UK's FSA clarifies TCF for wholesale firms

LOSSES & LAWSUITS

LONDON - Principle Six of the UK Financial Services Authority's (FSA) Treating Customers Fairly (TCF) initiative states "a firm must pay due regard to the interests of its customers and treat them fairly". It has been unclear whether this applies to wholesale firms, but at a Protiviti breakfast briefing held in London on April 15, Sarah Wilson, director for TCF at the FSA, attempted to clarify the issue. She stated that the FSA's focus would be on retail firms. "Principle Six applies to all 'customers', defined in the Handbook - broadly - as clients who are not eligible counterparties," she said. "While this can encompass a wide range of entities - including, for example, professional clients such as commercial enterprises - the TCF initiative, being risk-based, is primarily concerned with retail clients. The focus of our supervisory effort is therefore on firms who design, market or are involved in the operation of retail products or services; those that distribute retail products; and those that have a contractual or other relationship with retail customers (including as a result of producing or distributing a product) such that they provide an ongoing service of some kind."

Jonathan Jesty, a director in Protiviti's financial services industry practice, says there was a mixed reaction to the clarification from the FSA. "Most firms welcomed the news from the FSA that firms that did not deal directly with retail investors or have a primary role in producing products for the retail market would not normally be subject to scrutiny in relation to the TCF initiative. But there was also some frustration over the focus of the TCF language on 'products', as many firms in the wholesale market regard themselves as providing services, not products in the sense FSA is using. Such firms must decide for themselves what aspects of their business model are relevant under the TCF initiative."

Although the FSA has stated its focus will remain on retail, it cannot say with any final clarity that wholesale firms can opt out of Principle Six entirely. "Firms need to think about how Principle Six applies to them and their business model if they haven't done so already," says Jesty. "Sometimes in the past firms haven't been helped by mixed messages from different departments of the FSA. If the FSA can ensure consistency in its approach to how TCF applies to wholesale firms, based on Sarah's comments, I think wholesale firms will be able to take a commonsense approach to the application of TCF in their businesses. The sensible thing for such firms to do, if they haven't already done so, is a basic analysis of the areas of their business that are relevant in the context of the spirit of TCF and Principle Six, taking account of the complexity of what they provide and the sophistication of their clients/end investors (even where professional) and decide whether there are actions they still need to take for management to obtain the requisite assurance."

Most firms in the wholesale market not involved with retail clients or products (directly or indirectly) should not be much burdened by TCF, but it is clear they do need to take a foundation-level view of how it applies to them and where their business could benefit from it. "One area touched on at the seminar was the impact of recent market turbulence," says Jesty. "Some firms could benefit from an analysis of credit-related products sold to the corporate and institutional market with varying degrees of sophistication before the credit crunch hit to see if they have done enough to ensure customers have been treated fairly and anticipate whether any problems are being stored up only to be discovered further down the line when they might well be more difficult to deal with."

The deadline for firms to submit their TCF Gap Analysis passed in March 2008. This document shows regulators, and the firms themselves, that customers are being treated fairly and that firms have the right management information in place to test whether or not they are treating their customers fairly.

A survey held at the briefing showed that only 16% of financial institutions feel their TCF project has been substantially completed, and 15% claim no project had been initiated or is planned at all. Firms displayed polarised views of the value of the TCF initiative in the context of wholesale/institutional business. Some 37% of companies represented felt their TCF work would positively result in benefits to their businesses and strengthen their reputations. On the other hand, 53% did not consider TCF would generate any additional value to the firm or its customers. Most of these were firms who said their business was with corporate/institutional clients or high-net worth/private banking clients and that they had no or negligible retail business.

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