The Financial Conduct Authority’s upcoming introduction of the new consumer duty for financial services businesses is the biggest change in conduct regulation for more than a decade.
It has the potential to be a major catalyst for positive change for both the industry and consumers and should create the impetus for companies to move to the kind of customer-centricity they have long aspired to and better affirm the sector’s role in society.
This is much more than a simple update to the current principle of treating customers fairly, which has not been enough to wholly prevent the exploitation of customers’ behavioural biases or the asymmetry of information in the relationship.
Now, all companies need to focus on getting things right the first time.
They will need to move from a mindset of preventing poor conduct to proactively delivering good outcomes for customers. And they will need a major rethink of how to measure and respond to potential harms.
The consumer duty consists of three main elements:
- The Consumer Principle – requiring companies to act to deliver good outcomes for retail customers.
- Cross-cutting rules – requiring companies to act in good faith towards retail customers, avoid foreseeable harm, and enable and support retail customers to pursue their financial objectives.
- Four specific outcomes that the FCA sees as the heart of the business-customer relationship: products and services, price and value, consumer understanding and consumer support.
A shift in culture, not just a compliance exercise
There is a danger that companies will see the duty as setting equivalent standards to the existing TCF principle. But merely increasing focus on complying better with existing rules and principles will not be enough.
Conversely, there is also a risk of ‘gold-plating’ the implementation, which will see companies run out of time and take a ‘tick-box’ approach to the final elements.
Getting the right balance will require a shift to a customer-centric culture.
Companies will need to demonstrate how their culture focuses on good customer outcomes and enables customers to make effective, timely and informed decisions about products and services.
At the same time, companies will need to make process and system changes.
Many have begun reviewing all their main products, distribution channels and services, and undertaking a gap analysis against the new standards to understand what mechanisms they need to put in place for outcome monitoring and governance.
Some companies will also need to make operational changes or develop new capabilities, such as data and analytics or behavioural economics.
Importantly, as they do this, they will have to think about how it all ties back to the customer-centric culture the FCA expects of them.
To manage all this, there are three areas financial services firms should focus on.
Think of customers first, not compliance
By truly putting customers first, you will intuitively comply with the new regulations.
This starts with defining what a customer-centric culture means with regards to each of the four outcomes.
For instance, if you say the support you provide to customers should be responsive, proactive, thorough, and barrier-free, this must translate into your products and services, systems, processes, and people’s behaviours.
It is then important to review how you engage with and support customers pre and post-sale.
It needs to be easy for people to understand whether a product or service will help them achieve their financial objectives and be good value.