Click here to read more - CP21/13: A new Consumer Duty
Regardless of the final wording the FCA settles upon for the Consumer Principle, there are likely to be implications for operational activity across all products and steps in the customer journey. Without a clear plan of how to implement the changes required as a result of the Consumer Principle, Rules and Outcomes, there is a clear risk of not meeting the FCA's expectations. This could lead to heightened regulatory scrutiny, increased numbers of complaints and / or remediation activity.
To prepare for the implementation of the Consumer Duty, the most pressing activity for most firms will be to review their existing suite of products. This will help firms to gain an understanding of how customers are using them at present and whether there are any groups of customers where there is a risk outcomes may not be "good" or in their best interests.
Both wording options for the Consumer Principle are a step change in regulatory expectations. This raises one of the most important points for firms to consider: what type of outcomes will be in line with the Consumer Principle?
Good outcomes
If the FCA settles upon the 'good outcomes' option for the Consumer Principle, firms will need to consider exactly what this means for customers. For many types of product a good outcome for one customer may not be good for another – for example, in a debt consolidation, one customer may benefit by reducing the total interest payable whereas another may benefit by reducing their monthly payments. When reviewing products and services being provided it is therefore important to consider the different types of customer circumstances and needs, including where circumstances change while the customer holds the product.
Best interests
If the FCA settle upon the 'best interests' option, there will be the added complication for firms of not only assessing the outcome but also considering the customer's wider circumstances to determine if this outcome is in their best interests across all products. Firms will need to be able to clearly explain how they balance a customer's current needs (or wants) with outcomes which are in their longer term best interests. Some firms could find this leads to product simplification projects or other changes to their existing suite of products.
For either option, understanding how products are currently being used will also identify whether changes are required to allow better understanding of customer circumstances, which will in turn help inform whether activities are aligned to the Consumer Principle. This may require new call scripts, changes to online journeys, greater flexibility of customer facing staff or updated criteria for when particular products and options are available to customers. In many cases, the guidance provided to staff will need to be more granular and more proactively consider the range of customer needs – in some cases this will require new or updated training to be provided.
Consideration will also need to be given to the potential differences in expectation of the outcomes the Consumer Principle should lead to between firms, and their customers, and also the FCA and FOS. Potential differences here could lead to firms taking a more cautious approach to product development, which customers may in turn perceive as poor service. For certain types of products, there is also a risk that customers do not fully appreciate the impact of product performance on outcomes. Where outcomes are appropriately impacted by product performance, customers (and CMCs) are likely to raise a higher number of complaints which could draw additional scrutiny from both FOS and the FCA.
To mitigate these risks all customer communications will need to be reviewed to make sure they are effectively driving the outcomes required by the new Consumer Duty, avoiding sludge practices and not abusing customers' behavioural biases. This is likely to be particularly relevant to communications relating to sales / renewals and arrears handling, but could be equally as relevant where changes are made to products. Additionally, firms may decide additional communications are required where it is identified that the way the customer is using the product has changed or could impact whether it is in their best interests to continue using the product. We have already seen FCA intervention in this area with credit card and overdraft use warnings as well as the more recent rules relating to insurance renewal. It is likely that, once the new Consumer Duty is in place, the FCA will expect firms to consider whether similar “warning” communications are required in relation to other products which are not being used as intended – and FCA may expect firms to justify why such communications have not been put in place and demonstrate this has not impacted customer outcomes (especially if the FCA adopts the "best interests" formulation for the Consumer Principle).
Perhaps the most important activity firms can undertake for long term implementation of the Consumer Duty is to ensure that they have an effective product monitoring approach in place. This will need to cover product design / review, reporting, change processes and testing:
- Product design / review: what is the product for, what is the target market, how do you expect it to be used, what outcomes do you expect customers to have, etc.?
- Reporting: what management reporting is in place relating to customer use of the product, customer outcomes, alignment to target market, actual vs expected sales numbers / profit margins, etc.?
- Change processes: how do you document the questions raised and decisions taken as a result of management reporting, is a robust change management process in place?
- Testing: do you carry out post implementation testing to ensure changes have the desired effect and don't lead to other, unforeseen, issues, is 1st and 2nd line testing in place to confirm implementation of processes and effectiveness of the overall customer journey?
Once the Consumer Duty is in place, a key part of being able to demonstrate ongoing compliance will be determining the right metrics for measuring a good customer outcome / an outcome which is in the customer’s best interests. This will include the type of product, target market, expected use, step in the journey and, perhaps most importantly, a rationale for what is considered a good outcome / best interests.
All of these factors will need to be considered alongside change decisions (including where no change is required), and the reasons and intended consequences of those decisions will need to be documented and retained. This will help demonstrate to the FCA that your firm, and the relevant individuals under SMCR, are taking reasonable steps to act to deliver good outcomes / act in the best interests of customers. In addition, 1st and 2nd line testing of front line activity and the overarching customer journey for compliance with the Consumer Principle, Rules and Outcomes will help demonstrate these are being effectively implemented for customers on a day to day basis.
Even for firms with modern systems and relatively low numbers of products and who consider that they are already delivering good outcomes for customers / acting in customers’ best interests, it is likely to be an extensive task to effectively embed the Consumer Duty. In particular, it will not be sufficient in the future simply to rely on process adherence to demonstrate that a customer's outcome is appropriate – firms will need to show that the way a process has been implemented for a specific customer has been intended to deliver that. This will inevitably be harder for firms with higher numbers of products, with legacy systems that may be inflexible or difficult to change and more customers with a broader range of circumstances.
Next steps
While the FCA has not yet confirmed the formulation of the Consumer Principle, it is clear that the FCA will be pressing ahead with these new standards of behaviour. Now is the ideal time to take a deeper look at the products and services your firm offers and begin considering what an outcome aligned to the Consumer Principle options looks like for different customers in different circumstances. Early understanding of this will help inform changes which may need to be considered and any operational difficulties which may make implementation of changes more difficult or time consuming.
Our engagement across the industry, and with regulators, means we are uniquely well placed to help firms consider best practice and regulatory expectations while balancing this with the needs of your business. Our combined legal practice and consulting team can help you consider the legal and regulatory implications of an assessment of customer outcomes as well as the operational practicalities of the proposed changes.
Authored by Matthew Handfield.
