The FCA's new Consumer Duty is a vital aspect of the current regulatory regime. This is a significant regulatory intervention aimed at raising standards. The proposed new principle - 'A firm must act to deliver good outcomes for retail customers' and the associated cross-cutting rules represent a clear shift in approach and a significant raising of the bar across the product lifecycle.
Where good conduct was once demonstrated primarily through adherence to policies, processes and rules, the FCA is itself focussing more on outcomes and expects firms to do the same. Rules-based compliance, in isolation, has given way to an outcomes-based approach with the FCA expecting firms, and their Boards and Senior Executives, in particular, to assess and monitor the outcomes customers receive.
A way for firms to evidence against this requirement is to undertake customer-focused outcomes testing.
What is Outcomes Testing?
Apart from ‘outcomes’ being the new buzzword (it is used 152 times in the FCA’s Final Guidance), outcomes testing is still quite a nebulous concept. So what is it?
At Square 4, we view Outcomes Testing as a holistic review of a customer's journey, to determine whether, based on their individual circumstances, customers’ received a good outcome. Typically we’ve found a level of direct customer engagement to be most effective. The articulation of the desired outcome should be defined by the firm for each component part of the customer journey taking into consideration FCA requirements, its defined standards in relation to customer interactions aligned to its customer experience agenda, and its defined risk appetite. It is useful in the design of the outcomes testing methodology to consider regulatory expectations regarding the conduct of business and treatment of customers, however, it is imperative that outcomes testing is more than just a detailed assessment against the FCA rulebook.
Upon reaching a consensus on a defined standard, firms should consider the KPIs and tolerances that are acceptable and how they are then going to measure the outcomes. Measuring outcomes can take many forms and would include intelligence around; product usage, customer contact, file reviews, MI from distributors and third-party suppliers, feedback from analytics on digital journeys, complaints, business persistency rates etc. Of these, customer contact is critically important, particularly to test the quality of financial promotions, disclosures, and ultimately customer understanding.
In designing the Outcomes Testing Framework and methodology, we’d encourage firms to think about some of the key drivers behind the Consumer Duty, namely; the irrational nature of consumers, the behavioural biases they display, whether their products are fit for purpose and provide fair value, the level of financial literacy of their target market, and the imbalance of knowledge that exists between firms and consumers.
Assessment throughout the customer journey
The new Consumer Duty requires firms to put consumers at the heart of their business and focus on delivering good outcomes. To do this effectively, firms need to consistently consider the needs of their customers, and how they behave, at every stage of the product/service lifecycle.
With ongoing testing in place, this allows firms to continuously learn from their growing focus and awareness of customer outcomes, which plays to both, firms’ commercial and customer experience agenda as well as the identification, rectification and prevention of any risks of consumer harm.
With strong governance around the process to ensure that Board members and Executives have; adequate visibility of customer outcomes, can monitor action taken to address issues, and can provide direction back to the business based on trend analysis or concerns. These measures help complete the picture in line with SMF accountability under the Senior Managers and Certification Regime (SM&CR) and ensure Boards are well placed to approve annual compliance with the Consumer Duty.
Common challenges faced by firms
In designing your Outcomes Testing framework you should consider your current approach to testing and monitoring to ensure leverage of existing processes where possible. That being said, a comprehensive and robust approach to outcomes testing could require changes to; the definition of good outcomes and the measures for assessment, policy and process definition, sampling volume methodology, potential changes to roles profiles and associated training needs for key staff, developing case clinics and quality assurance processes, management information capture and enhanced reporting to key committees and Boards.
With all that in mind, it is clear that developing an Outcomes Testing Framework requires input and buy-in from stakeholders across the business. Not only to undertake the customer journey mapping and policy and process definition but also with risk, compliance and audit functions to inform their role, scope and frequency of testing through the three lines of defence.
The Solution – About Square 4
Square 4 was founded with the vision to support people and businesses to grow and thrive.
Across the team, we have extensive experience incorporating the ‘big four’ professional service firms, industry regulators, leadership roles within Global Systemically Important Financial Institutions (G-SIFIs) and other outsourced learning, resourcing and consultancy providers. We combine this expertise with best-in-class technology across an evolving spectrum of conduct, financial crime and operational risk.