Consumer Duty: embracing strategic solutions and embedding change

July 2023

The end of July marks a significant milestone in the implementation of the FCA’s Consumer Duty. For new and existing products and services, the Consumer Duty is now live, meaning a fundamental step change in regulatory standards and expectations, requiring firms to put customers at the heart of what they do, and to monitor and evidence that they are delivering good outcomes for their customers.

Implementing the rules has been a significant exercise for many financial services firms, cutting across their business and operations. Indeed, in a Treasury Select Committee appearance in July 2023, FCA Chair Ashley Alder commended the progress firms have made. But there is more work for firms to do - and today’s intervention from the FCA in the cash savings market shows the strength of its intent to ‘assertively supervise and effectively enforce’ against the requirements at an early stage.

The Duty has required firms to answer fundamental questions that go to the heart of their business and strategy, such as how they define and measure ‘good outcomes’, and how they determine ‘fair value’ across different product suites and customer cohorts. The Duty also requires firms to be more forward looking by preventing foreseeable harm; to clarify responsibilities of firms across the distribution chain; and to deliver appropriate Board and senior accountability, oversight and challenge.

The shift to a focus on achieving good - not just fair - outcomes has been complex. While most firms have got over the line for this deadline, their journey is by no means complete and firms’ day two plans will revisit and expand on many of these strategic questions.

So where should firms now turn their attention, to deliver against the FCA’s expectations as it moves into supervision mode, and to embrace the longer term opportunities the Duty presents?

Strategic solutions and cultural change

With the first implementation deadline now passed, the focus is on closing any gaps for those firms which were in ‘substantive’ but not full compliance by 31 July, as well as successfully managing the transition into business as usual compliance. That means assessing whether new processes and controls are being executed and operationalised in line with expectations, particularly given many firms have put in place changes at speed to meet the 31 July deadline.

Day two plans need to factor in strategic solutions. Most firms have had to take some tactical approaches to implementation that will need to be revisited in order to be sustainable. This will likely involve greater exploration of analytical and technology solutions around customer listening, data and dashboarding, to enable real time monitoring of the delivery of good customer outcomes.

Taking steps to bring about the cultural change required to embed the Duty throughout the organisation - and to be able to evidence this to the regulator - will also be key. To assess whether firms are building a customer-centric culture, the FCA will look at organisational values, purpose, people strategies, and pay and incentive frameworks. Firms should review whether remuneration policies incentivise the right behaviours, encourage leaders and managers to role model a customer-centric approach, and support employees to understand their role in meeting the standards of the Duty.

Early supervisory scrutiny

Today’s announcement from the FCA on cash savings shows how seriously the regulator intends to supervise its new powers and embed the Duty at the heart of its supervision strategy. This marks the start of changes in the cadence of regulatory interventions, with firms having to respond very quickly. Firms can expect similarly strong and early interventions in other product areas, particularly where there is public or political scrutiny, significant consumer harm, or an impact on vulnerable customers.

Today’s update is just one example of how we expect the FCA to focus on fair value in its initial supervision of the Duty. Firms across sectors and product lines will be expected to evidence how they’ve acted upon the concerns highlighted in the FCA’s fair value review in May 2023.

The FCA has also indicated other areas of likely early supervisory attention, such as insurance claims handling and valuations. It's also committed to follow-up reviews of asset managers’ and general insurers’ fair value assessments. It is imperative that firms devote sufficient resources to meeting enhanced expectations in these priority areas.

The difficult economic backdrop is also likely to influence the FCA’s focus, and will continue to shine a light on firms’ support for customers in financial difficulty and vulnerable circumstances. Improvements to customer communications and customer support (including addressing growing concerns over call centre waiting times) will be key, particularly with the FCA’s recent financial lives survey data showing that customers continue to experience challenges in these areas. These findings build on the shortcomings identified by the FCA in the way that insurers and lenders treat customers in financial difficulty, in recent multi-firm reviews.

Third party relationships and back book challenges

Beyond these immediate areas of supervisory focus, firms are also turning their attention to addressing a wider set of issues which they may not have been able to devote as much resource as they would have ideally liked in the run up to 31 July. These issues include effectively managing relationships with third parties on an ongoing basis. Establishing and maintaining appropriate oversight of outsourced arrangements will be critical to continued compliance with the Duty. Firms should also seek to establish an operating rhythm for the sharing of information between manufacturers and distributors to inform ongoing monitoring and review of customer outcomes, for example as part of regular fair value assessments.

In addition, the immediate implementation journey is not over for firms with a back book, which will be working towards the July 2024 deadline for closed products. Challenges around data availability and the scale and complexity of closed books means firms should be taking proactive steps now to complete product reviews and fair value assessments, and considering how technology can support this. This phase of implementation will be particularly challenging for firms with life and pensions closed books.

Embracing future opportunities

As firms move into day two compliance, the FCA has made clear that it expects the Duty to boost competition, inspire customer loyalty, and increase trust in financial services. While some firms have implemented tactical solutions to meet the July deadline, they now need to adopt an approach that embraces the longer term opportunities the Duty presents, to drive positive transformation and value for their business.

The Duty is an opportunity to deploy new technology to optimise business processes, spot and address potential harm at an early stage, and improve the customer experience. Doing so will ultimately help firms on their journey towards delivering better customer outcomes, increasing customer loyalty, enhancing their brand, and reducing costs associated with complaints and redress.

In a world where traditional financial services business models are increasingly being disrupted by competitors such as FinTechs, now is an opportune moment for firms to take stock of how the Duty impacts their strategy and business model. Firms should look to intensify digital transformation efforts, taking advantage of the rapid advances in technologies such as Artificial Intelligence to deliver operational efficiencies.

The evolving road ahead

For firms, the July deadline is a staging post in an ongoing journey and the work is far from over. At the heart of the Duty is the expectation that firms will continually monitor and improve the outcomes their customers are getting - that means testing customer communications and carrying out fair value assessments at appropriate intervals, for example.

The regulator is also on a journey as it develops its approach to the supervision of ‘outcomes-based regulation’ and the delivery of ‘good outcomes’. The FCA has made clear that it wants to be a more data-led and less prescriptive regulator. What this looks like in practice remains somewhat unknown, and the early days of supervision of the Duty will mark something of a learning curve for the regulator as it strives to achieve consistency in a less prescriptive world.

While an outcomes-based approach gives firms greater flexibility to define for themselves what good looks like, they need to be ready to tell a compelling story - backed up by data - to evidence how their business model, actions and culture are focused on the consistent delivery of good customer outcomes under the Duty, and their plans to evolve this in a day two world.