27 May 2022
Five things we've learned about the Consumer Duty
In a few weeks from now, the FCA will finally publish its Consumer Duty policy paper, nailing down the new rules which it first began consulting on 12 months ago.
Over the past year, we've spoken to dozens of firms about how they intend to meet the new requirements - and we've seen a wide range of approaches from the "on it" to the indifferent.
It's not unreasonable for firms to want to see the final rules before they take any action. However, given the comprehensiveness of the second consultation paper that was published at the end of 2021, a growing number of firms are taking the view that they need to get ahead of the new rules.
Some have kicked off - or even completed a top level gap analysis project. While others have decided to dive straight in and get a clear picture about exactly how they stack up on the four new outcomes straight away.
We've now completed out first few Consumer Duty assessments for clients - and it's fascinating to see the differences in preparedness close up. The kind of companies that work with us tend to be those who already have a good culture - and a strong desire to do the right thing. We are not the kind of consultancy that just tells our clients what they want to hear and the firms that use us value our critical friend approach.
But even in these firms who think they are probably doing everything they can to deliver good outcomes, we're finding plenty of areas that will need attention to be ready for a Consumer Duty world.
Here's five things we've learned over the past year.
1. No one is ready
The Consumer Duty raises the bar in terms of conduct for retail financial services companies. Although many firms do have the customer at the heart of their decision making, this can often lead to gaps in governance and benchmarking. Often the confidence that their firm is doing the "right thing" means they're not as good as they need to be at having the data, and processes to prove it.
2. Communication is where the greatest work is needed
The Consumer Duty not only talks about firms needing to ensure all communication is clear - but puts the onus on them to prove it. It's an open secret in most organisations that the terms and conditions - and even some of the day to day letters that go out - simply aren't clear enough. They use complex language, design is not used effectively - and they do not achieve their goal of getting over the key points that they need to. The Consumer Duty means firms have to get to grips with this - and the process can be long.
3. Determining fair value is not easy
The Consumer Duty requires firms to prove they are offering fair value - and that means proving there's a reasonable relationship between price and the benefits of a product. There's no simple economic model that do this assessment. It requires a comprehensive assessment of product features, and an accurate assessment of price vs the market. When it comes to insurance, where there may be thousands of different pricing buckets, it's an even harder task. But there is no shortcut. The FCA expects firms to think about this and make a compelling argument.
4. Storytelling is key
Ultimately, there's no right answer to many of the challenges raised by the Consumer Duty. But firms need to be seen to be asking the difficult questions, and coming up with convincing narratives to explain how their answers prove they are delivering good outcomes. MI and good governance is only part of the picture. Firms need to more clearly draw the line between their internal processes and the actual outcomes for their customers.
5. Getting started now makes sense
Given that some of the actions required - particularly around communication - will take more than 12-24 months to complete, it's worth getting going as soon as you can. Those firms who are waiting till the final policy paper, may find they are disappointed if they are relying on an extension to the proposed implementation date. The time to start is now.
If you'd like to hear more about our work in this space, do get in touch. We'll be back with another update once the final policy paper is out in a few weeks.