With consultations closed, the countdown to the FCA’s new consumer duty has begun in earnest. The resulting shift from ‘fair’ to ‘good’ outcomes marks a major step-up in regulatory expectations on consumer protection. The big challenges don’t just include delivering the right outcomes, but also demonstrating those outcomes.
What do the new requirements involve and why do they matter? What does good look like in practice? What can you do to prepare for the impending overhaul? In this article, we address these questions to help you set off in the right direction, sharing five key priorities to help you get ahead.
What do the new requirements involve and why do they matter?
The FCA is setting an exceptionally high bar for customer protection with the introduction of the consumer duty. Launching the final round of consultations at the end of 2021, Sheldon Mills, Executive Director of Consumers and Competition at the FCA, said: “The new duty will drive a change in culture at firms. We expect firms to step-up and put consumers at the heart of what they do, and we’ll be holding senior managers accountable if they do not.”
At the core of what the FCA describes as a “fundamental shift in industry mindset” is the move from fair to good outcomes. To turn fair into good, the FCA emphasises the need to get it right first time rather than relying on the backstop of remediation and redress. A key part of this is supporting and empowering consumers to make the right decisions and preventing harm before it happens. The onus is therefore on you to consider your culture, governance, accountability, processes, and controls across four key areas of the consumer journey.
The governance of products and services
- Designing products and services that specifically meet the needs of your consumers
- Targeting products and services at those consumers whose needs they are designed to meet
- Regularly assessing whether your products and services are performing as intended
Price and value
- Making sure the price reflects the overall benefits consumers can reasonably expect
- Considering the price and value to the end consumer throughout product design and distribution, as well as regularly reviewing this during the lifetime of the contract
- Considering how each stage of the distribution chain affects price and value. This includes the potential risk that value could be eroded by third-party fees and commissions
- Putting a communications strategy in place that is designed to deliver effective, timely and useful communications for consumers
- Delivering communications which are fair, clear, and not misleading, while being appropriately tailored to your audience
- Measuring the success of communications in driving good consumer outcomes and adapting the timing, content or channel of communications where required
- Supporting consumers to derive the full value of their products and services at appropriate times
- Where your consumer support functions are outsourced, conducting regular and robust reviews of third-party operations, resourcing and culture to make sure that consumers receive good outcomes
- Properly supporting consumers when accessing their products and services and making sure there are no unreasonable barriers or exit penalties in place
- As many consumer support functions are outsourced, this will call for a critical assessment of third-party providers, their operations, resourcing and above all, their culture
What does good look like in practice?
There has been little or no guidance or illustrative examples to explain what all these expectations mean in practice. And even when the final rules are published in July, it’s possible that there may still be little to go on. The new regulations open some complex dilemmas including:
- What is the difference between a fair outcome and a good outcome?
- When is the right time to measure good outcomes for long-term products, considering that these can be impacted by radically changing social and economic circumstances and their performance is designed to vary over time?
- Should good outcomes look different when marketing and selling via digital channels?
- How can you consistently deliver good outcomes without crossing the advice threshold?
- History has shown that nudges and clear information are not always sufficient to deliver good outcomes. Does the consumer duty require you to take proactive measures to deliver good outcomes. Possible examples include acting on behalf of consumers to switch out of poorly performing products or close unused accounts?
You may be waiting for further guidance from the regulator, or collaborative initiatives from industry bodies to clarify these questions. However, the emphasis of the consumer duty on principles rather than prescription offers an opportunity to get on the front foot competitively. There is a window of opportunity to take the lead in defining a high bar for ‘good’ within your marketplace, develop meaningful consumer insights, and to leverage these through an innovative consumer communications and engagement strategy.
What can you do to prepare for the impending overhaul?
We’re already working with several financial services organisations, mobilising their programmes, building their internal business cases for change, and defining the parameters for maturity assessment. Based on this ongoing work, five priorities stand out as ‘no regrets’ foundations for consumer duty compliance:
1/ Involve the right people at the right time
Responsibility for compliance with the consumer duty can’t be delegated by senior management or dealt with in a piecemeal fashion by different functions. You should be mobilising programmes now, bringing together divisional heads from across your organisation to lead how you plan and implement change in affected areas. As this programme will touch on a broad range of functions, including product development, pricing, distribution, outsourcing, marketing, consumer support, data and compliance, there needs to be a clear vision, a defined set of outcomes, and personal accountabilities in place to set the programme up for success. This top-level collaboration should be mirrored in the breakdown of functional silos at the operational level. A clear example is aligning pricing mechanisms with ongoing monitoring of product performance and customer support.
2/ Assess your maturity in delivering ‘good outcomes’
It’s important to interpret what good means in practice and be able to demonstrate an improvement in consumer outcomes from April 2023. Defining good will involve consultation with a range of experts across your organisation. It also calls for use cases to understand the impact on consumer experience according to product, service, channel, and provider, be it a direct, or outsourced provider. Once good outcomes are well understood, you can move on to a maturity assessment in each of the four outcomes defined by the FCA: price and value; customer support, customer understanding, products, and services. Delivering a comprehensive and robust maturity assessment with a clear and robust methodology is the most useful thing you can do in advance of the July deadline. This would allow you to identify, plan and prioritise activities to deliver compliance, as well as to seize opportunities for market advantage.
3/ Know what data you need, what’s missing, and what can be repurposed
The good news from evaluations we’ve carried out so far is that most organisations don’t need wholesale change when it comes to generating data and reporting on consumer outcomes. Rather data is being used in silos to inform some areas of the business and not being shared with other functions. Data may also be collected, but not robustly interrogated to form insightful, forward-looking reporting. To avoid needless cost and disruption, you should firstly map out your existing data sets across the organisation and understand how these can be better exploited. Reporting and feedback metrics should be optimised and shared across product, pricing, distribution, outsourcing, marketing, support, data and compliance teams. Alongside understanding what data you have available, it’s important to examine your governance structures and forums to challenge whether data is flowing to senior management in a meaningful way, driving informed actions and decisions that result in better outcomes for consumers.
4/ Aim for more than just compliance
Targeting ‘bare minimum’ compliance for the consumer duty may be necessary in some cases, but there is a significant opportunity cost to this approach. The need to collect and assess consumer outcomes data more robustly can provide a valuable boost to product development, marketing, and consumer advocacy. We could even see it providing the basis for helping consumers make informed choices relating to value, product, and company performance as well as price. There are also potential benefits to developing more sophisticated approaches to consumer profiling. A better understanding of the consumer, for example, behavioural testing, can give you a better understanding of the consumer and ensure that they're making informed decisions based on value and performance, as well as price. It can also provide a useful feedback loop for future product development.
5/ Build consumer duty into wider transformation
Consumer duty requirements should be considered as part of your wider transformation strategy, in particular feeding into digital transformation. This will help to prevent delays or the need to rework plans down the line. A clear example is the need to show evidence of consumer outcomes as part of your long-term data strategy. This underlines the importance of bringing data, systems and innovation teams as you plan for implementation.
The countdown to consumer duty
- February 2022 Consultations closed
- July 2022 FCA policy statement on final rules
- April 2023 Implementation deadline
In our upcoming articles, we’ll be sharing in more detail some of the most challenging areas of consumer duty – and how to tackle them in the least disruptive and most cost-effective way. In the meantime, if you'd like to know more about the incoming consumer duty and what it means for your organisation, please contact Daniel Golding or Guy Munton.