The Financial Market Authority recently released a research paper, Understanding Fairness in Financial Services.

Eliot Abraham - Principal Consultant

The research asked ~3000 people to rate 33 scenarios for fairness on a scale of 0 to 10 (0 being unfair and 10 being fair). These scenarios canvased different areas of the financial services industry, painting quite stark scenarios.

The FMA has provided the research findings to all New Zealanders to provide insight into how fairness is viewed. Helping New Zealanders to understand what fairness means in financial services is to be applauded. Naturally, the qualitative nature of the research will draw debate on the design, context and interpretations.?

Our key observation is that fairness is not a fixed concept but rather a subjective and contextual one. Even the scenarios that evoked the strongest feelings of 'unfairness' still garnered responses that deemed them fair. This underscores the need to consider the broader context in which real-life situations unfold to determine their fairness.

That aside, the FMA's call for this to aid insight for financial service providers is relevant, particularly as many organisations face licensing under the Conduct of Financial Institutions (CoFI) regime. It is also another?signal of the FMA’s shift towards focusing on consumer outcomes.?

In this article, we want to focus on how organisations, particularly those impacted by CoFI, can reflect on the hypothetical scenarios presented to research participants and assess how their organisation mitigates (or could mitigate) the ‘unfairness’ in the hypothetical scenarios. What additional context could an organisation demonstrate or provide to reduce the level of perceived unfairness (e.g. what aspects of an organisations fair conduct programme could either have prevented the ‘unfair’ situation from occurring or, despite the customer’s perception of unfairness, help demonstrate that the organisation is treating those customers fairly?)

The following looks at a few scenarios that produced the starkest responses for unfairness, considers the core issue and potential organisational failures that made the situation seem unfair, and then poses the questions an organisation might ask itself in response to the hypothetical scenario. The questions could lead to uncovering weaknesses in the policy, processes, systems, and/or controls that support the fair treatment of customers.

Scenario 1: Ineffective remediation

“George received a letter from his bank telling him they had charged him extra fees because of a mistake they had made. His bank apologised for this and told George he would receive his money. However it took his bank over a year to repay him and by this time George had moved overseas and closed his account. How fair do you think this is for George?”

Unfair response: 86%

Our observations

Remediations can be complex and context-specific and can take time to identify root causes and impacted customers, calculate remediation amounts, and plan the return of funds and associated communications.?

Although no organisation wants mistakes to happen, it is an operational risk. When they do occur, how the organisation responds is critical.

In our view, the issue of fairness in this instance was down to an organisation taking an extended time to refund the customer, having set expectations that a refund would be due, or the closure of the account when the organisation knew it owed the customer.

Potential organisational failures

Contextual questions

• How do we ensure the communications are clear and transparent?
• How do we ensure (and record) that due regard was paid to customers when designing and prioritising the remediation?
• How do we ensure records about the customers are up to date so we can avoid closing the account when we know we owe them money?
• Are we investing in our data capabilities so that we can quickly identify mistakes, the quantum of the error, and the impacted customers?

Scenario 2: Denied theft reimbursement

“Jimmy’s home was recently burgled and his bank card was stolen. The burglars made several contactless purchases using Jimmy’s card. When Jimmy asked his bank to repay him the money the bank refused as they said he should’ve kept his bank card with him instead of leaving it at home. How fair do you think this is for Jimmy?”

Unfair response: 74%

Our observations

Unfortunately, events such as Jimmy’s happen to customers occasionally.??

However, it is not necessarily unfair that a customer is not reimbursed by the bank when such events occur (even though the customer may see it that way).

As much as possible, the organisation should set expectations about how it will respond to customers in these situations (e.g. to ensure the bank responds consistently, with appropriate empathy and support).?

The issues of fairness here may be misalignment in the understanding of the service (card access) or how the bank has communicated and responded to the customer's stressful circumstances (e.g. blaming the customer).

Potential organisational failures

Contextual questions

• Did we ensure the customers were clear on the features, benefits, risks and limitations (including their responsibilities for a service)?
• Did we ensure that staff had the tools, training and support to deal with customers in unfortunate situations?

Scenario 3: Insurance document clarity

“Isabella recently got a new dog and she decided to take out pet insurance. When she received her new insurance policy she found it difficult to read as it was very long and the text was too small. It was hard for Isabella to work out which parts of the policy were the most important. How fair do you think this is for Isabella?”

Unfair response: 71%

Our observations

Consumers have a range of needs when it comes to communication. Some consumers will have lower levels of reading comprehension or financial literacy.?

Organisations must be confident that the target market/customer can understand the key benefits, features and limitations of the product and service as they go through the purchase process and that the distribution channel for the target market is appropriate.??

The issues here are that the customer has purchased a product for which they aren’t clear on features and benefits, as well as collateral (in this instance, the policy) that is, from the customer's perspective, not clear or concise.

Potential organisational failures

Contextual questions

• Did we ensure customers were clear on the features, benefits and risks of a product so they could make informed decisions?
• Did we ensure collateral or communication was clear, concise and transparent?
• Did we ensure our products meet the needs and objectives of our customers?

The above analysis highlights common underlying themes that impact a customer’s perception of fairness. These themes are not new; for example, clear communication, timeliness, and transparency are expectations that most consumers would have of any organisation. They already underpin existing consumer protection laws in financial services, however in most cases compliance with existing legislation is somewhat binary (i.e., ‘yes’, ‘no’ or ‘not applicable’).?

Under CoFI whether a particular situation seems unfair or not isn’t necessarily the issue.

CoFI will not always prevent situations where a customer or group of customers (or the regulator) perceive a situation to be unfair. The focal point will be if that organisation isn’t confident, and cannot demonstrate, they have designed and operated effective policies, processes, systems and controls to treat those customers fairly, or the organisation has failed to monitor and adequately invest, resource or prioritise improvements or address gaps. In short, the Fair Conduct Programme is ineffective and the organisations has not addressed this.?

It is important to recognise that fair conduct programmes are expected to evolve and improve. Ongoing focus and investment will be critical to their success in meeting customer and regulatory expectations for fairness.

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