I have spent the last few years working with the industry on vulnerable customers, working alongside our clients on their preparedness, sitting on industry working groups and engaging with the regulator. So, when Consumer Duty came around, I took a keen interest because for me, the two pieces of regulation draw many parallels. We were asked to target better outcomes for those most at risk of harm if we didn’t start acting with greater care, diligence, and flexibility. Consumer Duty is asking us to build on that work, level the playing field and deliver better outcomes to all consumers.
There is also a cultural and behavioural element underpinning both, that necessitates a change in mindset and requires many areas of the organisation to consider the impact. Some regulation is very mechanical, asking the industry to deliver something very specific, which can be achieved through a finite project that delivers the required capability, but Consumer Duty is different. It's not a cliff edge piece of regulation. Two years after final guidance on vulnerable customers, and nearly a decade after the FCA started their work, firms are still grappling with how best to ensure the fair treatment of vulnerable customers, and I expect Consumer Duty to follow a similar path. More importantly, so does the FCA. Whatever place firms get to by this July, and July 2024 on closed books, I suspect many will fall short simply due to complexity and time restrictions; continuous improvement beyond 2024 feels inherent within the Duty.
In our consulting work and engagement with the industry, we have noticed common themes in terms of areas the industry is grappling with. The price and value outcome is proving complex, as we seek to establish frameworks to evidence that products and services deliver fair value, how do we make the subjective, objective? How we assess value is very personal and based on our individual assessment of the intersection between price and quality. We are being asked to offer financial service consumers a form of paternalism, a form of good value guarantee that you don’t find in free market economies. No one tells Rolex they can’t sell a premium time piece that delivers the same outcome as one for a fraction of the cost.
Consumer Duty is about outcomes but what constitutes a good outcome? That can be straightforward enough to answer in terms of the end objective of a product. For a pension, it is to permit consumers to save and invest toward a comfortable retirement (setting aside the market and behavioural risk the investor bears in defined contribution cases). However, there are many outcomes across the 40+ year lifecycle of a pension. How do you define other outcomes? If the client is in vulnerable circumstances? If the client is not suitable for your product or service, or in your target market? How do you get them to a good outcome?
A core tenet of Consumer Duty is that the regulator is not only looking for firms to deliver good outcomes but is placing a requirement on them to prove it wasn’t by chance. The FCA is looking to firms for engagement at board level, and that appropriate levels of governance and monitoring are in place. Data and management information are therefore going to become key, but as is often the case in financial services, firms lack a single customer view, or mastery of – and access to – their data in a manner that permits management information and insight to be developed.
The Dear CEO/Director letter reinforced that Consumer Duty should be a top priority for both the organisation and for the CEO/Director personally. It also reiterated the requirement to embed the ‘substantive requirements’, which the FCA stated in response to finding some of the industry to be overconfident based on existing processes or having not understood the full scale of the task. This reconciles with our experience engaging with the industry on preparedness, seeing the typical array of approaches to regulatory change. There are those who see it and are treating it as a real opportunity, and others being complacent about the scale of the challenge and considering requirements as closed off under existing regulation (e.g., PROD).
In some ways it is understandable. The FCA have not laid out in detail how they will enforce Consumer Duty. As the regulation comes into force in July 2023, the industry awaits their approach and adjudications from the Financial Ombudsman Service to see how Consumer Duty will be interpreted. The FCA has set out to become a more data-driven regulator and although they have not introduced any new regulatory reporting requirements at this stage, they have confirmed they will be collecting data from multiple sources as part of supervision and enforcement.
To complement the FCA’s work to monitor progress and create a benchmark for industry progress, Altus Consulting has developed a Consumer Duty Assessment tool. The Altus Consulting Consumer Duty Assessment tool is free to use and enables firms to complete an assessment of their progress as we approach the first implementation deadline. Rather than a one-time assessment, firms can assess themselves at regular intervals to track the progress of their programme of work up to July 2024 and beyond. Tracking progress using an industry benchmark will enable an assessment of progress vs. the wider industry, and provide firms with an independent benchmark and audit trail.
You can sign up to use the Altus Consulting Consumer Duty Assessment tool, by clicking here.