Can the Consumer Duty be a catalyst for positive, lasting change?

Justin Elks, Partner, Head of Risk Consulting and Isaac Alfon, Director, Risk Consulting

The Financial Conduct Authority (FCA) has set high expectations for its new Consumer Duty to “set higher and clearer standards of consumer protection across financial services and require firms to put their customers’ needs first.”

Laudable aims, of course, but is this a revolution or evolution from previous regulatory initiatives such as ‘Treating Customers Fairly’ and ‘Conduct Risk’? Is Consumer Duty unfairly biased in favour of customers and against the needs of the financial services industry? Will it unreasonably raise consumer expectations?

Not necessarily. We believe that the Consumer Duty does not need to be a zero-sum game. We think that firms that understand and embed its principles, rather than applying a tick box compliance approach, or layering on additional requirements to existing complex approaches, will be best placed to gain a source of long-term competitive advantage.

How can firms embrace this change, measure and benchmark their progress? What should Boards look for to satisfy themselves that their organisation is deriving meaningful benefit from their investment?

Even by FCA standards, Consumer Duty is a very transparent initiative. This means that firms should expect scrutiny from, and on behalf of, customers to ensure firms are meeting the “high expectations for the standard of care we expect firms to provide for consumers” (led by the Financial Ombudsman and the FCA’s own supervisory teams). Firms face a real risk of suffering reputational damage if they execute poorly.

With a high bar, and fast approaching deadlines, firms are facing intense pressure to scale up their compliance capability in response. This is particularly onerous for medium and small firms that lack the resource for a large-scale compliance effort. But for all firms, bolt-on tick box and layered additional compliance processes could lead to the worst of all possible worlds, such as:

  • higher costs, which could ultimately be passed on to the customer
  • difficulties in clearly identifying and prioritising remediation in areas with sub-optimal Consumer Duty outcomes, ultimately leading to regulatory scrutiny and sanction
  • less engaging, less empathetic customer experiences that fail to truly put the customers’ needs first and deliver any meaningful benefit from implementation
  • mis-steps in identifying and supporting vulnerable customers appropriately that would ensure they receive fair treatment and experience outcomes in line with their expectations and needs.

Embracing the spirit of Consumer Duty

So, how can businesses operationalise such a wide-ranging regulatory initiative without becoming mired in regulatory or self-created red tape?

We believe that embracing the spirit of Consumer Duty provides an opportunity for organisations to re-think their operational and compliance processes, moving towards a first-line led approach that meets both customer and compliance needs by design, rather than as an afterthought.

Boards should expect to be fully engaged with this transformation, by shaping and sponsoring the Consumer Duty agenda and regularly reviewing progress against its objectives, not just at the point the Consumer Duty comes into force, but as an integral part of the way in which business performance is measured. Data gathering should complement performance measurement, enabling a feedback loop that leads to further enhancement, improved employee engagement and rewards performance aligned to consumer outcomes - as well as identifying training and development opportunities.

Reviewing a sample of implementation plans, the FCA said:

"Many of the plans we reviewed showed that firms have understood and embraced the shift to focus on consumer outcomes, established extensive programmes of work to embed the Duty, and are engaging with the substantive requirements, including the four outcome areas. We are convinced this will bring benefits for both consumers and firms.”

But must organisations resort to establishing an extensive, siloed programme of work? Or can firms leverage best practice to achieve effective compliance efficiently?

From our work with firms, we see a number of positive behaviours and common pitfalls that we would recommend firms consider.

  • Do use Consumer Duty to drive strategic change in the organisation from the top, with culture and people strategies that ensure the business is – and can be seen to be – focused on delivering good outcomes for consumers. Don’t mistake a principles-based approach for superficial engagement with what the FCA considers to be “a significant shift in what we expect of firms”.
  • Don’t layer an additional compliance burden onto existing inefficient or ineffective processes – instead, re-think the processes and approaches embracing the spirit of Consumer Duty. Consider a shift in compliance expertise and capability towards the first line.
  • Don’t equate price with value. Firms that thrive under the spotlight of Consumer Duty will be able to articulate the value of their product and demonstrate that it serves its target audience. These firms will benefit from higher customer trust and satisfaction – seen through reduced acquisition costs, higher retention rates and fewer complaints, measured through ongoing testing of customer interactions.
  • Do use advancements in data analytics to help improve the information you have, to enable timely and effective monitoring and response to changes and issues.
  • Don’t ignore closed products in the initial phase of implementation simply because of the longer deadline. After sales processes should ultimately be equally efficient regardless of whether a product is available to new customers today. It may well be that increasing efficiency and effectiveness is a positive source of value for the organisation.

We think embracing the spirit of Consumer Duty provides an opportunity for progressive organisations to re-think their operational and compliance processes, and ensure a strong relationship with customers. We believe the most progressive organisations will adopt an embedded approach to meeting customer needs, and differentiate through a more customer-centric approach to business.

This will help them to build long-term trust with their customers and meet their social purpose, which is much needed in financial services. It will also help them to build an approach to compliance that is more efficient and effective, and will enable the organisation to respond better and more cost effectively to the future requirements of regulation in this space, which we anticipate will continue to evolve and be refined over years, as they have over previous decades.


How Crowe can help

We are currently helping clients to assess their approach to Consumer Duty, not only in terms of regulatory compliance, but also helping them to cut through the detail to focus on what really matters to their organisation.

Crowe can help your business to be compliant by design and proportionate by default. Please get in touch with Justin Elks or Isaac Alfon for more information.

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Justin Elks
Justin Elks
Partner, Head of Risk Consulting