In the UK, the FCA has recently announced the version of their Consumer Duty regulation which will intrinsically improve how consumers are protected. The changes impose higher standards for consumer care and are designed to increase consumer protection whilst promoting effective competition across the retail and financial services sectors.
Previously, the approach had been reactive, which limited the extent of protection for consumers. However, this outcome-based approach places consumers’ needs firmly at the forefront of the regulation and ensures that products and services will meet consumer requirements. Furthermore, it’s expected that these changes will encourage firms to become more innovative and agile to meet the needs of their consumers with the introduction of clearer guidelines in areas such as cost-cutting and communication.
Feedback received in consultation with stakeholders confirmed that more time was required and that the review of closed book products and services was likely to be the most onerous. As a result, the new schedule for implementation of the Consumer Duty is as follows:
- 31st July 2023 for new and existing products or services that are open to sale or renewal
- 31st July 2024 for closed products or services
The Duty comprises three main elements: the consumer principle, cross-cutting rules, and the four outcomes.
The new Consumer Principle requires ‘a firm must act to deliver good outcomes for retail customers’ and is supported by the cross-cutting rules that require firms to take all reasonable steps to:
- Avoid foreseeable harm to customers
- Enable customers to pursue their financial objectives
- Act in good faith toward customers
The four outcomes the FCA are seeking are as follows:
- Fair value – consumers receive fair prices and quality
- Suitability and treatment – consumers receive suitable products and services and receive good treatment
- Confidence – consumers have strong confidence and levels of participation in markets
- Access – diverse consumer needs are met
The scope of the Consumer Duty is broad, as the term ‘retail customers’ also applies to products and services delivered to corporate entities as well as individuals. The Duty will also apply to firms that do not have a direct relationship with the end customer and have a material influence on retail customer outcomes. However, it is not applicable to a company that provides IT systems.
Under the new regulation, firms will have to consider every single step of the customer journey throughout a product’s life – including product design, marketing communications, and customer service across the entire product life cycle.
Whilst many firms are already providing good service and fair customer outcomes, others will require renewed focus and potentially significant effort to comply and meet the deadline. Initially, all firms will be required to complete detailed product reviews and document all decisions made along with their recommended actions.
This regulation could require some financial services firms to undertake a large-scale review of their products, IT, operations, customer service, and customer communications. This regulation includes products sold direct to customers as well as through third parties, therefore the product owner is always accountable to comply with the regulation, potentially adding complexity and cost to some organisations.
The Consumer Duty could impact some firms’ profitability, as customer service must meet the reasonable needs of the consumer. Organisations’ back-office operations, customer service, and communications capabilities could need significant changes to comply with the regulation. Complying includes supporting the ability of customers to easily leave, cancel or transfer their product in a frictionless way. In other words, it must be as easy to exit or transfer as it was to purchase.
Firms will also need to assess their products as to whether they deliver ‘fair value’. This will need to be fully documented in their own assessment of pricing structures, and the review process may lead some firms to conclude high margin products need to be reassessed, potentially impacting overall profitability.
The FCA has set out its expectations for the implementation period:
- Implementation plan ratified by the board – Oct 2022
- Complete review of all products and services prior to April 2023 and then remedies by July 2023
- Prioritise any serious items causing immediate consumer harm
- Consider bringing forward any changes that give consumers better outcomes
- Engage with FCA where products and services will be withdrawn
- Boards responsible for review and monitoring to keep on track
- Alert the FCA if work will not be complete. Prioritise those actions with the biggest impacts on consumer outcomes
- At the end of the implementation period boards should be sure that they are complying and remedy any gaps or weaknesses
A firm’s communications form a vital part of delivering a good outcome for their customers, an example might be the need to clearly communicate alternative product offerings. There is also very specific guidance on how to support vulnerable customers. We will delve more into communications and the Duty in our next blog.
Enforcement and monitoring
To meet the new requirements set out by the Duty, governance processes will need to be reviewed and updated, and customer outcomes will need to be tracked and measured. Entire customer service processes, measurement and reporting will need to be reviewed and updated to ensure the right outcomes for customers, and any product changes quickly and effectively managed and communicated.
The FCA will expect a company to be able to provide them with:
- Evidence of the appointment of a champion at board level
- MI specific to the Duty
- Part of the Annual report dedicated to the Duty
While currently there are no regulatory reporting requirements firms will still be expected to be able to demonstrate data collection and the results of their monitoring. Some consumer groups involved in the consultation felt that no regular reporting requirement would lead to non-compliance. However, the FCA has indicated that it will use its full range of powers to tackle any serious misconduct which could include a fine or securing redress for customers that have suffered harm.
“When considering whether a firm has fallen short of our expectations, we form a judgement on whether the firm has acted reasonably taking into account the rules and guidance applicable, as well as the facts and circumstances of each case. This will not change under the Duty. The only difference is that firms will be judged against the higher standard set out in our new rules and guidance.”
In support of the four outcomes (the key elements of the firm-consumer relationship), firms could choose to work with third parties to help shape and deliver improved customer service and communications. Working closely with specialist communication companies, such as APS Group, across the key areas listed below, could create a simpler path to compliance whilst improving customer service and communication, and ultimately managing operational costs down.
- Product design
- Customer service
- Price and value
As customer communication specialists, APS Group can support your Consumer Duty-related review and future requirements to meet the regulation. Using its specialists to advise on all communications, starting with the output from the product design phase, they can work with you to complete detailed customer journey mapping of each product and design bespoke communications, giving your customers individual flexibility in their communications and channel of choice.
APS Group will advise, design, build and deliver an ongoing service to all of your regulatory customer communications, in a secure pay-as-you-go model.