With only a couple of months to go until the 31st July deadline for new and existing products, you will likely be knee-deep in finalising customer journey mapping, testing and implementing operational and product changes, tweaking your fair value assessments following the FCA’s recent review and developing your outcomes-based monitoring.
The FCA believe that you have had an ‘epic head start’ in implementing the Consumer Duty and should be able to meet the July implementation deadline. In theory, the FCA want absolute compliance with the Duty from Day 1. Yet, a consistent message reiterated through its guidance, podcasts, letters and speeches is that substantive compliance will suffice, assuming sufficient prioritising and focusing on the areas where customers are at the highest risk of harm.
So, is this message around prioritisation a sign that the FCA is sympathetic to the enormity of the task and will apply a degree of pragmatism come 1st August, particularly if your firm is one which has adopted a proportionate approach to the July implementation deadline?
What does successful implementation look like?
The FCA’s primary aim is to reduce harm and ensure firms are delivering good outcomes for customers.
As much as you will need to delve into the detailed rules to ensure compliance with specific requirements – a significant shift from the principles-based approach of treating customers fairly – success will only be achieved if your firm’s culture and people strategies are focussed on delivering good outcomes for customers.
The requirement for your firm to nominate a Board-level Consumer Duty Champion demonstrates how the FCA expects this cultural shift to be set at the top, cascading down through all levels of the business under the watchful gaze of the new conduct rule which requires employees to act to deliver good outcomes for retail customers.
To reinforce the importance of the role, the FCA’s guidance sets out examples of questions that Champions should be asking Senior Management, holding them to account and forcing them to answer the fundamental question: ’Are our customers receiving good outcomes’?
But in this new age, simply answering the question with a “yes” won’t be enough. Your firm must be able to define, monitor, evidence and stand behind the outcomes that it delivers. Harnessing the benefits of data and technology to generate meaningful MI will be critical. But you also need to make sure that your firm doesn’t fall into the trap of assuming that the plethora of MI that you already have in place will be enough.
You should focus on outcomes over process. To do this, you must have invested time in developing a robust outcomes testing and monitoring approach and given considered thought to what ‘good’ really looks like from your customer’s perspective. Your product development frameworks, customer journey mapping and fair value assessments should have already considered the areas of your business where customers are most susceptible to harm. You should have made changes to, or been working on, removing any unnecessary barriers and unreasonable costs, and supporting customers to achieve their goals in an open and transparent manner.
In its portfolio letter to mortgage lenders in February, the FCA set out its plan to engage with firms – from as early as September 2023 – to find out what changes they have made following their baselining and gap analyses, and what their enhanced data indicators and dashboards are telling them. Another wave of oversight is scheduled for January 2024 when the FCA further casts its ‘customer outcomes monitoring’ net to understand what firms’ enhanced outcomes-focused data and dashboards are indicating about customer outcomes, whether these outcomes are meeting the Duty and what corrective actions have been taken.
However, having the data is just one part of this customer jigsaw. The other part, which may not become wholly realised until after the implementation deadline, is what you are actually going to do with the results. For example, do you have the frameworks in place or resource capacity to make the changes needed – and quickly? Are your governance committees prepared for the information that is going to be presented to them and what their responsibilities are in delivering change? If your MI indicates that a customer journey needs an end-to-end review or your enhanced data collection and root cause analysis has identified an underlying problem that you didn’t know about, will you be ready to respond effectively?
Whilst tight, the FCA’s published review timescales do provide some wiggle room to use your outputs to tweak and adjust your monitoring and remediation approaches to make sure they work in reality and tell your Board what it needs to know. This calibration exercise will be crucial, particularly in those areas where the likelihood for customer harm is greater, to measure how successfully you have implemented the Duty or whether you need to plan for a ‘Day 2’.
How and where will the FCA be looking to measure success?
The FCA’s policy statement outlined that monitoring key outcomes for customers will be its primary measure of the Duty’s success.
Complaints data will play a strong role, with the FCA citing a reduction in upheld complaint volumes – particularly in relation to poor value, unexpected fees or charges, products and services not working as expected, and complaints around switching, cancellation and service levels – being paramount to measuring whether the rules around the Duty’s four customer outcomes have been delivered and embedded effectively.
Customer satisfaction will also be important. The FCA plans to measure what customers are seeing and feeling, and their levels of trust and confidence, through its Financial Lives Surveys. The new rules requiring you to test communications to prove that customers can understand them further weigh that direct customer feedback is fundamental to the Duty’s success.
The FCA also plans to develop its own data-led approach to more quickly identify practices that negatively affect customer outcomes, intervene before such practices become entrenched as market norms, and prioritise the most serious breaches. As it implements the Duty, it plans to develop and consult on further metrics to assess the Duty’s impact at the level of particular sectors and portfolios.
However, the bulk of information will be gathered through the FCA’s supervision and authorisation activities. As seen in the approach to its Borrowers in Financial Difficulties project, you should prepare yourself for an increase in data requests, thematic reviews and sector-specific surveys. It is likely that you will need to provide copies of relevant documentation including MI, reports to the Board and minutes containing Consumer Duty discussions. It is inevitable that the FCA will ask to see your annual Consumer Duty Board report when the time comes, making the planning and preparation for this absolutely vital.
So what should I do?
As Sheldon Mills, Executive Director – Consumers and Competition, at the FCA said: “Don’t panic, but do act!” The FCA wants you to know that its purpose is to encourage and support you but know that it will take action if it finds that you have buried your head in the ‘Consumer Duty’ sand.
For those of you who can see the finish line, dig deep and keep going! Use the remaining few weeks to finalise the ‘go/no go’ decisions with the Board, implement those last changes and perfect your monitoring and three lines of defence oversight arrangements.
For those that are a little further behind, prioritisation is key. Look at where customers are, or may be more likely to, suffer harm and make immediate changes to remove those barriers. Think about the outcomes that customers would want from the products and services you offer and develop key performance indicators to measure whether these outcomes – not the underlying process – are being delivered. Get your Board Champions involved in challenging the status quo and agreeing on a robust, longer-term delivery plan.
And for those of you in a closed book firm, don’t relax just yet! Whilst you still have over 12 months to go, the FCA will expect that you’ve read the speeches, digested the feedback and poured over your now dog-eared copy of the rules. The FCA understands that the task in hand might be more extensive given the size of your back book, but it is highly unlikely that the pragmatism that might be shown to new and existing product firms will be extended to you.
How can Square 4 help?
Square 4 has developed a simple five-point Consumer Duty implementation health check to provide assurance, on a review and recommend basis, to determine whether the work you have undertaken to date is complete and aligned with industry and regulatory expectations.
Our implementation five-point health check considers a range of different factors and examines the following:
- Governance and Oversight
- Culture and People
- Implementation plans
- The four outcomes
- Data strategies
Further information can be found in the PDF here.
If you would like to discuss any aspect of your firm’s Consumer Duty implementation plans or would like further information on our Consumer Duty implementation health check, please get in touch at: hello@square4.com.
