Firms need to consider if outsourcing elements of their business has any impact on their duties under the consumer duty, the Financial Conduct Authority has said.
Speaking to Ozge Ibrahim on the latest Inside FCA podcast, the regulator’s head of competition policy, Ed Smith, outlined what the FCA expects of firms in relation to outcomes monitoring.
The consumer duty is fast approaching, with firms expected to have integrated the regulation into their way of work by the deadline of July 31.
The consumer duty requires firms to assess, test, understand and evidence the outcomes their customers are receiving.
In relation to how the monitoring rules apply where a firm outsources some of its services, Smith said that in general the firm doing the outsourcing will remain responsible for compliance.
“First of all, when outsourcing services consider the duty and whether or not that act of outsourcing in and of itself does create the potential for impacting on customer outcomes,” Smith said.
“So, the processing itself of outsourcing should be thought of through the consumer duty lens,” he added.
Firms will need to have arrangements in place with outsourcers to capture any data they need to demonstrate good outcomes.
They will also need to monitor this to ensure the third-party is collecting the data.
Where the third-party firm is also an authorised firm carrying out a regulated activity, both firms will need to demonstrate good outcomes.
Elsewhere, Smith explained that the FCA wants to see firms “harness the benefits” of the data and technology that they have to improve their services and understand the outcomes they achieve for their customers.
The rationale behind outcome monitoring is to allow firms to monitor their compliance with the duty and to allow them to tackle any potential breaches at an early stage, Smith explained.
“Without the information or the evidence, it's not really possible for firms to know that they’re meeting the requirements under the duty,” Smith said.
He added this is why firms should have a strategy in place to ensure they have the data they need.
“As part of that strategy, we expect firms to identify any risks that are there, to good outcomes for customers and spot where customers are getting poor outcomes and really understand and drill down into the root causes of those poor outcomes,” he explained.
In addition to this, Smith said firms need to be able to demonstrate to the FCA how they have identified and addressed issues leading to poor outcomes.
“For example, if they're adapting or amending their product design, or changing their charges, or using communications to prompt consumer behaviour, the evidence that those changes are,” Smith said.
Identifying risks
When it comes to identifying issues and risks, Smith noted the FCA expects firms to “drill down into the root cause of problems”.
“When they see evidence in the data of potential poor outcomes, they're likely to have to do some more research into that,” he explained.
Smith gave the example that it might be a failure of communication or a case of consumers not understanding the product they are using, in any case the firm will need to find these root causes and come up with a strategy of change.
He explained the type of information a firm will need to gather will depend on factors like the size of the firm and its client base.
“We're going to be pragmatic and open in working with firms to develop the data and analytics to demonstrate that compliance.
“We don't expect them to have all of it on day one. As long as they can evidence good outcomes from day one, but then have a strategy to develop the data that they need to really understand those better in the future, that's fine and they can work with us,” Smith said.
The FCA’s finalised guidance, which was published last July, gives examples of the sort of data firms should consider.
This might include things like customer retention records, complaints, cancellation rates, and both formal and informal customer feedback.
On top of this, the FCA wants to see firms document an underlying root cause analysis for bad outcomes.
Smith also noted that listening to staff feedback is an important step firms should take.
“Often staff have very good, frontline knowledge and understanding of where customers are finding it difficult to navigate a product, where they’ve got complaints or issues with the product or the processes that they have to work with.
“Listening to that staff feedback is often quite useful to understand what the customer outcome is and what the customer experience is,” he said.
Different outcomes for different groups
The FCA expects firms to be able to monitor distinct groups of customers to see whether they might be receiving worse outcomes than others.
Smith gave the example of long-standing customers who may not switch around as much and are therefore more prone to get “poor back book outcomes” - ie, the product value becomes less good for them because they have not switched.
Similarly, he spoke about how the FCA is conscious of the poverty penalty, where customers pay more because they haven't got enough available cash, which he noted is a common issue in financial services.
“Where there are differences in prices charged to different groups of customers, firms need to consider whether the price charged to each of those groups provides fair value to those different customer groups.
“They need to be aware of those differences and understand those differences and satisfy themselves that those differences are appropriate for fair value,” Smith said.
When asked to what extent the FCA expects firms to monitor customers’ protected characteristics, Smith said that there are already requirements for this under the Equality Act and data protection legislation.
“Firms should clearly ensure they’re aware of their obligations under that legislation and collect data in line with those obligations,” Smith said.
“We're conscious, for example, that collecting and monitoring data about customers’ protected characteristics is not always going to be possible. However, where firms do already collect that data, you know, we would expect them to use that to monitor differences in outcomes between different groups with different protected characteristics,” he added.
Other regulations
Smith also explained that where a firm is already obliged to comply with existing regulation, this may mean they are meeting the requirements of a consumer duty outcome.
For example, the consumer duty’s products and services and price and value outcomes are not new to firms in the general insurance sector or pure protection firms.
“If those firms are already complying with the Prod rules and for general insurance firms, if they're already complying with our general insurance pricing practices interventions, then they'll already be meeting our expectation under these two of the duty’s four outcomes - the price and value and the products and services outcomes,” Smith said.
jane.matthews@ft.com
