The Financial Services Authority (FSA) has given companies until the end of the year to ensure that they “treat customers fairly” and it has brought forward plans to check they are complying. But how fair is fair?

In 2006 the FSA announced that it was going to tear up chunks of its 8,000-page rule book and rely instead on a handful of high-level principles, based around fairness. The industry was upset: how could the FSA suggest that they were not treating their customers fairly already? Then the mis-selling of endowments, pensions and split caps was pointed out to them and they said: “Well, what do you mean by fairness, exactly?”

To which the regulator in effect replied: “We don’t want to say what it is exactly, but we’ll know it when we see it. And we expect you to recognise it, too.”

The FSA has given good and bad examples of what is fair practice, but the industry continues to bemoan the fact that the regulator won’t define it. Yet, as one FSA executive said: “We deliberately don’t offer a definition of fairness. Fairness means different things to different people.” At which point, you start to have some sympathy with the companies.

So what is fair? To illustrate how tricky this can be, and in the spirit of seasonal quizzes, how would you answer this nonfinancial services example? You have purchased a first-class train ticket. The carriage is half-empty . . .

1 The guard discovers that a passenger in the first-class compartment has a standard-class ticket and asks that passenger to leave. Is this fair?

2 It then transpires that there are no seats in standard class. Is it still fair to ask the passenger to leave?

3 The train company has just announced £1 billion profits and is refusing to put on extra carriages. Is it still fair?

4 The passenger being asked to leave is a woman aged 80 who is infirm and nobody in standard class has given up their seat for her. Is it fair to eject her from first class or do you just hide behind your laptop?

I put this to a seminar recently and the responses were 100 per cent in favour of scenario one and progressed down to one person who rather sheepishly insisted on ejecting the elderly lady. So fairness in this case depends on the circumstances and, crucially, on your own attitude to train companies, first-class travel and elderly people, which is why fairness in general is so hard to define and presumably why many companies have found it difficult to acknowledge that their practices might be unfair.

It also illustrates the certainty that rules give; no first-class ticket, no seat in first class. And the uncertainty, but potential for greater fairness, of principles; an elderly person with no ticket ought, perhaps, to be allowed to stay.

The FSA’s Treating Customers Fairly has the potential to deliver substantial improvements for consumers, as long as companies understand “fairness”. The FSA thinks that it will know it when it sees it; companies will just have to hope that the FSA sees it the same way as they do.

John Howard is a former chairman of the Financial Services Consumer Panel

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