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Megan Ho
With the implementation of the new Consumer Principle, the FCA is aiming to improve consumer protection through an outcome-focused approach. The new Consumer Duty must be read in conjunction with its three main elements: the new principle, cross-cutting rules and the four outcomes rules. Principle 12 states that ‘a firm must act to deliver good outcomes for retail customers’. It is expected that firms will have to impose significant top-down changes in order to comply with the new Consumer Duty. In order to monitor compliance, the FCA has suggested numerous data collection methods, with two being customer feedback and the number of complaints. As a result, it is foreseeable that more innovative firms will be drawn towards implementing new technology solutions for complaints handling.
The Financial Conduct Authority (FCA) has laid out final rules and guidance for a new Consumer Duty that will set more stringent standards of consumer protection. This major reform will impact the whole financial services sector. By the FCA's own estimate, implementation costs to the industry could be as high as £2.4bn. This is because firms must implement fundamental changes to comply with this new Consumer duty, such as reorganising corporate governance structure and improving the customer service system.
What are the main aims of the Consumer Duty?
The establishment of this new Consumer Duty aims to enhance protection for consumers. As the new rules place a higher standard of conduct on firms, many firms will have to make fundamental changes to their policy in order to comply with the stringent rules. The FCA expects the firm’s board or its equivalent to be responsible when assessing whether the new Consumer Duty is complied with. This means that fundamental cultural changes will have to be made so that not one individual is responsible for the compliance of the Consumer Duty, but rather, accountability will be distributed throughout management. The FCA’s goal is to ‘fundamentally shift the mindset of firms’. Therefore, the implementation of this new Consumer Duty will require firms to embed changes across their organisations.
What were firms’ previous obligations?
Previous obligations were mainly related to the following FCA principles:
- Principle 6: a firm must pay due regard to the interests of its customers and treat them fairly
- Principle 7: a firm must pay due regard to the information needs of its clients and communicate information to them in a way which is clear, fair and not misleading
These two principles will remain with the introduction of the new Consumer Duty. The new principle extends the old principles and will be implemented in phases. The FCA confirms that there is an overlap, but principle 6 and 7 will not be removed. In-scope products and services refer to products and services which relate to a firm’s ‘retail market business’. Principle 12 will be applicable to in-scope products and services whereas Principle 6 and 7 will only be applicable for out-of-scope products and services.
What is the scope of the Consumer Duty?
On 31 July 2023, the Consumer Duty will apply to all new products and services and all existing products and services that remain on sale or open for renewal. On 31 July 2024, the new Consumer Duty will apply to all closed products and services. Closed products refer to those which are no longer marketed or distributed to retail customers or are open to renewal. Simply put, if the product or service is not available for new customers, and existing customers can still continue to pay and use the product or service under existing terms, then it would be considered a closed product. An example would be an insurance policy, where existing customers continue to pay for it but it is no longer available for new customers to purchase.
What are the main elements of the Consumer Duty?
A new principle: delivery of good outcomes
Principle 12 states that “a firm must act to deliver good outcomes for retail customers.”
This means firms will have to ensure that ‘good outcomes’ are provided for their retail customers. Whilst the term ‘good outcomes’ may be vague, as the definition of ‘good’ will range between industries and circumstances, the general application is that firms will have to hold what they deliver to a higher standard as opposed to what is stated in Principle 6, treating customers ‘fairly’.
Cross-cutting rules
There are three overarching, cross-cutting rules that apply to firms’ standard of conduct:
- act in good faith toward retail customers
- avoid foreseeable harm to retail customers
- enable and support retail customers to pursue their financial objectives
The Four Outcomes
These outcomes are read alongside the principles and helps establish the suite of more detailed rules and guidance setting the FCA's expectations of firms in respect of their consumer relationships under the Consumer Duty.
- Products and Services
- Price and Value
- Consumer Understanding
- Consumer Support
What are firms’ obligations towards vulnerable customers?
Previously, the FCA issued guidance on the fair treatment of vulnerable customers. Vulnerable customers were defined as:
someone who, due to their personal circumstances, is especially susceptible to harm, particularly when a firm is not acting with appropriate levels of care.
However, guidance was just what it was; there was no mandatory fair treatment of vulnerable customers. The new Consumer Duty embeds the previous guidance and implements it into regulation. The Final non-Handbook Guidance for firms on the Consumer Duty states that:
consumers with characteristics of vulnerability [will be expected] to benefit from the overall improvements in outcomes delivered as a result of the new Duty…
Additionally, the FCA removed reference to serving a hypothetical ‘average customer’, but required firms to serve ‘customers in their target market’. This prevents the whitewashing of vulnerability and forces firms to cater to a larger demographic of customers. As a result, the new Consumer Duty has a broader and deeper scope - firms are held to a higher standard, and more customers are protected. The implication is that firms will be expecting to receive more complaints as their actions are held to a higher standard and a larger demographic will be protected under the new regulations.
“These proposals are part of the FCA’s broader push to ensure that firms are proactively doing the ‘right thing’ for customers. Although it will take time to see the effect of these proposals on the market, it is clear at this stage that firms will need to undertake a thorough review of their current approach to retail customers.” Jonathan Herbst, Global Head of Financial Services, London
What will firms need to do to monitor outcomes and evidence compliance?
Firms will have to evidence that they are complying with the Consumer Duty by providing an annual report. This means that firms cannot view this as a tick box requirement, and implement ‘quick fix’ solutions, but will have to implement long-lasting changes to ensure good outcomes are delivered to customers.
The FCA’s Final Guidance for Firms on the Consumer Duty provides a list of different types of information firms could use to monitor outcomes:
- Business persistence
- Distribution of products/pricing and fees and charges
- Behavioural insights
- Training and competence records
- File reviews
- Customer feedback
- Numbers of complaints
- Complaints root cause analysis
- Results of the regular testing and monitoring required under the outcome rules
- Feedback from other parties in the distribution chain
- Compliance reports
- Researching or testing customer experiences
- Allowing staff to give feedback honestly
- Reviewing whether processes and policies are effective
- Drawing on external sources of data about consumer outcomes
The FCA is not concerned about what data is collected and which of the various methods are used to comply with the new Consumer Duty. The only thing that the FCA expects is that firms collect a wide range of data to evidence that they are providing the ‘best outcome’ for their retail customers.
How can Deriskly support better outcomes for your customers?
Deriskly utilises advanced AI/machine learning technology to extract and categorise available customer inquiries, feedback and complaints data from diverse sources, including emails, documents, social media, and websites in real-time. This allows firms to monitor outcomes in relation to the Consumer Duty.
Deriskly has developed tools to help proactive management of customer interactions to further shorten and streamline the complaints handling cycle.
Real-time tracking & monitoring
- Deriskly analyses customer interactions from different digital channels in real-time. It automatically tracks, monitors and categorises potential problems (and root causes) from volumes of customer enquiries, complaints and feedback. These real-time insights can help you spot emerging issues early on, identify the need for product, service or operations improvement and detect any compliance and regulatory risks in relation to the Consumer Duty.
Management of correspondence
- Deriskly automatically converts chains of customer correspondence into concise summaries of the key issues for the customer service agent, saving your agent a lot of time. No need to scroll through long chains of conversations to find the original or new problem.
Smart replies
- Deriskly can automatically generate for the customer service agent a range of ‘smart replies’ based on our nuanced analysis of customer interactions. Each response is tailored to the particular problem your customer is facing.
Evaluate potential escalation
- Deriskly automatically assesses any improvement and deterioration of customer relationship based on each interaction your customer service team has with the customer. A call to action is generated by highlighting customer relationships that are at risk of escalating into a dispute.
KPI analytics
- Our analytics platform helps you monitor in real-time key performance metrics, including the number of interactions, time to first reply and resolution time. Analyse customer satisfaction trends across any time period. Deriskly’s dedicated toolkit for customer complaints and feedback help your customer service team achieve those KPIs with greater confidence.
Conclusion
The new Consumer Duty will be fully in force by the end of July 2024. The FCA is expecting a significant change in a short period of time. The Consumer Duty is not only a ‘compliance’ issue but presents firms with opportunities for innovation in their approaches to customer relationships. New technology solutions can support this process and help firms deliver good consumer outcomes with robust monitoring and evidence.
