals and, if so, how to do this with appropriate periods of transition to limit any adverse effects on the proper working of the market. We are aware of the need to proceed cautiously and to consider carefully the impact of potential changes. However, it is clear to us that current arrangements are not sustainable, so we are determined to make progress. Thematic work Where similar issues arise in a number of different firms, we carry out thematic work – a co-ordinated programme of work involving a number of different firms to address an issue of potential or actual risk to our objectives. In planning our programme we consider the overall impact on the firms and markets we regulate. We have a range of regulatory tools that we can use to assess and monitor the risks; mystery shopping is just one of them. We also use, for example, desk-based reviews of firms’ product literature or visits to firms. There is no single prescribed sample size for a mystery shopping project; our aim is always to make the research ‘fit for purpose’. In being proportionate, we have to achieve the right balance between the cost to ourselves, the cost to the industry and the level of coverage required to generate useful conclusions. Qualitative samples are not (and are not meant to be) statistically representative of the population being researched. Instead, they are designed to reflect the target population by comprising a spread of the different types within the population. Quantitative research is used to measure what common behaviours or attitudes are, and so involves large samples that represent the target population. Because of the much larger samples required, quantitative research is more expensive and time consuming than qualitative research, and we would only use it if our research objectives dictated it. Our thematic plan for 2007/08 has fewer projects and is more clearly positioned so that it highlights the key issues we are focussing on. We have received positive feedback on this from industry and trade associations, who have told us that this gives them a clearer understanding of what our thematic priorities are and how we intend to address them. In the coming period, we intend to focus on a smaller number of larger themes. In response to requests from the Panel and other industry practitioners, we will say more about the risks we decide not to address in line with our risked-based approach. In all cases we will consider whether regulatory intervention is a ‘must-do’ rather than a ‘nice-to-do’.
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FSA Annual Report 2006/07 - Better Regulation Ltd

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