Navigating the FCA Consumer Duty: A post-implementation reflection
It’s almost four months since the “go-live” date of the FCA Consumer Duty on 31 July 2023. During this time, the financial services landscape has undergone a transformation towards a more outcomes focussed approach. The regulatory framework aimed at putting customer outcomes at the forefront of firms’ purpose and strategies is here. It has been placed on Board agendas, stirred discussions and challenges, and promoted cultural, strategic and procedural adaptations across the industry.
However, implementation has posed challenges for financial services firms. Adapting to the new requirements has demanded significant resources and restructuring within business operations. Some firms have grabbed the opportunity to use the Consumer Duty to improve their offerings, whilst others have faced difficulties in aligning their existing processes with the enhanced measures, leading to a period of challenge and adjustment.
If you haven't already, I strongly recommend you read the speech by Nisha Arora, of the FCA, that was published on 1 November 2023 - giving an insightful overview of the of how the Consumer Duty is progressing, observations and next steps.
In light of this, I will give you my reflections on a couple of the key areas where I have seen firms falling short, and what we may expect from the regulator in the coming months.
Vulnerable Customers:
There is a tendency to be too narrow about the definition of vulnerability and the points where this can be identified throughout the customer journey. This presents a risk that Firms are not going far enough to understand the customers who will be inherently “vulnerable” at the point of marketing and inception of their product.
Many traditional vulnerable customer policies focus on providing support to individuals with physical, mental or emotional impairments identified later on in the product lifecycle. However, this doesn’t go far enough. Firm’s need to think broader in terms of the Consumer Duty outcomes. It applies to new and potential customers within the target market and those who may be susceptible to not understanding product risks or being offered unsuitable products. This is intrinsically linked to delivering under the “Products & Services” and “Customer Understanding” outcomes.
For example, credit brokers offering a range of credit products: their target market will have a variety of characteristics (e.g., prime, near prime and subprime) who require tailored information based on their circumstances and their ability to understand the product risks. This needs to be factored into marketing and sales processes. We have seen this messaging from the FCA in their most recent “Dear CEO Letter” calling out Wealth Management and Stockbroking firms who are not demonstrating sufficient care to their “vulnerable” customers in calling out the risks of investment products and even going as far as taking advantage of them. This messaging is not specific to those in that sector, and highlights the FCA's goal to foster a financial environment where consumers can confidently make decisions that align with their best interests. More is detailed on this in my recent blog: (Blog: Dear CEO Letter Wealth Mgmt & Stockbroking Firms).
Key takeaway: Firms need to consider their target market and product offering. Challenging themselves as to whether they are confident they know and understand the types of inherent vulnerable characteristics.
Monitoring & Reporting:
We have seen Firms change processes and terminology so that they are aligned to the delivery of “good customer outcomes” as defined by the Consumer Duty. However, for many firms there’s still a way to go in designing and implementing key elements of a framework that would the allow them to monitor this and ultimately facilitate continual improvement. In particular, the design and implementation of appropriate business wide MI that is used at an operational level and escalated up to senior management committees.
Firms are making the mistake of assuming that the controls and MI around the delivery of good customer outcomes are largely the role of a Quality Assurance (QA) function. However, in reality, firms will need MI drawn from across the whole product lifecycle if they going to effectively deliver against the purpose of the Consumer Duty and be able to deliver, monitor and improve customer outcomes. Shortcomings I am seeing include:
No meaningful MI at Boards and Executive Committees
“Outcome” MI limited to QA/call listening results
No linkage between factors such as product governance and credit risk MI and customer outcomes
Information not being shared between manufacturers and distributors and vice versa.
Senior Management Teams need to challenge themselves, does their data and MI enable them to get assurance over their customer outcomes and compliance with the Consumer Duty? Not only that, the FCA’s messaging around MI and data has never been clearer, they are becoming a data-led regulator and they going to turn up the requirements on regular data submissions (see my recent blog on PSD requirements: FCA PSD Data Requirements Blog), so having the appropriate MI capabilities is becoming a regulatory requirement.
As Nisha Arora points out “Firms need to make sure they are learning and improving continuously and must be able to evidence this in their annual board report.” - for me, an effective annual Board report needs to be informed by efficacious MI.
Key takeaway: Firms and accountable individuals must ask themselves if they have sufficient controls in place to enable the effective monitoring and feedback loop for the continuous improvement of customer outcomes.
A Wider Shift in Culture:
So, what can we expect in the coming months from the Regulator?
“The Duty isn’t something where you can tick the Consumer Duty box on your to-do list and move on. It’s something that needs to become part of who you are as a firm, your culture” Nisha Arora 01/11/2023.
The Consumer Duty represents a paradigm shift. This move is not a compliance checkbox. It’s not just “Treating Customers Fairly”. Firms must evidence a cultural change in the way they consider their customer needs throughout the entire lifecycle, and they are going to have to proactively evidence this to the FCA.
In recent months we have seen publications from the FCA including Consultation Papers and Dear CEO Letters referring to the use of initiatives like improving Diversity & Inclusion and clamping down on “non-financial misconduct” as part of a wider agenda to improve the integrity of the UK Financial Services market, and ultimately customer outcomes. So, we can expect more scrutiny and challenge than ever from the regulator to firms on what is driving their cultures and how are they ensuring the right “tone from the top”.
Key takeaway: Firms should ensure that they promote more diverse and representative workforces with a culture that drives out poor behaviours.
Conclusion:
The Consumer Duty has ushered in a new era in financial services, where customers must be at the heart of business decisions. Four months after implementation, the industry is navigating the challenges and opportunities presented by this regulatory framework. As financial institutions continue to adapt and innovate, the true impact of the Consumer Duty on consumer protection and industry dynamics will become more apparent in the months and years to come.
We have a highly skilled team who specialise in conduct, culture and governance. We have helped and continue to help a variety of firms improve and embed their Consumer Duty controls.
Do get in touch to understand how we can help.
Drop me a line, Will@avyse.co.uk
