Treating customers fairly or treating customers frivolously

Whether covered by regulation or not, it is important for debt buyers and debt collectors to embrace TCF guidelines now, so they are prepared for any future regulatory changes

By Willem Wellinghoff, Legal Counsel, Cabot Credit Management

It is almost a decade since the Financial Services Authority (FSA) challenged financial services firms to embed the treating customers fairly (TCF) principles and still today TCF forms a central part of the FSA’s regulatory agenda.

In recent years, there has been a significant focus on embedding TCF in the debt collection and debt purchase industry, but why is this and what can we expect in the future?

It is often a misconception that TCF is linked to customer satisfaction and how you treat customers and, although this may be a measure, it is actually outcome-based regulation which has the consumer at the heart of every decision, process and model that a business operates. It is primarily focused on improving the consumer experience and confidence in the financial services industry based on six outcomes.

Firms regulated by the FSA need to instil TCF within their culture and need to evidence compliance with TCF through management information. It is, therefore, understandable why the debt collection and debt purchase industry is captured by TCF.

As financial services firms make the conscious decision to outsource or sell debt to specialist debt recovery and purchase agencies in the consumer credit industry, they need to ensure that the appropriate systems and controls are in place with collectors to ensure that the consumer will not suffer any detriment and that the same culture is implemented.

Every process, from recruiting an employee and having adequate risk controls to evidencing decisions you make in every part of the business and your rewards schemes, needs to consider the outcome-based regulation and what impact it has on the consumer.

Currently, in the UK, debt buyers and debt collectors do not need to be regulated by the FSA, however, as the Office of Fair Trading (OFT) and FSA have overlapping interests and statutory objectives, which include the protection of consumers and ensuring confidence in the financial services industry, both regulators signed a memorandum of understanding in December 2009.

It came as no surprise then that the OFT agreed to focus on TCF and pressed consumer credit institutions to implement TCF within their business. Indeed the OFT stresses, in their own guidance, that TCF must be adhered to by consumer credit institutions, despite it not be regulated by the FSA, as otherwise it could question the trader’s fitness to hold a consumer credit licence.

This has never been more important - debt buyers and debt collectors are being urged to embed TCF as part of their culture and continually monitor systems and controls and appetite for risk.

The Financial Services Bill has made provision for consumer credit regulation to be transferred to the Financial Conduct Authority (FCA) from the OFT. Once the bill, which has recently had its second reading in the House of Lords, becomes an act, it will more than likely provide powers to the FCA which have not been granted to the OFT or the FSA previously.

These may include the ability to withdraw promotions and products and publicising investigations and enforcement activity. So it is important for collectors to consider early on which products they are willing to service or purchase to ensure they do not risk regulatory intervention longer term, especially where products with a higher risk profile are coming to the market. Due diligence and having adequate information to make the right decisions are again crucial.

How TCF will shape up in the awakening of the FCA is yet to be seen, however, it is more than likely that a similar or stricter regime will take its place.

An impact assessment on how consumer credit regulation will be transferred to the FCA is due by the end of this year, so we will have a better idea of how the FCA is intending to manage TCF and to ensure organisations have adequate systems and controls. However, until then we know one thing for sure: the FCA is coming in 2014 and only those debt buyers and debt collectors that are excited by the prospect of this challenge and are willing to consider a change to their systems and controls and embed TCF within the culture will be successful.

July 2012

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