Series 4 Episode 1 - Consumer Duty - translating policy into practice

Transcript

Andrew Strange: Hi everyone and welcome to the latest episode of Risk and Regulation Rundown, giving you our latest insight and analysis on hot topics in financial services risk and regulation. I'm Andrew Strange and I lead our financial services regulatory insights team and I'm your usual host. In this month's episode we're going to be talking about the FCA's new consumer duty rules, with the FCA terming it a paradigm shift in the way firm's treat their retail customers, we're going to explore what the recent final rules means for firms across financial services, as well as discuss some of the key challenges firms are grappling with and the different approaches we're seeing from our clients across the market. Today I'm joined by two guests, Ian Ody and Iqy Hunjan, both directors supporting clients in this area, hi both.

Iqy Hunjan: Hi.

Ian Ody: Hi, good morning.

Andrew: So Ian, some of our regular listeners may have tuned in earlier this year to hear us talk about consumer duty around the time the FCA's second consultation paper came out, but for those who are uninitiated or would like a recap, can you bring us up to speed on where we've got to with the rules, and what are some of your reflections on the changes we've seen in the consultation papers to the final rules that were recently released?

Ian: Thanks Andrew, yes. So, the final regulations were issued at the end of July and throughout the consultation period the FCA told us that we wouldn't have many changes from the consultation we’d seen and we should get planning. In particular with vulnerable customers. However, at the end of July they dropped us a little bit of a bombshell, they told us that we had to get our implementation plans board approved and scrutinised in by 31st October. Now, given that it was the end of July and most of financial services go on holiday in August, that means people came back from holiday and had a fair bit of work to do. Now, we also got other deadlines, fortunately they extended the deadline for the live book implementation to the end of July in 2023 and for the closed book implementation in July 2024. So, all in all, much will be expected with some adjustments to the deadlines imposed.

Andrew: I can't believe we haven't done the Halloween joke around 31st October to be honest with you, but I mean that deadline as you say is not far away and clearly there's a lot for firms to be considering. What action should firms be taking now to get ready for that October deadline, what should firms be prioritising and how should firms approach implementation beyond October and into next year? That sounds like I'm asking for a full implementation plan, please?

Ian: Yes, it is, right, absolutely and there's a lot to do. Look, the implementation plan from the board has to be robust, it can't be a plan for a plan. There has to be a gap analysis, you have to look at where the gaps are in providing good outcomes to your clients and customers and that has to be reflected through the plan. Firms should be examining their data, where's their data coming from and have a fresh look at your KPIs that is fed by those data. Two other things to think about, define what good looks like before you start, if you don't know what the gap is and you don't know what good looks like, you're not going to get far with your implementation. Finally, don't forget about things like servicing, but also remuneration policies, people policies. Anything that would provide or promote poor outcomes for customers and clients needs to be looked at.

Andrew: I think you're totally right, if I think back to the asset management market study where firms were thinking about value as one of their equations, actually articulating what value meant was a really difficult task. So, being able to articulate what good outcomes means must be I would imagine an even harder to ask in this space, so that's really interesting. So Iqy, let me turn me to you, I know you've been having lots of conversations with various clients about this, well, since before the final rules came out and then subsequently. What have you been hearing from your clients and from the industry on the final rules, and what do you think are some of the most challenging aspects that people seem to have been grappling with?

Iqy: I think what I've been hearing from clients is really, you know, the far-reaching breadth that the regime has and the implications it has firm wide. Just, kind of, touching back on the points Ian made, this is about really revisiting everything across the business and making sure that it's fit for purpose and in line to the consumer duty regime. This actually, in firms where they have multiple products is going to be something that is going to require a lot of time, retention and resource to be able to clearly undertake that gap analysis, but also be able to take the appropriate actions where required. I think the other area that we did touch on briefly was about the delivery of good customer outcomes. That's quite a subjective topic, and actually what a good outcome is for one customer may not be for another, and it's really about understanding what your market is and actually defining your good outcomes based on your market and other information that you hold within your business, but also insights that you hold from servicing these customers over a number of years. I think this is something that every firm will do slightly differently and it's really around tailoring it for their business.

Andrew: You talked there about product lines. I mean do firms need to do this at a product level?

Iqy: You would need to because every product has different characteristics etc. and the impact and the potential risk of poor outcomes for customers will be different based on the different products.

Andrew: Okay, yes, and certainly some of the conversations I've had with with clients I think that's maybe not been a welcome interpretation, but I would agree with you, certainly. So, let's just dive into some of those challenges in a bit more detail then. I mean, so data which Ian briefly picked up on earlier as well is a significant piece of that consumer duty puzzle. Where firms are looking at trying to define and evidence those good outcomes. I mean what kind of challenges are firms seeing there around data, how should firms be addressing it, what kind of data should they be using?

Iqy: I think this is the first things that firms have grappled with on the basis that every firm has a significant amount of data available within their business. Whether, you know, it's information that goes to various committees or it's information that's used by a management within the different areas within the business to manage their day-to-day business. It's really around, kind of, sifting through that and identifying what those key KPIs are that you may want to monitor, but also how do they align to your outcomes. So, if, you know, we take a textbook answer and you are able to define what a good customer outcome looks like, it's about really articulating and really pinpointing what those data points could look like and how that would then support the delivery of those outcomes. You know, firms are taking different approaches in which they do this, so I have heard that some firms are essentially reviewing what they currently have in place and picking out the key areas that they're really interested in. Another firm that I've spoken to has found the opportunity to just really take a blank sheet of paper and say, 'What is it that we want to have in place and how do we get there?'

Andrew: That's interesting, and Ian you might want to come in here, the other thing that I was just thinking there around data in particular is do people have data on outcomes or do people have data on process?

Ian: I think, I'll come back to your point in a minute Andrew, I think Iqy made a really valuable point about getting some fresh eyes on the data. I think we all become a bit data blind and once we've set our KPIs to evidence our compliance with a process, we become used to that and it's a very comfortable space to be. I think the regulator knows that all the firms have the data they need already in their businesses, what they need to do is extract that data and just get some fresh eyes on it, and say what's that data telling us, or what KPIs do we really need to evidence these outcomes? I think that touches on your point there Andrew, compliance with a process has been our BAU for, what are we onto, twenty odd years now. You know, we have TCF regime coming in and then we had RDR coming in which was what, ten years ago. We've had different strategies driving through financial services, so compliance has always been a big part of that, but the compliance with a process era has now ended. It's this mindset shift we have to have from compliance to outcomes, and I think that's going to be really important for firms to grasp.

Andrew: That's interesting, I still get a nervous twitch when people say RDR, so let's not dwell on that point there. So, I mean again, as we had mentioned earlier on, the regulator split out some of the timelines for implementation of this, and it split them by open and closed books with firms obviously having until July 2024 in terms of the closed book products. I mean they've given them an extra year, is that because it's particularly difficult, what kind of issues are firms facing there, what is a closed book, how do firms deal with that? It feels potentially huge to me I think?

Ian: Yes, and these are conversations I'm having right now with a number of different firms. If you just turn to the insurance industry for example, the number of closed back book products and services they will have will be huge. So, it's going to be quite an undertaking for some of them, even though they can group similar products together. The conversation around what is closed book is causing some angst for people, the example given to me the other day was that somebody on a fixed rate mortgage which is going to turn over into a standard variable rate mortgage, is that closed book or open book? I think we need some more clarity from the regulator in some of these issues, some of them are probably resolved and you can take a view on, but others will become harder to define as we move through this process.

Andrew: Okay, that's interesting, and another point you talked about was around accountability here and certainly I read some of the rules. So, the final rules and guidance do suggest that firms want to appoint a consumer duty champion. Now, the slight cynic in me would ask what's the regulatory status of a champion in a firm and how does that compare to a controlled function or to a senior manager function and so on, and things like that. You know, what role does the regulator expect a champion to play really and who is driving forward this change in a firm, is it the chief exec or is it someone more junior?

Ian: Look, a really interesting point there, the reg's state an independent, non-executive director is ideal for the role. Now, not every firm is going to have that, so, you know, we have to cut our cloth, but certainly somebody independent to the day-to-day running of the business is key. They have to be able to challenge the implementation plan and the ideas and the gap analysis, they have to be able to, sort of, report back to the board and they also have to have sufficient standing within the board to be able to be credible. It's not a defined term, but the obligations should be passed around different members of the board. For example, culture comes out of the chief executive's office, and absolutely should be driven by that. Having your clients and your customers at your heart of your business is a cultural issue and the chief executive should be pushing that through. Monitoring good outcomes which is the key part of the new principle. That has to be driven by line too, they have to be in there, making sure that those outcomes are being spotted and they're predicted. It's going to be, in terms of the board functions, a change to what they're used to, and they're going to have to deliver and push down right through the board level, down to their various business owners and business lines and service lines. To make sure that consumer duty is being implemented throughout the business.

Iqy: Just another thing that we want to add on here, the consumer duty champion is really there to be the voice of the customer and really hold individuals accountable for, 'Is this really the right thing to do with the customer in mind?' That's just really need to be at the forefront of decisions that are made in relation to, you know, developing products across the end-to-end customer journey.

Andrew: Okay, thank you. We're going to touch there on some of the cultural issues, I mean if we're focusing on outcomes rather than process, it feels to me that culture is a really important part of how you deliver those outcomes to your customers. You know, that must surely be reflected in all kinds of ways for a business? Is this, I mean how does this differ from some of the messaging we've had on culture over the last five years from the regulator? Is this just more of the same or is this a slightly different approach?

Iqy: I think it's a combination, so whilst it is, you know, more of the same, it is also really taking home and really pushing it back to firms around there is a need for a shift, and it's really about let's take the focus and really focus on the customer, and that delivery of good customer outcomes. Whilst, you know, over the years we have moved slowly in that direction, you know, there are a number of instances where the regulator has highlighted that they're not being delivered. Actually, this is a great opportunity for firms to really move their business and move it more in a direction of the customer.

Ian: Yes, one of the points to bear in mind as we come up towards the end of the year, most firms have their performance year ending 31st December. So, if you're going to implement cultural change in things like remuneration packages or performance packages, you need to be thinking about that now and consulting with that now. It's going to be a really important part of consumer duty going forward. Iqy and I spoke to a motor finance firm the other day and we have to look back at some of the-, as an example, some of the remuneration practices we've seen through motor finance. That won't cover everybody through financial services, but everybody has their nuances through their performance packages.

Andrew: Well, and if I think back to some of the cultural points and some of the stuff around the senior managers regime when it came into effect, there was a big debate about who progressed, who did you promote in your organisation, who did you reward. Also, I think there must be something here about the incentives in terms of, you know, the commissions that are paid and certain environments as well. So, remuneration is both an individual thing for how you reward your staff, but also that, kind of, wider incentive part type regime as well. So, I mean I talked a little bit about value from my experience in the asset management space, value is one of the kind of, I'll get the wording wrong here, one of the pillars of this particular regime. How are firms approaching that because it was tough in asset management?

Ian: It remains tough, we're having debates about price is easy, okay, we can benchmark price right across different product suites and that kind of thing, but the piece about values getting harder and harder. I had a conversation in the wealth space and what value does a wealth advisor to a high net worth client bring? It becomes really subjective at that point, because services to people at the high net worth end or value become very bespoke and very tailored. So, you'd think that value is intrinsic in what they do, but how do they evidence that? How do they evidence that they sit down with these clients every three months, check in on them, how are their families, really get to grips with their whole financial lives. That is always going to come out as being data but also monitoring, and monitoring is the part where line one comes in. Can they gather evidence from those conversations that are going to demonstrate value that they can present to the regulator in a data led format, that's going to be really hard.

Andrew: Yes, I agree, and I think again in the asset management space when we were talking about value, people then began to think about not just the product itself, but also the service offering they had, what's the power of the brand and how do you value that? For example, the robustness of your brand. So, there was a whole range of quite esoteric factors that people tried to build in and tried to attach some sort of numeric value to. Well, thank you both for joining us today, this has been fascinating and I've really appreciated hearing your perspectives on consumer duty and some of the changes firms need. I like the plan for a plan is not an answer, that's something that I think probably should focus people's minds in the next, sort of, six or seven weeks certainly. So, just before we wrap up, is there any, sort of, last thoughts you want to leave for our audience? What's the one thing that you want people to go away and worry about tonight when they can't sleep?

Iqy: I think the focus on customer outcomes and the delivery of good outcomes for customers is one of the key things and it essentially underpins everything within the regime. Actually this is an opportunity for firms to really press the reset button and really, kind of, move forward in the right way.

Andrew: I'd argue potentially future proof themselves as well slightly, because, you know, the regime is, well, the regulators in their entirety are moving more to an outcomes-based regime. So, pivoting or thinking about that is going to be really important and have longer term value. Okay, I agree, and Ian?

Ian: Look, if you're going to demonstrate that you can support your customers to pursue their financial objectives, which is part of the cross-cutting rules, you have to evidence the good outcomes you have and that the only way to do that is going to be through your data. So, go back to your data, have a look at what you've got, the data you needed in your data sets, it's just surfacing that data out of your systems and then presenting it through your KPIs so that you and the management board and the executive board all have the indicators they need to be able attest every year that they are providing good customer outcomes in their businesses.

Andrew: Okay, thank you, that's great. To our listeners I hope you've also enjoyed this conversation and thank you for listening. As always, please do subscribe for future episodes and rate and review this series as it helps other listeners to find us. If you'd like to hear more from us on risk and regulation, please look out for our regular bulletins and I look forward for you joining us for our podcast next month.