Consumer Protection

Antonio Lucas

19th April 2012

Page 2

Contents

Section Page1 Increasing global pressure 3

2 How might firms respond? 9

3 Conclusions 14

Page 3

Section 1

Increasing global pressure

Page 4

Increasing global pressure: Regulations

► “Consumer protection – how firms approach the sale of financial products and services - is at the core of customer confidence in financial markets and central to the GRR initiatives.

► As firms seek to return to growth following the financial crisis they will need to rebuild customer trust. It will be no small feat to achieve this, particularly in a still-fragile market environment. Regulators, who in many cases are now also shareholders, are taking a tough and politically popular line and a raft of changes to consumer compliance laws and regulations have been introduced.

► In order to meet the demands of the changing regulatory requirements in the area of consumer protection, financial institutions will need to holistically evaluate and modify business strategies, product offerings, pricing structures and compliance governance and oversight; all with a focus on improving both transparency and the customer experience.”

Consumer Protection

Page 5

Evolving regulatory landscape: Overview

► Regulation getting tougher generally

► Regulators critical of own performance leading up to the crisis

► Move to “show me” regulation

► Boards and senior managers not on top of their business

► Continuing high risk environment

► Believe issues are replicated across the industry

► Politics – responsibility / accountability

► Panel review processes, new more intensive/intrusive approaches to prudential and conduct risk

► Deal with problems before they occur – product intervention, but focus on sales and post –sale continues

Page 6

Regulatory landscape

Building high quality

capital and liquidity

standards

Strengthen Governance

&Risk

Management

Make the financial

system and infrastructure more robust

Risk-aligned remuneration

Improving the ability to

manage failure

“Too big to fail”

Expanding the

regulatory perimeter

Consumer Protection Initiatives

Dodd-Frank

PRIPs

MMRClient Money

MiFID II

Page 7

……And there is more to come…..2011 2012 2013 2014

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Insurance Mediation DirectiveCommission proposals expected April 2012

Packaged Retail Investment Products (PRIPS) Directive

Estimated to take effect within one year of RDR in UK

Review of Insurance Guarantee Schemes Review of Insurance Guarantee Scheme – further developments?

Consultation period ends 30 Nov2010

Strengthening Financial Supervision through implementation of a new supervisory regime

Key milestones

Review of Corporate Governance

Solvency II implemented?

Revised MiFD Firms can expect to receive consultations and guidance on implementation from national regulators at some before end of 2012.

Consultation ends 31 January 2011

Page 8

Example Consequences

Barclays Bank plcUK Investment Advice, January 2011, £7.7m

Alliance & LeicesterUK PPI, Oct 2008, £7m

RBS and NatwestUK Complaint Handling,

January 2011, £2.8m

AmexItalian usury, money

laundering and transparency

requirements, April 2010Issuance of cards

prevented

Bank of AmericaUS illegitimate fees, June

2010, $108m fine

Lehman Minibond16 distributor banks –agreed to repurchase minibonds at 60% of

notinal valueBanks disgorged

commission income to tune of $291m

Page 9

Section 2

How might firms respond?

Page 10

The customer journey

Product Design

Marketing Product Disclosures ClaimsSale Processes Complaint

Handling

FinancialDifficulties/

ArrearsHandling

▶ Project Definition

▶ Target market▶ Testing▶ Regular product

reviews

▶ Financial Promotions

▶ Product literature▶ Clear, fair and not

misleading▶ Jargon free▶ Factually correct

▶ Pre Sale disclosures▶ Post Sale disclosures▶ Accuracy of information▶ Information up to date

▶ Informed of the claims process

▶ Informed of what can claim for

▶ Competent claims handler

▶ Fair assessment of claims

▶ Settled in a timely manner

▶ Identified within appropriate time

▶ Affordable solutions sought that are suitable for the circumstances

▶ Forbearance measures

▶ Informed of the complaint handling process

▶ Resolved in a timely manner

▶ Complaints recognised and handled accordingly

▶ Investigated thoroughly and independently

▶ Clear explanation of the decision

▶ Suitability▶ Appropriately

skilled staff / Training

▶ Demands and needs appropriately addressed

▶ Clear information regarding the implications of the products

▶ Regular customer reviews

Governance

Treating Customers Fairly

Reg

ulat

ory

Req

uire

men

ts

Stra

tegy

Confidential – All Rights Reserved – Ernst & Young 2012 Ref. Int/24112010/74199

Page 11

Where problems can occur

Problems

Exploitativepricing and

design features,disregard of

how products might behave,unfair contract

terms

Exploitation ofconsumer

behavioural traits(risk appetite,

inertia)

Misalignment of firm and consumer

interests leading to:

Unsuitable advice

Mis-selling

Unclear responsibilitypost-sales

Lack of information onproduct performance or

review of appropriatenessin changing scenarios

Churning/lack ofpersistency

Lack of continuingconsumer care

Further unsuitable salesto “correct problems”

Post-sale handling

Traditional focus of FSA intervention

Point-of-saleDistributionstrategies

Development

Increased focus under the new strategy

Financial Promotions

Act to prevent detriment before it happens

Page 12

Embedding consumer protection initiatives through the customer journey

Product Design

Marketing Sale Processes

Policy

Process

Systems and Controls

ØIs there a product approval committee whose role is clearly defined?

ØWho attends this and how is the “customer voice” represented?

ØHave go / no go criteria been set and is there a clear plan to product launch?

ØHave your target customers been defined? Have you clearly articulated where manufacturing responsibility ends and distribution starts?

Ø Do your processes permit the sale of your product in the way intended?

ØDo your systems and controls allow you to monitor performance and report such that action is taken?

Governance

ØWhat does your conduct risk appetite state in relation to mis-selling risk?

ØIs the risk managed through policies that first consider the customer?

ØAre staff appropriately trained to ensure suitability has been properly assessed? What ongoing training and competence arrangements are in place?

ØWhat processes are in place to ensure consistent and compliant treatment of customers? What additional steps has your firm taken to prevent staff proceeding with sales that may be unsuitable (e.g. systems constraints)?

ØDo your firm’s monitoring mechanisms allow risks to be detected efficiently (eg, by using different monitoring methods)?

ØHas your firm established sign off procedures which are appropriate for the different types of literature?

ØIs all literature clear, fair and not misleading . Has your firm set guideline s for what this means?

ØDo processes ensure all literature includes expiry dates and that there is a process for issuing new literature ahead of expiry dates?

ØHow does the firm operate systems and controls such that financial claims can be tested and substantiated prior to sign off?

ØDo monitoring arrangements include assessments of the above factors?

Page 13

Embedding consumer protection initiatives through the customer journey

Product Disclosures

Policy

Process

Systems and Controls

ØHow does the firm decide which features are included within which documents?

ØHave documents been appropriately branded with the firms’ / regulators’ logos correctly used?

ØIf joint branding, is it clear who the customer relationship will be with?

ØHow do you test that disclosures are clear, fair and not misleading and made at the appropriate point in the sales process?

ØDo your processes ensure information you are providing is accurate and up to date?

ØDo your systems allow for immediate fulfilment of documents where required?

GovernanceØAre complaints handled independently from the area about which the complaint is made?

ØHas the firm set policy to determine what is reported as a complaint / which complaints fall under which jurisdictions (e.g. FOS rights)?

ØHow are complaint reports, e.g. where required by the regulator, signed off?

ØHas the firm set its policy on redress when upholding a complaint and on goodwill gestures when a complaint is rejected?

ØAre processes providing effective feedback loops and is management receiving relevant MI?

ØWhat is your claims experience telling you about the product performance and sales process (eg was the product designed at a time of low unemployment)?

ØDo claims teams have appropriate authority levels with clear escalation routes?

ØDo processes ensure claims are settled in a timely manner?

ØAre claim handlers appropriately skilled and trained? Are guidelines in place to assist claim handlers to deal with sensitive customer scenarios (terminal illness or death claims)?

ØWhat does your complaint data tell you about the claims process and is this information used to inform the claims process and product design / disclosure?

Claims Complaint HandlingFinancial

Difficulties/Arrears

Handling

ØWhat is your policy for dealing with customers in financial difficulty?

ØDoes policy always account for individual customer circumstances? If not, when does this not happen and why?

ØCan the firm justify its charging policy in relation to arrears handling?

ØHave customers been provided with affordable solutions and been clearly informed of the steps they need to take to repair their situation?

ØHave forbearance measures been considered?

ØAre you obtaining MI to tell you if repayment strategies are working?

Page 14

Section 3

Conclusions

Page 15

Conclusions

Client Issues

Key challenges we are seeing at our clients include:

► The increased regulatory focus on the Consumer Agenda within the UK, EMEIA and US is driving clients to proactively assess their systems and controls

► The format and intensity of regulatory visits has evolved and frequently involves interviews with business managers and testing. Detailed preparation is required for these visits

► The level of enforcement activity has been increasing, with regulatory authorities issuing significant fines for non compliance

► Inconsistent approaches to process and controls across business units and jurisdictions is resulting in regulatory breaches

Thank you

Ernst & Young

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