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Part 2: Driving business capital value

Posted on 29 June 2021   

In our previous newsletter, Driving Success in Challenging Times – Part 1: Driving business capital value, we highlighted factors that can drive and destroy capital value in a business. One particular factor that we expand on in this newsletter is how the implementation of Treating Customers Fairly (TCF) contributes to driving business capital value by contributing to both, client and income retention.

The history of TCF dates back to Board Notice 80 of 2003. At that time, the principles of TCF were woven into the legislation. The aims of the TCF principles are to reduce market conduct risks and protect consumers of financial products. In a nutshell, the Financial Services Board, who was the Regulator at that time, was looking for a way to reduce customer dissatisfaction and increase confidence in the financial services sector. Since then, we have seen a steady increase in regulators incorporating the TCF principles into legislation. The latest being the Amendments to the General Code of Conduct (GCoC), with the final amendments taking effect on 26 June 2021. One of the new requirements in the GCoC includes a new Complaints Management Framework that includes the requirement to categorise complaints in relation to the six TCF principles. The Conduct of Financial Institutions Bill (COFI Bill), that will replace the FAIS Act and several other pieces of legislation, includes reference to the implementation of the TCF principles which, makes the TCF principles legally binding and enforceable. Our previous newsletter looked at the positive impact that consistency of service and continuous effort to meet client expectations, especially when it’s documented in a client Service Level Agreement, has on building business value.

Taking a step back, and looking into your business with objective eyes, are you comfortable that it is structured in a way that treats your customers fairly? Are you comfortable that your administrative processes, advice process and client servicing processes are designed to serve your customers? Are these consistently implemented by everyone in the business? Is there a central Operations Manual which provides guidance on the ‘How to treat our customers fairly’ in your FSP, and is this consistently reviewed and adapted as changes come into place?  Are you able to evidence examples of how your business has integrated the six TCF principles into your business?

To gain a thorough understanding of the policies and processes that must be included in your Operations Manual, read more and register for our How to create an effective Operations Manual for your FSP webinar.

Consider the following:

  1. How would you describe that your business treats its customers fairly?
  2. Have you documented all the processes in your business with the aim of placing the customer at the heart of the business, and therefore demonstrating the TCF principles?
  3. Do you keep a record of complaints related to the TCF principles as Management Information?

Below we provide examples of processes that demonstrate TCF Outcomes 1 and 2, giving you insight into how these principles can be embedded into the business, and as a result, demonstrate that clients are placed at the heart of your business.

TCF Outcome 1 – Customers must feel confident that they are dealing with an institution where TCF is at the core of their culture 

Educating employees and creating awareness about TCF
The first steps are to think about your business culture and how this is underpinned by TCF. What are the core values? What does the business stand for and how are these values ‘lived’ every day so that it demonstrates that the client is truly at the heart of the business. For example, when weekly meetings are held, is “adding client value” on the agenda? If any complaints were received, is part of the process to try and understand the issues and/or frustrations, how it could be improved and which TCF principle it links to? Do you share ideas on specific actions taken to add value to your clients?

Once you know what these values are and how you ‘live’ your business culture, the next step is to embed these behaviours in your business by linking them to the TCF principles. The best way is for the leaders to be the example. How is the culture ‘lived and demonstrated’ every day? How do you educate and train your people? One can constantly reinforce the business culture by providing ongoing education and creating awareness about the link between the business culture, values and how these fit with the TCF principles. This constant reinforcement will contribute to employees gaining a broader understanding of the TCF principles, its requirements and impact on the business. It will also provide guidance on how to practically demonstrate it in their day-to-day activities. A practical way of embedding TCF in your business is to have a workshop session, or sessions, and to discuss employees’ job descriptions and how TCF is relevant. For example, basing Key Performance Indicators or Key Measurable Indicators on the quality of work done and client satisfaction versus the quantity of clients served/serviced.

In our previous newsletter we also referred to the fact that non-compliance to regulation destroys business value and will influence the price/value as it could directly impact your licence to operate and as such, embedding the TCF principles in your business positively builds business value and, as a result, positively influences the price/value you could expect if you wish to sell.

TCF Outcome 2 – Products & services marketed and sold in the retail market are designed to meet the needs of identified customer groups and are targeted accordingly

The essence of this outcome is to ensure that you understand your clients’ financial needs and circumstances and are able to provide a suitable product or service solution which will meet these needs. In order to achieve this, your selection of Product Suppliers is a key factor towards being able to cater for the financial needs of your clients. In our previous newsletter, we mentioned that getting involved with unsuitable products or companies where due diligence does not stack up, destroys business value. Consequently, it is important to truly have a good grasp on your existing and potential new Product Suppliers and their overall offering.

When assessing existing and new Product Suppliers, it might be useful during the process of assessing the overall product and services offering to look out for any possible risks. For example, the target market the product was designed for and whether it is suitable for your clients. Further to this, whether there are any elements as part of the product design that might affect your clients e.g. annual premium increases based on age, which could result in the policy/cover becoming unaffordable or promises of extra-ordinary investment returns. When assessing a lesser-known Product Supplier, a more detailed due diligence is required. For example, verifying whether the Product Supplier is licensed with the FSCA to provide the products they are offering, the duration of them being in business, claims history, or whether there have been any Ombud cases against such a company. Further, unsuitable products may result in clients losing their savings and your business’ reputation might be badly affected. An example of this is illustrated in the following case:

Ombud case: In the case of Teddy Maditse (the complainant) versus Magajana Trading and Projects CC and Lindiwe Mtasa Magajana. The complainant made an investment with Magajana to utilise the capital to further his tertiary studies. However, Magajana was an unlicensed FSP when this transaction took place. The end-result is that the complainant did not receive his capital and there is no evidence where or how the complainant’s funds were invested, if at all. The complaint was upheld, and Magajana was ordered to pay the complainant the amount of R94 000 with interest.

According to the Edelman Special Report: Brand Trust in 2020, respondents rated “I must be able to trust the brand to do what is right”, as one of the top five important factors influencing their buying decision. Therefore, partnering with respected and trusted Product Suppliers and/or Third Parties, such as Discretionary Fund Managers (DFM), or a CAT II FSP, can positively impact business reputation and that may lead to client referrals. If you think of your own customers, how confident are you that they trust your brand to do what is right? How do you constantly review your brand to ensure that it stays in line with your customer’s changing needs?

Product Specific Training
In our industry, it is a given that product specific training on new products and on changes to existing products forms part of the competence requirements as set out in Board Notice 194 of 2017 and ensures that all Representatives are fit and proper to provide suitable solutions to the FSPs’ clients.

We all know that keeping up to date with product changes is key to ensure that the product solutions offered to clients remain relevant. For example, changes to the waiting period, minimum premium amounts, or any other material changes, etc. Keeping clients in the loop regarding changes continues to tangibilise the value that your business brings to its clients. It allows both the business and the client to determine whether the product still suits the client’s financial needs and if not, to make the necessary changes. Another key consideration about remaining up to date with product specific training is that it builds client trust as clients become used to being made aware of any changes which could e.g. possibly impact a future claim. The process of building and keeping trust becomes part of their interaction with your business.

This brings us back to TCF Outcome 1, which requires that TCF is at the core of the business culture. When employees (both administrative and Representatives) are trained properly, they can easily explain and address any queries the client may have on any product, within the ambit of their job description. For example, administrative employees would answer queries dealing with turnaround times, or the state of a query, whereas representatives will deal with advice and product-related queries. This will mitigate the risk of mis-selling, which leads to a reduction in client complaints. It may also improve the quality of service provided which positively impacts the client experience. According to an article published on Blog Hubspot, a positive customer experience promotes loyalty, helps you retain customers, and encourages brand advocacy (Bordeaux, 2021).

Suitability Analysis
In our previous newsletter, we addressed the value of client reviews. Although Section 7(4) of the FAIS GCoC requires FSPs to provide a client with a statement at least annually, the initial advice is the starting point of the financial services relationship with the client.

How does providing suitable advice contribute to driving business capital value? It is the beginning of the client’s relationship with the business, and one that ideally would last for many years. This, as we know, creates an opportunity to provide suitable advice across a variety of financial needs clients might have. This would constantly be updated over the years as client’s financial needs and circumstances change. Discussing money, finances, and possibly mortality, are very emotive and sensitive subjects. The Certified Financial Planner (CFP) Board also recognised the link to emotion and behaviour, to the extent that it will include questions on the psychology of financial planning in the examination for the Certified Financial Planner (CFP) Board of Standards designation (Barney, 2021). They think that it is important that advisors are prepared when advising clients on money which may come from unpleasant events e.g. a divorce, the death of a parent or a partner. Or dealing with clients who are socially conscious and do not want to invest in companies that are not environmentally friendly. Understanding the emotional and behavioural aspects allows for better and more effective communication with clients. This ultimately allows the advisor to also provide more suitable advice.

We are all aware of the regulatory requirements as set out in Section 8 of the GCoC, to ensure that advice provided to the client is suitable. We also know that sometimes when the required processes are not followed, there is the potential that a claim goes wrong because the advice was not suitable for the client. The following example highlights the importance of understanding a client’s needs and circumstances in order to provide guidance and insight about knowing and following the requirements of the GCoC when rendering advice. This is necessary to ensure clients’ needs are understood and that the advice and product solutions match those needs so that it is suitable.

Ombud case: In the case between Hylton Forge and Old Mutual Life Assurance, the complainant had intended to withdraw his entire fund value in order to resolve an urgent liquidity need he had at the time. The complainants fund value stood at R220 000. Old Mutual incorrectly advised the complainant, saying it was not possible to withdraw the full amount, leading to the complainant withdrawing only a third of the fund value (R70 000). Of this amount, the complainant was paid R48 000 after all the necessary deductions. The complainant lodged a complaint with the FAIS Ombud. The complainant sought the full commutation value of his fund. The complaint was upheld. Old Mutual was ordered to take the necessary steps to reverse the transaction, recalculate the tax and pay the complainant what was due to him, less permissible deductions, plus interest.

Not truly understanding a client’s financial needs and objectives or having insufficient product knowledge could result in an Ombud ruling and a tainted business reputation. Is it possible, that if the advisors followed the TCF principles that these determinations could have gone the other way?

As mentioned earlier, the TCF principles have slowly been integrated into current financial services legislation and the COFI Bill. In support of this movement, to treat customers fairly, the COFI Bill forms part of the ongoing legislative reforms aimed at strengthening the regulation of how the financial services industry treats its customers. Masthead has stood firm in our vision to ‘keep the independent advisor independent since 2004 and continues to do so. As such, we consistently review regulatory changes from the perspective of the IFA and have provided substantial feedback to the FSCA/National Treasury on the COFI Bill, which is in the process of being finalised by National Treasury for submission to Cabinet for approval.

Feedback to the FSCA/National Treasury on the COFI Bill
Masthead members can read the full submissions on Masthead Connect.
Log in here and follow this path to access the documents: For Members > MHFAA > Regulatory input by Masthead.

Treating customers fairly is beneficial to any business, in that it builds client trust and therefore creates a loyal client base. Loyal clients support your business, positively impacting business revenue and therefore helping to build business capital value. As a result, there is an indirect link between treating customers fairly and business profitability and sustainability.

We have discussed two of the six TCF Outcomes in this newsletter and will continue to unpack these principles in our upcoming newsletters.

Treating Customers Fairly – Webinar and Online Course
Masthead offers a Treating Customers Fairly webinar and a TCF Overview Online Course to ensure you have a good understanding of the six TCF outcomes, the areas within your FSP that require TCF implementation, how to implement the outcomes, and the types of Management Information needed to demonstrate integration in your FSP. 

MASTHEAD IS

A national supplier of risk management services to independent financial advisors and other licensed financial service providers (FSPs). Established in 2004, we help our clients overcome their risk management challenges so they can grow and thrive in an increasingly regulated industry. Providing professional guidance and practical support, our team of specialists is passionately committed to delivering tangible solutions.

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