Embracing the spirit and opportunities of the new consumer duty regulation

This article was first published in FT Adviser

The Financial Conduct Authority’s upcoming introduction of the new consumer duty for financial services businesses is the biggest change in conduct regulation for more than a decade. It has the potential to be a major catalyst for positive change for both the industry and consumers and should create the impetus for companies to move to the kind of customer-centricity they have long aspired to and better affirm the sector’s role in society.  

This is much more than a simple update to the current principle of treating customers fairly, which has not been enough to wholly prevent the exploitation of customers’ behavioural biases or the asymmetry of information in the relationship.

Now, all companies need to focus on getting things right the first time.

They will need to move from a mindset of preventing poor conduct to proactively delivering good outcomes for customers. And they will need a major rethink of how to measure and respond to potential harms. 

The consumer duty consists of three main elements: 

1. The Consumer Principle – requiring companies to act to deliver good outcomes for retail customers. 
2. Cross-cutting rules – requiring companies to act in good faith towards retail customers, avoid foreseeable harm, and enable and support retail customers to pursue their financial objectives. 
3. Four specific outcomes that the FCA sees as the heart of the business-customer relationship: products and services, price and value, consumer understanding and consumer support. 

A shift in culture, not just a compliance exercise  

There is a danger that companies will see the duty as setting equivalent standards to the existing TCF principle. But merely increasing focus on complying better with existing rules and principles will not be enough.   

Conversely, there is also a risk of ‘gold-plating’ the implementation, which will see companies run out of time and take a ‘tick-box’ approach to the final elements.  

Getting the right balance will require a shift to a customer-centric culture.

Companies will need to demonstrate how their culture focuses on good customer outcomes and enables customers to make effective, timely and informed decisions about products and services. 

At the same time, companies will need to make process and system changes.

Many have begun reviewing all their main products, distribution channels and services, and undertaking a gap analysis against the new standards to understand what mechanisms they need to put in place for outcome monitoring and governance.

Some companies will also need to make operational changes or develop new capabilities, such as data and analytics or behavioural economics.

Importantly, as they do this, they will have to think about how it all ties back to the customer-centric culture the FCA expects of them. 

To manage all this, there are three areas financial services firms should focus on. 

Think of customers first, not compliance 

By truly putting customers first, you will intuitively comply with the new regulations.

This starts with defining what a customer-centric culture means with regards to each of the four outcomes.

For instance, if you say the support you provide to customers should be responsive, proactive, thorough, and barrier-free, this must translate into your products and services, systems, processes, and people’s behaviours.

It is then important to review how you engage with and support customers pre and post-sale.

It needs to be easy for people to understand whether a product or service will help them achieve their financial objectives and be good value.

Complaint handling is core to the consumer duty, so prioritise how your approach can highlight foreseeable harms and resolve complaints quickly and fairly.

Companies must identify gaps and consider the impact for all customers, paying specific attention to vulnerable customers. 

Finally, continuously monitor customer experience. This will involve both subjective assessment, such as customer feedback, and objective assessment, such as the number and nature of complaints. Data and analytics will be crucial to providing insight and early warning of any emerging risks.  

Embrace the shift 

Getting the whole organisation on board will give you confidence that your people will always do the right thing.

This will be a different challenge in different companies and sectors, and the FCA is clear that the work should be proportionate.

But for most it will be important to consider how to define a consumer-centric culture and how that breaks down into measurable behaviours across each of the four outcomes, then to identify and embed behavioural change levers into your consumer duty implementation programme.

These include governance, roles and responsibilities, learning, performance management, leadership, and habit formation. In simple terms, it is making sure that it is real and that it sticks. 

And it is important to recognise that culture does not come with a defined start or end date. You need to continuously nurture culture using levers like the ones above.  

Use the regulator’s insight as a guide 

The FCA has already done a lot of the thinking around how to put customers first, highlighting that mapping where and how the four outcomes intersect in your organisation gives you a framework for redesigning strategy, governance, and the organisation more broadly. 

You can also look to work already done, such as that with general insurance, to understand how the regulator views outcomes like ‘fair value’. 

Consumer duty can create genuine customer-centricity 

Proportionality is imperative and there is an understanding that it will take time for the duty to fully embed. Many companies will be looking towards a minimum viable product for April 2023, with an aspiration to move to best practice over time. 

Some companies may feel they have a head start in terms of culture but need to avoid complacency.

Others can use the new duty as an accelerator for change.

For all, it is an opportunity to drive genuine customer-centricity and improve the trust and confidence of customers and the wider public. 

The regulation presents an opportunity for organisations to reframe their role in their customers’ lives and work collectively to reposition the industry as a force for good.