July 2023 marks the second anniversary of Consumer Duty, the FCA’s tentpole regulation designed to set higher standards for financial services and drive better customer outcomes.
Two years on, some firms have seized the opportunity to stay closer to clients and made good progress in better understanding their needs and tailoring service to deliver better outcomes.
By contrast, there are still firms which are behind the curve, whether it’s in complying with the duty and getting to grips with principle-based regulation, or the wider expectation to embed these principles into business culture, governance and leadership. Complacency remains a big issue as firms overlook the step change required to meet the FCA’s expectations.
Consumer Duty remains the cornerstone of the FCA’s entire regulatory approach. Even with a remit of deregulation, the FCA views Consumer Duty as the principal way to drive growth and innovation in the sector. So, whether firms like it or not, Consumer Duty is here to stay. With two years under our belt, how can we deliver the change the regulator wants to see?
Customer vulnerability
One of the biggest areas for improvement is customer vulnerability. In its recent multi-firm vulnerability review, the FCA identified that firms still cannot effectively monitor or take action on outcomes for vulnerable customers. This is hardly surprising – identifying vulnerable customers has long been considered the most difficult aspect of Consumer Duty.
Although we are all vulnerable at some point in our lives, many firms still report very few, or zero, vulnerable customers. This just isn’t realistic – especially when the FCA’s Financial Lives survey found that 49% of UK adults have one or more characteristic of vulnerability.
Part of the problem is many firms’ reactive approach – waiting for consumers to tell them of their vulnerabilities. Or focusing on just a subset of their customer base – or one channel, such as claims or complaints.
While this is a good place to start, it doesn’t give firms anything like the full picture. To reach that true proportion, the FCA has repeatedly said that firms need to “actively engage” with consumers; this is still proving to be a real stumbling block for many.
A lack of quality data
Whether it’s ignorance or a piecemeal approach to engagement, firms inevitably become data-poor – unable to demonstrate fair value, good outcomes or wider compliance with Consumer Duty. The FCA has seen examples of some firms repackaging existing data without really thinking about the information needed to truly understand outcomes.
Our experience is that by engaging directly with all consumers using a vulnerability assessment, firms can acquire the robust data needed to not just identify their vulnerable customers, but to monitor and report on the outcomes that customers receive. Crucially, these assessment methods have to be consistent and objective to generate the quality of data needed.
As data standards improve, we can look at data sharing across the distribution chain – this would bring new levels of efficiency to Consumer Duty and allow us to truly put the customer first. The entire process would finally become joined-up – and far smoother for consumers as they share their information once for all parties to act upon in a consistent way.
Technology is available
The regulator knows that firms face an arduous task, which is why it has long advocated for technology adoption to help meet the requirements. Rather than adding nondescript tick boxes to CRMs, or expending both time and money of developing systems in house, firms can use one of the many digital platforms already available to overcome these key challenges. In the two years of Consumer Duty, these systems continue to not only get better but also lead the way in what’s possible.
Technology plays a critical role in bringing consistency not only to assessments but also to how information is collected, standardised and recorded. Just as important is objectiveness; this cannot be achieved through human decision-making – however well trained, advisers, agents and frontline staff will always be subjective.
Technology has to be the priority for financial services firms in year three. Not only does it drive efficiencies, it brings consistency, scale and cost savings which cannot be achieved through a manual approach or training.
The future
Given the recent focus by the government on deregulation to stimulate economic growth, Consumer Duty has found its future in the spotlight. The Chancellor’s recent Mansion House speech saw some in the industry taking her comments out of context – and thinking it’s all over for Consumer Duty.
The shift to principle-based regulation and a focus on outcomes is a significant move. It ensures consumer protection while also providing flexibility for growth. It’s a forward step, yet it’s almost as if firms want to go back to the prescriptive tick box regulation of old.
Firms which have not embraced Consumer Duty and vulnerability management underestimate the value and growth opportunities which will spring from increasing consumer trust in financial services. Much of the talk so far has been less about the carrot and more about the stick – and this is not helpful.
In our corner of the market, we see tangible examples of real commercial benefits for firms – not just from delivering a more personalised service – but leveraging the vulnerability data they generate to make better lending decisions and ultimately launch new and highly-targeted products.
There will always be those bemoaning the regulation and looking to slash what they perceive as red tape. I firmly believe that, as Consumer Duty continues to develop, we see more examples of commercial gain and better customer outcomes – and the Duty deniers will either retire or be late to the party once they realise what they’ve been missing.
Andrew Gething is managing director of Morgan Ash
