The Financial Conduct Authority’s (FCA) Consumer Duty Rules (“the Duty”) come into force at the end of July for firms’ Open Book products. Although the implementation date is a significant milestone and firms should be prioritising any key actions, it is vital that firms maintain momentum past the July implementation date – this is just the beginning.
In this article, we’ve set out some key considerations for banks to ensure long-term success, including:
- Understanding the Duty opportunity for improvement, adding value and long-term growth – not just a regulatory burden.
- The challenges and opportunities of increased digitalisation in banking.
- The importance of a robust data strategy and good governance in embedding the Duty across the business.
The FCA expects firms to regularly share information on their progress, focusing on the outputs of firms’ gap analysis against the Duty outcomes, the approach and progress of firms’ evolving outcome measures, monitoring and oversight strategy and associated data strategy.
From September, the FCA will engage a sample of firms to share specific examples of any changes made to meet Duty requirements following gap analyses, including the enhanced data, indicators and dashboards being used to monitor customer outcomes.
Compliance or competitive advantage?
The Duty introduces a new Principle for Businesses for the first time in 20 years – requiring firms to deliver good outcomes for their retail customers – and all staff and senior management will have a role to play. Whilst outcomes-based regulation is not new to the industry, this is not Treating Customers Fairly 2.0 (TCF) and repurposing existing TCF processes and MI will not meet the regulator’s expectations.
Banks that embrace the Duty as an opportunity for positive change and to engage with their client base in a meaningful way, in turn boosting their competitiveness, will be best placed to successfully implement the duty in the long term and build a strong body of evidence that good customer outcomes are being achieved.
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Banks should not only seek internal sign-off from legal and compliance departments but should proactively test products and engage in research outside of their organisation. For instance, by engaging consumers directly, or via consumer research groups and charities, at all stages of the product lifecycle and customer journey. Qualitative research should be used to fill any information gaps in quantitative data. This will support a better understanding of customer behaviours and needs and provide insights into how products and services can meet them.
By adopting a customer-centric approach, banks can improve profitability, as customers who experience good outcomes are less likely to switch. Over time, good outcomes will improve reputations in the market, which will lead to more business. Customers that have a better understanding of products and services will have greater confidence to make purchases and will require less servicing thereafter, leading to lower costs.
How can digital platforms drive good customer outcomes?
As customers increasingly rely on digital tools and banks leverage technology to create and promote their products, it becomes important for banks to ensure that customers remain at the heart of their services and products. To achieve this, banks can prioritise user-centric design principles, ensuring that their digital platforms are intuitive, accessible, and tailored to meet diverse customer needs. They should invest in user research and feedback mechanisms to gain insights into customer preferences, pain points and barriers they may face while interacting with digital services. Regular customer testing and usability assessments can help identify areas for improvement and ensure a seamless user experience.
To protect vulnerable customers, especially in challenging economic conditions, banks can implement robust vulnerability identification measures. This includes training frontline staff to recognise signs of vulnerability and equipping them with the knowledge and skills to provide appropriate support and guidance. Banks should establish clear protocols for escalation and referral to specialist teams or external organisations that can offer further assistance. It is crucial for banks to have strong safeguards in place to prevent vulnerable customers from being exploited or subjected to harmful practices. This can involve setting transaction limits, implementing additional security measures, and conducting periodic vulnerability assessments.
The FCA expect banks to use the same standards and capabilities to improve customer outcomes as they do to optimise sales and marketing. Therefore, where tools such as behavioural biometrics and machine learning are used to drive sales, these could also be used to achieve good customer outcomes, including for any vulnerable segment of the target market.
Banks could incorporate chatbots and open text boxes into the online customer journey to aid the disclosure of vulnerabilities. They could build tailored online environments analysing behavioural biometrics, such as keystroke patterns and time spent, at stages of the online journey and offer support from a human advisor via pop-ups where behaviours linked to vulnerabilities are flagged.
As we continue to see the trend of branch and ATM closures and banking customers moving to solely digital/telephony channels, banks should take heed of the FCA’s recent Dear CEO letter, which highlights the significant impact these changes could have on customers, particularly those in vulnerable circumstances. Banks should ensure prior testing is conducted to understand the impact of changes and put mitigating measures in place. Where limited channels are available, the customer journey and support offered should meet the needs of the customer, communications around any changes should be clear and timely, outcomes should continue to be monitored following any changes and exceptions processes should be in place to deal with non-standard circumstances.
Embedding the Duty across the Firm
In today’s fast-paced and interconnected world, data has become a key focus for the FCA across industries. Organisations are increasingly relying on data to make informed decisions, drive innovation, gain a competitive edge and support a consistent approach to embedding processes across a firm. Harnessing the true potential of data to support good customer outcomes requires a well-defined and robust data strategy. An effective data strategy will equip firms to drive and monitor customer outcomes even where a firm has large headcounts or geographic footprints.
It may be a challenge for some firms to integrate platforms, systems, and databases so that data can be shared, particularly with legacy platforms and systems, but investment in these areas will provide a holistic overview of customer outcomes to key decision-makers. Firms should explore both short-term and long-term solutions to advance the functionality of their systems and data collection to evidence and monitor that Duty requirements are being met and customers are receiving good outcomes.
Policies and processes should be updated to provide the necessary guidance for staff to meet the requirements of the duty. For momentum to be maintained past the implementation date, a customer-centric approach should be embedded into the culture of the firm. This should be supported by sufficient ongoing resource allocation, ensuring good outcomes are consistently achieved.
The Duty encourages a tone from the top approach by prescribing rules, including board approval of implementation plans, annual review and reporting of performance against the Duty and putting in place a Consumer Duty Board Champion who will challenge things when required.
A board and governance engagement plan should be adopted – the board should receive regular updates on performance metrics, risks and challenges at the right level of detail, and board input should be sought for key decisions. The FCA expects action to be taken where poor outcomes are identified, and outcomes should be monitored on a continuous basis to improve them. Key to this is having consistent governance of customer outcomes and robust approaches to root cause identification, analysis, and rectification.
Staff training on the application of the Duty is key. Staff incentives, performance objectives and remuneration policies should also be aligned with the achievement of good customer outcomes.
The FCA has clearly set the expectation that the Duty needs to be a top priority for firms. Unlike previous FCA guidance, the Duty provides details and examples to support firms with adherence. However, it is essential that firms tailor and apply these recommendations appropriately.
In its review of Consumer Duty Implementation Plans earlier this year, the FCA highlighted that some firms had “superficial” plans and were “over-confident that existing policies and processes in place will be adequate”. Firms should not take a “cookie cutter” approach, they should not merely repurpose existing processes, and MI used for previous programmes, such as TCF. Nor should they be thinking of this as merely a “tick box” compliance exercise. Firms should view the Duty as an opportunity to differentiate themselves from their competitors through their products and customer journeys by building better relationships with their customers and increasing their competitiveness along the way.
In anticipation of the July 2023 implementation date, the FCA expects firms to consider several key factors. Firms must define the desired consumer outcomes and identify the necessary data to measure and monitor the delivery of these outcomes effectively. Careful consideration of how firms monitor outcomes for different customer groups, including vulnerable customers, by implementing strategies that promote fair treatment and positive outcomes is vital. Embracing Consumer Duty presents an opportunity for banks to enhance their competitiveness and sustainability by building trust, differentiating themselves, and prioritising customer-centric practices.
The regulatory guidance considered by Protiviti to collate this article includes Finalised Guidance (FG 22/5) on the Consumer Duty; the Consumer Duty Rules (PS 22/9); feedback provided by FCA to the industry on Consumer Duty Implementation Plans; and FCA Dear CEO portfolio letters. To supplement this, Protiviti applied its view of industry observations in practice in relation to Consumer Duty preparation from other relevant firms.
Bernadine Reese is managing director of Risk & Compiance at Protiviti.