The Momentum question: What is fair, and who decides?

Regulation in the South African financial services industry has been undergoing a major shift. From a rules-based approach in which financial services providers were expected to meet a strict set of criteria, they are now being judged not so much on what they do, but what the results are.

At the centre of this is a framework known as Treating Customers Fairly (TCF). The regulator’s essential concern is whether the way providers behave and the products and services that they offer lead to fair outcomes for their clients.

This new approach was highlighted by the recent incident in which Momentum refused to pay out an insurance claim based on a non-disclosure. The public outcry around the decision, which eventually forced the company to change its decision, clearly showed that many people felt that Momentum’s initial decision was unfair.

Fairness, however, is always in the eye of the beholder.

“Who determines what is fair is the first issue,” says Billy Seyffert, COO of Moonstone Compliance. “But, secondly, what might be fair to you is completely unfair to someone else given their personal circumstances.”

Indicators of fairness

For most people, the Momentum example might seem clear. The fact that Nathan Ganas had not told the insurer that he suffered from high blood sugar had no bearing on the fact that he was shot and killed in a hijacking.

However, sometimes fairness is less clear-cut. A very simple example would be if a firm only accepts claims over email. That may be perfectly acceptable to anyone with an internet connection, but how does a rural client with no money for data get what is due to them?

Fairness is therefore not the same as uniformity.

“It doesn’t mean treating everyone the same,” says Leanne Jackson from the Financial Sector Conduct Authority (FSCA, formerly the FSB). “It means treating people in line with the expectations you have created and in a manner that is going to lead to a fair outcome for them.”

This is what defines the regulator’s approach to the issue.

“The way we approached it is by saying let’s not focus on trying to define what is fair and what isn’t because when asked to define fairness it becomes unnecessarily philosophical,” says Jackson. “So let’s rather focus on the outcomes we would like to see that are indicators of fairness.”

Financial services providers are therefore being expected to show how they are working to ensure that what they deliver to clients is fair. They must be able to demonstrate that this is something that they constantly re-evaluate.

“The regulator wants to see what financial services providers are doing to consistently improve outcomes for their clients,” Seyffert says. “What are they doing with the data they get from complaints, from product history, claims history, and the feedback they are getting from their intermediary distribution force? How are they using all of that to continuously improve their products, the way that they deal with customers, and the way that they distribute their products?”

Fairness in underwriting

This becomes a particularly interesting endeavour in the insurance world, where underwriting plays such an important role. Every insurer needs to base its underwriting decisions on something, but what is fair to use, and what isn’t?

“On the one hand you have insurers looking to do finer underwriting and finer pricing – looking at as much data as they can trying to get the most accurate risk pricing possible,” says David Kirk, a consulting actuary with Milliman. “That is a very rational thing to do. But whether the end result is the best thing for society, even for the market or the insurance industry is an interesting question.”

For instance, is it fair for insurers to base underwriting decisions on factors that are outside of an individual’s control? In a recent survey Kirk conducted, he found that most actuaries felt that the answer to that should be no.

However, when asked whether it was fair to use sex or genetics, they felt that it was. This is not just a contradiction in thinking, but a challenge for the industry. This is because Kirk believes that those companies that focus the most on being fair to their clients and therefore decide to exclude these factors from their screening, may find themselves at a competitive disadvantage.

“If you use a lot of uncontrollable elements in underwriting like race, sex, and genetics, what often happens is that the population with the hardest deal in life also ends up getting the most expensive insurance,” Kirk explains. “Now if you leave it up to individual insurers to decide that they aren’t going to do that anymore, because it is unfair, they could end up getting out-competed.”

More prescriptive

There may still be areas where the regulator is required to set down clear rules to ensure that both the industry and clients are protected. Jackson acknowledges this.

“The outcomes-based approach is not solely principles-based,” she says. “It will be underpinned by regulations and rules-based requirements. There will be circumstances where, in order to deliver a particular outcome, we would be more prescriptive.”

What is also important is that financial services providers cannot be expected to be absolutely fair in every single case.

“What one must guard against is to say that in every instance there has to be a fair outcome to every client,” says Seyffert. “That I think is an impossible hurdle.”

The critical thing is that, broadly, there is a consistent improvement in the outcomes that clients are seeing.

“We are looking at customer experiences holistically,” Jackson says. “We will not say you have failed on TCF unless every single customer is personally happy with every single thing you do. Ensuring customer satisfaction and treating customers fairly are not necessarily the same thing.”

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