Topic 3 Flashcards
Purpose of Treating Customers Fairly (TCF) process
To fill the relevant gaps in existing legislation in terms of the fair treatment of consumers, thereby ensuring a clear and concise set of principles and rules around TCF
Risk factor
Conditions or behaviors that can affect a company either beneficially or detrimentally
Steps in managing ethical risk
- Identifying ethical risk
- Developing an ethical strategy
- Managing ethical risk
- Using ethics in the company as a marketing tool
Identifying ethical risk
Unilaterally (through the Board of Directors or through a delegated function) or multilaterally (through various stakeholders)
Advantage of unilateral approach
The company takes responsibility for identifying ethical risks, and the members of the board become actively involved in the process of governing the ethical risk behavior of the company
Disadvantage of unilateral approach
Risk identification is restricted to the perspectives of the board of the delegated function
Multilateral approach
Stakeholders (internal and external) need to be grouped and prioritized in terms of the impact they have on the company and the impact the company may have on them
Preferred approach
Developing an ethical strategy
- Reactive strategy
- Compliance strategy
- Integrity approach
Reactive strategy (defensive approach)
When companies sense that they are alienating a group of stakeholders through unethical behavior
Seldom satisfies the more sophisticated investors, consumers and talented employees
Compliance strategy (preventative)
To ensure all employees comply with the standards set, the company had to tightly monitor the ethical performance of the employees
Requires almost blind adherence to the rules of conduct and leads to a proliferation of ethical rules
Integrity approach
Principle-based and promotes ethical behavior as a strategy and a joint responsibility within the organization
Less control is required
Depends heavily on the leadership setting the tome and presupposes a clear sense of corporate identity and priorities aligned with the core ethical values
Managing ethical risk includes
Compliance
Identification
Internalisation
Compliance
The displayed behavior associated with the desire achieves some form of reward or avoids an identifiable punishment
Directional codes
Specific in prescribing what behaviors will not be tolerated and what kind of behavior is expected of employees
Compliance-driven strategies tend to have these
Identification
Behavior is shaped by and mirrors the behavior of significant others with whom the individual wishes to identify
Internalisation
Behaviors are accepted by the individual as his own, even though they are set externally
It is aspirational
Types of internalisations
- Individual’s existing values correspond closely with those held by the organization, and thus, little change is required to their own ethics
- The individual recognises the organization’s values as a set of principles that transcend his own and to which he wishes to aspire
Using ethics in the company as a marketing tool
- Infuses discipline into the ethics management of the company, as it indicates whether a company has reached its ethics objectives
- Reporting satisfies stakeholders that the company actively and effectively manages its impact on those affected
Code of ethic
A document or agreement that stipulates morally acceptable behavior within the organization
Identifies the moral standards or guidelines that need to be respected by all members
What can the ethical code used to achieve INTERNALLY
- It establishes agreement about morally acceptable behavior within a financial planning practice
- It facilitates moral decision-making
- It promotes organizational integration and coordination
What is the main purpose of the ethical code EXTERNALLY
It sends a message to external stakeholders that will bolster their trust in the organization
Audience for the external ethical codes and their purpose
- Consumers or society at large: to enhance the reputation of the practice to outsiders
- The government: to deflect government interference in the internal affairs
- Potential litigants: pre-empt legal action against a practice
Forms of the code of conduct
- Standard of conduct
- Code of conduct
Standard of conduct
A short document that spells out the ethical values that should guide behavior towards others in an organization
Benefits of a standard of conduct
- It’s a concise document, so it is easy to remember
- Being brief, it doesn’t contain much detail, so it is less likely to be confusing
- It doesn’t spell out every single moral action and so shows respect for the maturity and discretion
Weaknesses of a standard of conduct
It does not provide specific guidance on what is expected from organizational members in morally complex situations
Makes it difficult to specify the consequences for someone who disregards the code, which might be hard to enforce
Code of conduct/guidelines for conduct
A more extended document that provides specific guidelines about what is expected from members of an organization in specific circumstances
Strengths of a code of conduct
- It is specific
- It is easy to enforce
Weaknesses of a code of conduct
- It is specific and so iy tends to be long, so it is difficult to remember
- It doesn’t allow much discretion
Baaic components of an ethical code
- The rationale for the code
- Ethical values or standards
- Prescription or Prohibitions
- Sanctions
The rationale for the code
The justification for the code
Explains why the code has been developed and what this means for the organization
Ethical values or standards
Provide the norms that tailor organizational behavior and set ethical targets for all
Prescription or Prohibitions
They prescribe or prohibit specific actions
Either avoid malpractice or promote ethical behavior by giving explicit directions about what is expected from organizational members
Sanctions
Stipulate the consequences of disregard for the code
Product life cycle
- Product and service design
- Promotion and marketing
- Advice
- Point of sale
- Information after point of sale
- Complaints and claims handling
Financial Sector Regulation
The aim is to create two new regulatory bodies, namely the Prudential Authority and The Financial Sector Conduct Authority
Prudential Authority
Form part of the Reserve Bank
Will supervise the overall stability and financial soundness of financial institutions
Financial Sector Conduct Authority (FSCA)
Replaced FSB
Will supervise how financial services providers conduct business and treat their customers
Desired outcomes of the TCF initiative (immediate outcomes)
Outcome 1. Customers are confident that they are dealing with firms where the fair treatment of customers is central to the culture.
Outcome 2. Products and services marketed and sold in the retail market are designed to meet the needs of identified customer groups and are targeted accordingly
Outcome 3. Customers are given clear information and are kept appropriately
informed before, during, and after the time of contracting.
Outcome 4. Where customers receive advice, the advice is suitable and takes account of their circumstances.
Outcome 5. Customers are provided with products that perform as firms have led them to expect, and the associated service is both of an acceptable standard and what they have been led to expect.
Outcome 6. Customers do not face unreasonable post-sale barriers to change products, switch providers, submit a claim, or make a complaint.
The six fairness outcomes in product life cycle
- Product design phase
- Promotions phase
- Advise phase
- Point-of-sale phase
- Information after point-of-sale phase
- Complaints and claims-handling phase
Intermediate outcomes of TCF
- Improves customer confidence
- Appropriate products and services
- Enhanced transparency and discipline
Final outcomes of TCF
Customers’ financial services needs are appropriately met through a sustainable industry
Features that create a necessity to apply higher standards of conduct
- Intangible nature of financial products and services
- Underperformance or failure of financial products
- Products that carry high fees or are of low value erode disposable income and harm vulnerable groups
- Retail customers generally lack the sophistication and level of information possessed by institutions
- Not holding institutions accountable for mistreatment, futher increasing customers vulnerability
The 3 pillars of TCF
- The TCF framework
- Implementing TCF
- Incentives and deterrence
Stakeholders within an RM strategy
- Shareholders or owners will look for a return on investment
- Employees and managers will look for income, security of employment, training and development and job satisfaction
- Consumers and clients look for product, service performance or image to satisfy certain needs
- Competitors may find value created by a rival because this might open new doors for innovation and new ideas
TCF implementation
- Staff training and awareness of TCF
- Ssales and marketing material
- Product understanding
- Advice and sales processes
- Needs analysis and flow of information
- Complaint handling
- Remuneration and incentives
- Risk assessment of TCF non-compliance
- Record-keeping and management information
Impact of TCF on tied agents
Product providers who have tied agents will be able to better control the advice
Viewed as more beneficial due to the increased support structures in an increasingly regulatory environment
Impact on independent financial planners
It is becoming increasingly difficult to survive as an individual planner, a variety of models would have been built to accommodate the need for them
