In the early days of Consumer Duty (the Duty) consultation, there was a belief amongst some firms that if your customers were being treated fairly and your firm was compliant with Principle 6 and the six Treating Customers Fairly (TCF) outcomes, then the journey to meet the Duty would be a short one, or even non-existent. Let’s be clear – compliance with TCF is not compliance with the Duty. When TCF launched in 2006, it was one of the most significant changes in financial services regulation. But 17 years later, after numerous mis-selling scandals and fines hitting record levels, the FCA has understandably raised the bar. So, it’s goodbye to TCF and hello to Consumer Duty!
Let’s take a look at the key differences between the two and consider some practical examples of how you can demonstrate compliance with the Duty, and for those firms with closed books, how to meet the deadline of 31/7/24.
Purpose
The purpose of TCF was to make sure that firms put the well-being of customers at the heart of how they run their business. This should be led by a senior management team who champion a customer-centric culture with a TCF framework designed to deliver fair customer treatment across all aspects of the product life cycle.
Whilst there are some parallels, the purpose of the Duty is less about how well your policies and frameworks are designed, but more whether they are delivering good customer outcomes. Unlike TCF, which was mostly reactive and focused on ‘input’, the Duty requires firms to be proactive and focus on ‘output’. You’ve got to put yourselves in the customer’s shoes and walk through their end-to-end journey and ask yourself:
- have we proactively identified foreseeable harm and taken the necessary steps to mitigate it?
- do we act in good faith? and
- do we enable and support customers to make informed decisions across the entire product and customer lifecycle?
So, what should you be doing?
- Be critical about the accuracy and scope of your data. Complying with the Duty will be impossible without the use of data. We have observed some firms who produce significant amounts of data, generating MI packs sometimes reaching hundreds of pages with others, in contrast, producing very little. However, ask yourself these questions:
- How confident are you about the accuracy of your data? – ‘rubbish in’ equals ‘rubbish out’
- Is your data actually measuring customer outcomes? If not, then what purpose is it serving? Make sure that senior management is not distracted by information that isn’t adding value or not giving them the level of oversight that they need to discharge their senior management responsibilities.
- Does your data enable senior management to monitor and regularly review the outcomes that customers are experiencing, including identifying sources of poor outcomes and harm while also acting to better enable customers to achieve good outcomes through changes to products and services?
Take a look at the FCA’s Final non-Handbook guidance (FG22/5) which sets out the monitoring requirements for firms to test, understand and evidence the outcomes that their customers are receiving.
- Look beyond what you can see – you may well have reviewed your product governance frameworks, taken action off the back of your fair value assessments, improved the clarity of communications and considered your customer journeys. But what about what you can’t see? For example, how proactive are you in identifying customers with vulnerable circumstances and potential behavioural biases – outside of those that you have been told about – and making reasonable adjustments to accommodate those? Have a read of the FCA’s Vulnerable Customer guidance (FG21/1), its Financial Lives Survey and its Occasional Paper No.1 on applying behavioural economics to make sure that your products and services don’t cause unintended harm for customers with undisclosed vulnerabilities which may be present within your customer base.
Defining the end-to end customer journey
As TCF focussed on what was essentially a set out customer treatment standards or ‘inputs’, there was no specific requirement or need to define end-to-end customer journeys and individual customer interactions across the first line of defence.
Defining your end-to-end customer journeys – from product design to after sales and service – should have formed a significant bulk of your Consumer Duty project. Your products and services should now be free from sludge (yet contain appropriate friction) and suitable for all customer cohorts. The FCA has already started asking firms for copies of their dashboards, wanting to understand where you have made changes and, more interestingly, areas where you haven’t. The FCA isn’t leaving any stone unturned, and you need to make sure you have the answers.
So, what should you be doing?
- Define the end-t0-end customer journey – from product design to after sales and service. This could include, for example, customer onboarding, making a payment, customers in financial difficulties, making a complaint etc. Consider whether there are any journeys specific to a product or customer type.
- Prioritise your review. The FCA has made no secret that it expects firms to focus on areas which have the greatest propensity to cause customer harm. Prioritise your reviews and be prepared to explain how you’ve reached this risk-based decision.
- Map the journeys, detailing the key touchpoints and customer interactions. This might be clearest in the form of a flow chart, with ‘swim lanes’ detailing the responsibilities of the firm, third parties and the customer. It could also provide links to customer communications, including letters, call scripts and / or online links.
- Define good customer outcomes across the end-to-end customer journey touchpoints You may be surprised to hear but a number of firms we speak to have still yet to define what a good customer outcome means to them. Without defining what good looks like, it is impossible to measure, report, evidence or provide assurance over the quality of the outcomes your firm is delivering to customers. More on this shortly.
- Nominate someone to be responsible for each journey. This is really important and aligns to one of the FCA’s key objectives within its SM&CR. Make sure people know what they’re responsible for to ensure there are no ‘grey areas’. This will also put you in good stead for the production of the annual Board attestation next year.
Fair treatment vs. good outcomes
In order to treat customers fairly, a firm had to demonstrate that it was meeting the six TCF outcomes by having a robust and well-governed TCF framework including policies, processes, training and MI. Fair treatment – commonly defined as what was ‘fair’ to both the customer and the firm – was in part recognition that it was acceptable for customers to receive sub optimal outcomes as long as that outcome was considered fair to both parties. For many firms, this resulted in TCF being a tick-box exercise. For example, we have a responsible lending policy that complies with MCOB or CONC, owned by senior management, trained out to colleagues on an annual basis and MI showing the results of lending decisions and volumes of complaints around this. Tick!
Under Consumer Duty, the bar has been set significantly higher. Backed up by strict rules around monitoring and testing requirements, you must now evidence whether your customers are receiving good outcomes across the entire product and customer lifecycle. In other words, the best possible outcome for the customer. Gone is any reference to fair or any indirect recognition of suboptimal customer outcomes. As we have discussed above, you need to have a clear understanding of your business and define what ‘good outcomes’ are across every product, service and stage of the end-to-end customer journey. You also need to consider what different customer cohorts – including vulnerable customers – will reasonably expect at every touchpoint. Unlike TCF, a ‘one size fits all’ approach will not cut it, so firms will need to have the capabilities to identify where tailored services are required.
So, what should you be doing?
- Define what ‘good’ means. This is vital for success. How can you demonstrate if your customers are receiving good outcomes if you haven’t defined what the ‘good’ benchmark is? Write a list of ‘good outcome statements’ for each customer journey aligned to your firm’s risk appetite. Put yourself in your customers’ position – what would they expect? For example; I would like to understand all available options so I can make an informed decision; I would like my issues to be recognised and owned at first point of contact without any barriers, with the firm making adjustments to suit my individual needs.
- Define what metrics you need to measure whether the good outcome statements are being met. Again, we’re back to the importance of data. Produce a matrix to map each of your good outcome statements to a set of risks or harms, along with tangible controls that mitigate those risks and KRIs that report on the effectiveness of those controls. Where there are gaps, take steps to fix these.
- Produce good quality, focussed MI packs for each customer journey. The FCA is on path to becoming a ‘data-led regulator’ and expects firms to harness the data available across the business to act as evidence. Outcomes monitoring is a key component of the Duty and plays a vital role in supporting a firm’s case in complying with the Duty. It is therefore a given that implementing a robust Outcomes Monitoring Framework and reporting mechanisms to enable visibility of the outcomes throughout the end-to-end customer journey should be an important element of your firm’s risk and control framework. This will not only support good governance and decision-making but also your firm’s attestation that it is compliant with the Duty.
Customer understanding
The provision of simple, understandable information was a key element of TCF. Outcome 3 required firms to ensure that “consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale”, whilst Principle 7 asked you to produce communications that are “clear, fair and not misleading”.
While Principles 6 (TCF) and 7 still apply to customers who fall under the remit of the Duty, the rules now require you to take a proportionate approach to testing whether communications are being ‘understood’ (as opposed to just ‘understandable’ under TCF) by the customers they are targeted at. Its guidance defines what ‘communications’ are and that testing by those involved in its design (e.g., Compliance) will unlikely be enough to satisfy compliance with the rule.
So, what should you be doing?
- Develop a framework to determine what ‘proportionate testing of communications’ means to your firm. Use the guidance in PRIN 2A.5.12 to categorise and risk-rate all your customer communications. For example, it would be more important for you to test a communication where a customer incurs fees or charges for lack of action than one which is sent providing general information. Think about communication frequency, intended audience, and whether it is informing a decision. You will need to consider the regularity of your testing and put in place a feedback mechanism within the business to respond to the results.
Consider how you will test this. You need to make sure that the intended audience can understand the communication. For this, you need to do two things: 1) define who the audience for a communication is; and 2) ask those people questions about what message they have taken away. Understanding can only really be validated by talking to customers. Think about what testing methods are available to you – e.g., telephone surveys, questionnaires, panel discussions etc – and whether you should complement your internal, desk-based outcomes monitoring by introducing an outbound contact strategy to validate the outcomes that your testing is identifying. It is important to remember that testing customer understanding should not be a one-off exercise that is conducted as part of the implementation of the Duty. It should be undertaken on a regular ongoing basis – something many firms have yet to consider or implement.
Accountability and role of the regulator
TCF saw a move to a more principles-based approach, which placed responsibility on senior management to decide how best to apply the six TCF outcomes within the firm, resulting in significant variances in interpretation and approach. This meant that it became the responsibility of the regulator to review a firm’s data to decide whether it was treating its customers fairly. The broad assumption here was that, if a firm had the right framework in place and customers were not complaining, then fair treatment was likely being achieved.
Consumer Duty has completely turned the tables on this approach. The responsibility is now on the firm to prove to the FCA that it is delivering good customer outcomes and provide tangible evidence of what actions it is taking where outcomes are poor. FCA data requests will likely increase in volume and frequency and feel more like a Section 165 (as demonstrated by the data requests as part of its recent Borrowers in Financial Difficultly review), with very little wiggle room in its expectations. Senior management and the Board will be expected to demonstrate what reasonable steps it is taking to proactively identify foreseeable harm and fix and remediate issues promptly.
So, what should you be doing?
- Make sure you can confidently answer the “key questions for firms”. The FCA’s guidance (FG22/5) lists several questions that it will be asking firms in its supervisory activities, and which it expects your Chair and Consumer Duty Champion to be using to guide discussions. Be critical with yourselves – can you answer every question? If no, what steps are you taking to put yourself in a position to be able to answer them? Consider whether you need any additional support, training or data to help inform your decision making and discussions. Remember to use your Compliance and Audit teams to provide independent challenge.
- Do you understand the MI and information that is being presented to you? A common thread throughout this entire blog is that data is vital for success, but it is only useful if you can easily understand and interpret the content. Use this time to critically challenge the data and quality of supporting commentary, making sure that any actions are documented and followed up. As above, consider whether you need any training or support to help you execute your role effectively.
Final thoughts
When we pass our driving test, most driving instructors commonly say “well done! Now go and learn to drive”. They know that they have taught us to pass the test, but we will learn a great deal more out on the open road.
The same can be said of Consumer Duty. You’ve worked hard to review and enhance your products, services, pricing and communications for the 31 July deadline – you’ve passed the test! But now you need to go out and learn about the outcomes your customers are actually experiencing. This is a constantly evolving state where you need to check, amend, and check again. The FCA nor the industry cannot afford for this regime to miss another mis-selling scandal so the FCA will be eager to make sure that firms have used the implementation period well and have everything in place to identify foreseeable harm and evidence the outcomes that its customers are receiving.
How can Square 4 help?
Our dedicated Consumer Duty experts have significant insight into the FCA’s expectations and industry good practice. We have a tried and tested approach to Consumer Duty implementation and Outcomes Monitoring. This includes a simple five-point Consumer Duty post implementation health check that provides assurance, on a review and recommend basis, to determine whether the work your firm has undertaken to-date is complete and aligned with regulatory expectations and industry good practice.
If you would like to discuss any aspect of your firm’s implementation of Consumer Duty or any other conduct -related issues you are facing, please get in touch at hello@square4.com.
Alternatively, you can contact:
Darren Fisher – Advisory Director – dfisher@square4.com
Natalie Baglin – Senior Consultant – nbaglin@square4.com
