[First Published by the PIMFA Winter Journal in March 2023]
The Consumer Duty will be the cornerstone of the future regulatory regime and 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 and customer journey.
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, monitor, and be accountable for the outcomes customers receive.
A way for firms to evidence against this requirement is to undertake and embed effective customer-focused outcomes monitoring activity.
What is Outcomes Monitoring?
Apart from ‘outcomes’ being the new buzzword (it is used 152 times in the FCA’s Final Guidance), outcomes monitoring is still quite a nebulous concept. So what is it?
At Square 4, we view Outcomes Monitoring as ensuring that customers receive good outcomes, based on their individual circumstances, at every stage of the customer journey. Typically we find that incorporating a level of direct customer engagement to check and challenge business expectations and affirm that good outcomes are being achieved to be extra effective.
The articulation of the desired outcomes should be defined by the firm for each component part of the customer journey taking into consideration FCA requirements, the firm’s strategy and business model, its defined standards in relation to customer interactions and customer experience, and its risk appetite. It is useful in the design of the outcomes to consider regulatory expectations regarding the conduct of business and treatment of customers, however, it is imperative that this is more than just a detailed assessment against the FCA rulebook.
Upon reaching a consensus on the outcomes to be delivered, firms should consider the KPIs, KRIs and respective acceptable tolerances they will use to measure and evidence against the agreed outcomes. Measuring outcomes can take many forms and would include intelligence around; product usage, customer contact effectiveness, file reviews, MI from distributors and third-party suppliers, feedback from analytics on digital journeys, complaints, business persistency rates, vulnerable customer identification and treatment etc. A level of customer engagement is critically important, particularly to test the quality of financial promotions, disclosures, advice journeys and ultimately customer understanding.
In designing the Outcomes Monitoring Framework and execution 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, known target market risks and vulnerabilities, 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 monitoring in place, this allows firms to continuously learn from their growing focus and awareness of customer outcomes throughout the journey, which plays to both, firms’ commercial and customer experience agendas as well as the identification, rectification and prevention of any risks of foreseeable consumer harm.
It is important firms also implement strong governance processes around the monitoring activity 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 Monitoring Framework, you should consider your current approach to quality assurance, monitoring, metric gathering and MI reporting to ensure leverage of existing processes where possible. That being said, a comprehensive and robust approach to outcomes monitoring could require changes to; the definition of good outcomes and the measures for assessment, policy and process definition, sampling volume methodology, developing customer engagement processes, potential changes to roles profiles and associated training needs for key staff, developing case clinics and quality assurance standards, management information capture and enhanced reporting to key committees and Boards.
With all that in mind, it is clear that developing an effective Outcomes Monitoring 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. While the effort required to develop and implement an effective Outcome Monitoring Framework should not be underestimated, getting it right will play a large role in enabling firms to meet their Consumer Duty obligations.
About Square 4
Square 4 was founded with the vision to support people and businesses to grow and thrive.
We combine our industry and consulting expertise with technology and innovation to deliver pragmatic solutions across an evolving spectrum of conduct, financial crime and operational risk.