Last year, the Financial Conduct Authority (FCA) published guidelines for its new Consumer Duty that sets clearer and higher expectations for firms’ standards of care towards consumers. With the immediate deadline of 30 April fast approaching, firms must establish new routines and complete their review of existing products, argues Ryan Knapton, ERM Implementation Project Manager at Protecht.
All financial companies should have a responsibility to sell their goods and services in a transparent and accountable way. It’s not so long since the PPI mis-selling scandal exposed fundamentally dishonest behaviour designed to extract money from consumers for reasons against their interests. Although those institutions eventually paid a price, it was a stark reminder of corporate malpractice on a grand scale. As a result, the FCA introduced a range of reforms aimed at improving consumer protection and increasing transparency in the financial services sector.
The Consumer Duty initiative is part of this broader reform program and aims to ensure that firms prioritise the interests of their customers and provide them with products and services that meet their needs. Under the Consumer Duty, the FCA expects firms to have “customer outcomes as a key lens for risk and internal audit.” This means that risk functions need to integrate consumer duty requirements into their frameworks and day-to-day routines. What challenges does this pose to financial services organisations and how can they best prepare to comply?
Navigating the new regulations
Rather than the traditional, prescriptive tick-box approach to compliance, the Consumer Duty applies a more proactive, consumer-centric model, focused on outcomes to protect the customer from bad conduct, uphold the integrity of the UK financial system, and promote effective competition.
Specifically, those outcomes are defined as the essential components of the relationship between businesses and customers, comprising how firms develop, market, and provide products and services, as well as significant touchpoints throughout the customer’s journey. The critical success factors are defined as Communications, Products and Services, Customer Service, and Price and Value.
In practice, this means companies must begin by defining key risk indicators, such as mis-selling, for each stage, with metrics showing the customer outcomes. Begin by setting up a product governance risk management process, with committees overseeing the creation of products, which can identify root causes of bad conduct from the outset. This should be both ‘top down’ and ‘bottom up’, combining board-level champions with feedback from employees at the coalface. Perform a risk assessment on each product and establish a regular review cycle. For high-risk products, such as derivatives, you might want to review twice a year; for more vanilla retail accounts, it might be every three years.
With this review framework in place, build up a view of product inventory, processes, and assessments in an integrated, centralised product management system. This will enable businesses to monitor how internal and external events might impact customer outcomes and to effectively manage risk. For example, the number of customer complaints per month might be a useful metric: when a set number is reached, a flag is raised and a process review initiated.
If you lack robust risk oversight, you could cause customer harm and the FCA will not look kindly upon it. The fact is that companies – supported by risk teams – have a responsibility to check and challenge the business with consideration for customers at the heart of everything.
Defining good customer outcomes
- Communications: Use clear and concise language, tested via market research and quality controlled by organisations, such as the Plain English Campaign.
- Products and Services: Identify what each is designed to deliver, deploy a solution to automatically track, monitor and analyse performance, with red flags to enable a proactive response.
- Customer Service: Make sure it is easy and user-friendly to communicate with your customers and measure engagement across multiple channels. Is your chatbot a help or a hindrance?
- Price and Value: Perform a fair value assessment against the competition, highlighting tangible benefits compared to other products.
Establishing operational resilience
The four pillars of Consumer Duty are closely linked to operational resilience, which is the ability to withstand and recover from operational disruptions, such as cyber-attacks, natural disasters, or system failures, while maintaining continuity of service to customers.
To ensure operational resilience, financial firms must assess their risks and put in place measures to mitigate them, such as identifying critical business functions, developing contingency plans, and testing their resilience through scenario-based exercises. By doing so, businesses can better protect their customers and maintain their trust, which is essential for building long-term relationships and meeting the objectives of the Consumer Duty.
Reviewing open products
All firms need to review their existing products and services ahead of the upcoming deadlines. Begin by gathering all the relevant information, such as terms and conditions, fees, charges and contractual obligations. Assess these against each customer’s suitability in terms of financial goals, risk appetite and budget. Ask whether each product is value for money in the current market and check for potential issues, such as hidden fees or penalties.
The simplest way to achieve all of the above, from establishing automated reviews to monitoring performance to flagging issues to enabling operational resilience, is by implementing a reliable, flexible and compliant enterprise risk management (ERM) software platform. Something that will do all the heavy lifting with minimal oversight, and then serve it up in an intuitive dashboard with analytics at your fingertips. This will also enable the collection of incident and complaint data that relates to individual product trends in one single repository for total visibility.
If you can show you have a process and a methodology, you’ll be well prepared for the Consumer Duty and its obligations.
