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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