The Financial Conduct Authority’s (FCA) proposed Consumer Duty continues to be of major interest within the retail financial sector. With the publication of the latest Consultation Paper (21/36) in December 2021, Faye Sadler-Clark, Webhelp’s Director of Risk and Compliance, takes an in-depth look at the Consumer Duty and shares her view on the actions firms can take now to be prepared.

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What is the Consumer Duty really about? 

The FCA have been considering whether to apply an overarching standard of care to authorised firms above and beyond existing Treating Customers Fairly (TCF) principles for many years, resulting in an ongoing consultation around a new Consumer Duty.  

The concept of an overarching duty of care came back on the agenda in 2020 in light of the FCA’s focus on customer outcomes, and is front and centre as one of the FCA’s consumer priorities within their 2021/2022 plan. Firms selling or involved in the manufacture or supply of regulated products to retail clients will be subject to the new rules, and have been waiting to understand the final position for some time. The third and final consultation is now open (at time of writing, Feb 2022), and expectations set that the final rules on the new Consumer Duty will come into force in July 2022, with a deadline for compliance of April 2023.   

In terms of FCA expectations, the Consumer Duty will require firms to ‘deliver good outcomes for retail customers’ and to compete ‘vigorously in the interests of customers’, in line with the FCA’s desire to make sure customers are better protected.  

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A ‘unique regulatory intervention’ 

The FCA’s latest Financial Lives Survey, conducted in February 2020, found that only 42% of adults had confidence in the UK financial services industry (up from 38% in 2017) and that people with characteristics of vulnerability and the over-indebted were more likely than average to lack confidence in the industry. 

Along with increasing confidence in retail financial services markets, the FCA have been clear in their publication of CP 21/36 their intention to ’bring about a fairer, more consumer focused and level playing field’ and to ensure firms are: 

‘consistently placing customers’ interests at the heart of their business’ and  

competing to attract and retain customers based on high standards of customer satisfaction, and innovative pursuit of good consumer outcomes’. 

Whilst the potential benefits for consumers are difficult to refute, firms and consultation respondents have, to date, challenged the FCA on the Consumer Duty proposals, with many suggesting the FCA should simply enforce existing regulations and TCF principles more effectively. Despite this, the FCA have held firm that the Consumer Duty sets significantly higher standards than that required under existing rules. The FCA’s goal is significant and ambitious - to ‘fundamentally shift the mind set of firms’ in order to provide adequate levels of consumer protection.   

Firms will be held to a higher standard, with the rules regulated and enforced differently too. At a big picture level, the FCA is focussed on becoming more data-driven, and as far as the Consumer Duty goes, this will allow earlier intervention to avoid practices that prove detrimental to the customer becoming entrenched as market norms. 

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What are the key challenges facing firms? 

New Customer Duty rules will be applied proportionally, taking into account a firm’s role in relation to their products or services, the nature of said products or services, and the characteristics of their consumer base.  For those firms with products or services falling with the Customer Duty scope, there are a number of challenges to consider: 

The rules will permeate all levels of a firm  

The rules will impact the end-to-end product governance process, including product and service design, distribution, and delivery. Getting products and services right from the outset will be key, with the principle of ‘delivering good outcomes for retail customers’ expected to be understood, lived and breathed at every level of the organisation given it will become a new individual conduct rule under the Senior Manager and Certification Regime. 

Meeting the scale of change will be demanding 

The challenge for firms comes in the magnitude of change involved, having to monitor, assess, understand and evidence the outcomes that their customers are receiving. For many this will likely require a significant investment in data and technology, and there are already firms highlighting that they may have to withdraw some products and services due to the higher compliance costs involved in meeting the new requirements. Whilst this is not an outcome the FCA wants, they have been clear that they are not budging on their expectations. 

Not a ‘one-and-done’ exercise  

An end-to-end product governance review cannot be viewed a one-off exercise to be completed ahead of the regulatory deadline. Instead, firms will be required to report at least annually on whether it is acting to deliver good customer outcomes in line with the Consumer Duty. This is clearly far from a quick, annual tick box exercise. 

The timeframe is short 

Firms have only nine months within which to comply with the new rules from their release in April 2023. 

The application of the rules  

Whilst the FCA has provided detailed explanations and examples on how it expects the Consumer Duty will apply in practice, firms naturally have questions about the application of the rules in reality. Questions have also been raised around whether the Financial Ombudsman Service will take a more expansive interpretation of the new duty, potentially creating misalignment with the FCA’s position and intentions. 

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Five steps firms can be taking now 

The concluding consultation draws to a close on 15^th February 2022 meaning the new Consumer Duty rules are yet to be finalised, however, firms can begin to take preparatory actions.  These include: 

1. Fully understand the Consumer Duty 

Firms need to understand the detail behind the Consumer Duty, which replaces and imposes higher standards than Principle 6 (TCF) & 7 for retail (clear, fair and not misleading communications). The examples the FCA provides within Consultation Paper 21/36 (CP 21/36) are not exhaustive but provide a useful indicator as to how the rules will be applied in practice. 

2. Ensure that Senior Managers are aware of their obligations  

This is essential, particularly given the fact that the rules permeate the end-to-end product governance, and all levels of an organisation, as described above. Senior Managers must take responsibility for their role in complying with the new duty.  

3. Identify changes required to implement the rules  

This should include an assessment of how easy it is for customers to make well- informed decisions. This naturally necessitates a review of product and service design, customer journey design, and associated policies and processes - the Consumer Duty rules should see firms working on true end-to-end transformation, avoiding working in front or back office silos,for example.  

Naturally, changes will also be required to systems, it is unlikely, for instance, that systems already capture all key data points firms would use to evidence the outcomes customers are receiving.    

4. Consider how to demonstrate fair value  

Firms are aware that their products and services need to meet the needs of consumers - under the new duty firms will also need to demonstrate that products and services offer fair value. This will involve proactively assessing the benefits that consumers can reasonably expect from the firm’s product and services, and ensuring these benefits are reasonable relative to their price.  

Fair value product governance requirements already exist for the insurance sector under the General Insurance Pricing Practices (GIPP).  The design and implementation of this aspect of the Consumer Duty is likely to be the most complex of all the requirements. As with the GIPP requirements, the needs of vulnerable customers must be considered, as these customers may be more susceptible to receiving poor value, and should not be placed at a disadvantage by a firm’s products and service.

5. Evidence consumer outcome monitoring  

Firms need to focus on the actual outcomes experienced by consumers, ensuring they take action to avoid foreseeable customer harm- which is no mean feat. Though it is ultimately up to firms to determine what data they collect and how the collect it in order to evidence customer outcomes, is likely to be a relatively complex undertaking. Whilst firms will no doubt lean on traditional metrics such as Net Promoter Scoring (NPS) and customer feedback (eg. complaints, expressions of dissatisfaction), further opportunity lies in demonstrating proactive prevention of foreseeable harm via use of data and solutions such as speech analytics, social listening and voice of the customer programmes. 

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Consumer Duty - In conclusion 

The arrival of the new Consumer Duty presents another regulatory consideration for banking and insurance firms engaged in the supply of products and services to retail clients.  Customer-focused firms will look at this in a positive light – as an opportunity to further strengthen their relationships with customers over the short and long term, and to build trust, advocacy and loyalty. 

Importantly, this opportunity to utilise the requirements behind the new Consumer Duty as a positive influencer of customer experience is available to any firm.  In taking the five preparatory actions listed within this article, for example, firms will be able to begin navigating the Consumer Duty requirements successfully and look forward to building stronger relationships with their customers. 

* The FCA Consumer Duty was confirmed on 27^th July 2022 with a 12 month timeline for implementation.  To discuss how we can support your implementation plans get in touch*

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As Director of Risk and Compliance for Webhelp, Faye Sadler-Clark supports our mission to be leaders and experts in delivering low risk solutions that help our clients and colleagues to innovate and stay safe. She has over 14 years of experience of working in the financial services industry. Faye has deep understanding of the challenging operating context faced by senior leaders today from her diverse experience in change, operations, consulting, and risk and compliance across the UK, Europe and Asia Pacific.