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Five steps to drive Consumer Duty implementation and long-term gains

Authors

  • Christopher Woolard CBE

    Partner, Financial Services Consulting, Ernst & Young LLP; EY UK FinTech Leader; EY Global Financial Services Regulatory Network Chair; EY EMEIA Financial Services Regulation Leader

  • Heather Alleyne

    Partner, Financial Services, Ernst & Young LLP

  • Brendan Gilroy

    Director, Financial Services, Ernst & Young LLP

13 minute read 21 Dec 2022
Related topics
Financial services
Customer
Strategy by EY-Parthenon
Digital
Innovation

The Financial Conduct Authority (FCA) wants to place achieving good customer outcomes more explicitly at the heart of financial services.

In brief   

  • The FCA expects Consumer Duty compliance by July 2023. Firms’ longer-term work will continue after this deadline to embed it into day-to-day operations.
  • Firms will need to build on existing implementation plans, including allocating sufficient resources, based on their learnings from their efforts to date.
  • Technology and data enhancements and cultural change will be necessary to meet the duty’s requirements and realise the value of better consumer outcomes. 

The Financial Conduct Authority (FCA) has made clear that it wants banks, insurers and wealth and asset managers to proactively question what they offer and how they offer it so that they know and can demonstrate that customers achieve good outcomes. Good outcomes will differ based on the product and services, the customer and their associated characteristics, and the firms’ role in relation to the product and service. Financial Services firms are required to act in good faith towards retail customers, avoid foreseeable harm to retail customers whilst enabling and supporting retail customers to pursue their financial objectives. If their products and services can’t be shown to deliver such outcomes for retail customers, then action must be taken to improve them. This is not just a theoretical change for customers or the FCA; the duty will be directly applicable for retail customers in many aspects of their financial lives, including everyday scenarios such as leasing a car, taking out a payment card with their favourite retail chain, or making online payments. This new principle is therefore intended to make a tangible difference for customers with regard to how firms provide them with financial services in their day to day lives.

How EY can help

The FCA is especially focussed on those areas where financial services firms are not helping customers to meet their financial objectives or where firms’ actions, or inaction, may lead to foreseeable harm. These objectives have been made clear through the specifics of the Consumer Duty rules and in public comments. The FCA have challenged firms to support customers through the current cost of living crisis and see it as the first test of whether firms are starting to meet the expectations of the Consumer Duty.

The FCA also recognises the large-scale impact the duty will have. In his speech to the Consumer Protection in Financial Services Summit, Sheldon Mills, the FCA’s executive director of consumers and competition, said, “Consumer Duty is a significant shift, both for firms and for the FCA.”1
 

Because of the scope, the FCA expects compliance to be an iterative process. During the EY Consumer Duty webinar, Mills confirmed that the FCA is seeking “substantive compliance” in time for the “day one” implementation deadline of July 2023. In other words, the FCA is taking a long-term view, and wants to see firms challenging themselves to continue to improve and deliver better outcomes for customers. Financial services organisations should recognise this change requires a shift in mindset, not just compliance by a particular date.
 

Though many firms did not at first clearly understand how FCA expectations had changed under the duty, they now recognise that initial compliance should not be the only objective of their implementation plans. In conducting principle and outcome based assessments of their services, firms have come to see that long term compliance means more than just monitoring internal process effectiveness, for example, or validating that product communications are understandable; the organisational mindset and knowledge of the customer must change as well. Staff at every level must be trained, empowered and motivated to actively question how offerings relate to customer outcomes.

 

This is the critical change in thinking that firms will need to make now and sustain in the future. This article will explore five steps to help organisations prepare both for the initial deadline and to enhance their capabilities over time.

1

Chapter 1

Build flexibility and ample resourcing into implementation plans

Because work will continue beyond July 2023, firms should design flexible implementation plans.

How EY can help

With the publication of the final Consumer Duty rules in July 2022, firms were required to formulate implementation plans, with sign-off by the board, by October 2022. These plans were intended to detail the steps firms would take to satisfy the requirements of the duty by July 2023.
 

In light of the tight deadlines and the amount of work required (e.g., determining good outcomes, training and identifying relevant data and metrics), many implementation plans submitted amounted to more of a “plan for a plan.” The FCA has said they do not view these plans as being set in stone, but rather expect firms to develop them between now and the implementation date.
 

Though current plans may not cover every detail of implementation, firms are working to establish the necessary governance and operating models, as well as the ability to measure and report on the requirements for ongoing compliance within the context of business-as-usual operations. We are encouraging clients to view implementation plans not as standalone or "point-in-time” regulatory exercises, but rather a tool to help them meet the expectations of the duty to deliver good outcomes for customers.
 

Plans therefore should remain flexible; where a change is required to better meet the needs of their customers, firms should expect to make adjustments right up to the implementation date and even beyond. 

The significant work already completed has helped firms to better understand their customers’ needs, and identify areas where enhancement is required. Flexible plans allow firms to incorporate what they have learned, as well as good practices from the market, to drive better outcomes for the future. For example, if an issue is identified with a lending product, the FCA would expect firms to proactively investigate investment products that use the same platform. Adding such reviews to implementation plans is key, even if some of the work continues after the initial deadline.

It's clear that the execution of these plans will require significant resources, both in terms of meeting initial requirements and ensuring that services are delivered in line with the duty going forward. Given short timelines and large scale budgeting requirements, resource assessment and allocation will need to be put in motion well in advance of the implementation date.

Ideally, board-level Consumer Duty champions can advocate for the duty’s importance and keep the organisation focussed on the necessary changes. Allocating sufficient resources to assess and deliver the expectations of the duty by July 2023 is key, but firms must look beyond the immediate implementation deadline and begin work on new capabilities (e.g., enhanced data management, customer insight generation) that they need for the long term. 

2

Chapter 2

Define day one readiness for different parts of the business

Clarity around the future role of risk and audit is key, especially relative to board inputs.

The FCA understands the breadth and depth of change required by the duty and acknowledges that day one will be the starting point on a journey of continual improvement. For instance, substantive compliance for day one may be delivered through manual reviews and interventions, with more automated monitoring to follow in the future.

From our experience in the market, most plans project that pilots, tests and the bulk of Consumer Duty programme activity will be delivered for day one, with ongoing work beyond July 2023 to further embed the duty into the business. For example, we expect the role of the second and third lines (risk management and compliance, and internal audit) relative to Consumer Duty to continue to evolve beyond the initial deadline. We have seen varying degrees of involvement by the second and third line across the market, but given the significant change being made up to the implementation date, substantial second and third line review across all areas is likely not possible for many firms before day one.

However, the duty clearly sets out that assessment of customer outcomes should be a central focus for the audit and risk functions. They should adopt the perspectives of customers, not only a view of internal commercial or materiality, in how they prioritise and evaluate observations within their reviews. Firms should not overlook the critical function played by the second and third lines in the run-up to the deadline and beyond, particularly as a key input to the annual board Consumer Duty report. 

3

Chapter 3

Dig deep on consumer understanding and outcomes

Evidencing good outcomes starts with a deep understanding of existing processes.

How EY can help

We know many firms are finding it difficult to determine what is required to meet the expectations of the consumer understanding outcome. Firms are reassessing their approach to how they set key customer messages and take reasonable steps to consider if these messages will be understood by their customers in how they are communicated. For a customer to understand a product, the firm needs to first be able to understand and articulate how they deliver the features that form the basis of a fair exchange of value. This awareness allows firms to determine the key messages to be communicated, segment customers into different groups receiving the message, and assess from customers’ behaviour whether they are taking the expected action in response. Some firms have benefitted from an “outside-in” approach by engaging independent organisations (e.g., customer research firms) to objectively challenge or validate consumer understanding.
 

Price and value are other outcomes that are receiving significant attention. There is a temptation to adopt exclusively quantitative calculations of the value of various product features, based on their usage. This approach may be complex and burdensome, particularly when trying to quantify the value of the peace of mind offered by insurance products, the value of strong customer support, or customers’ commitments to pay more for green products and features. 

Alternatively, some firms have had success by setting out high-level principles and then working out the key features customers value within a product or service. This approach is better suited to deal with the range of customers that use a product and the different ways they may use it. Whether customers receive value from specific features can be validated through a combination of metrics (e.g., market research, usage statistics). Such a set of holistic measures helps firms demonstrate that differences in pricing, features and structures of products are designed to meet customers’ needs, rather than being purported quality enhancements that customers may or may not actually recognise.

Products with complex distribution chains present unique challenges for implementation, including varying expectations and timelines among different firms. Firms that create financial products that others distribute are required to provide Consumer Duty data to others in the distribution chain by the end of April 2023. This is a tight timeline in itself, and firms receiving the data will find it difficult to interpret and use it effectively by July 2023.

The goal is to secure the information necessary to define and deliver good outcomes for customers. Firms need to evaluate key distribution relationships and, in some cases, may need to revise contracts and service level agreements (SLAs). Beyond legal reviews of these relationships, firms should assess whether their monitoring and governance structures are fit for purpose to understand and question the information received from other firms in the distribution chain.

The FCA is looking for a suitable degree of professional scepticism. Specifically, it wants firms to consider information from third parties (e.g., data on complaints and profitability of particular products) across the distribution chain to understand whether end customers are receiving good outcomes. 

4

Chapter 4

Build the right data and technology capabilities

New systems may not be necessary to evidencing good outcomes, but integrating data is vital.

Building comprehensive solutions for data-driven monitoring of customer outcomes will be a heavy lift for many firms. However, getting it right unlocks the real opportunity of the duty by positioning them to deliver good outcomes for customers at scale and in a sustainable way. The key challenge is how to make the available data meaningful and sufficiently granular to identify differences in outcomes for particular consumer groups, as well as aggregating it to inform strategic decisions.

Existing IT platforms, systems and databases may pose an obstacle if they are not integrated and can’t share data effectively. Firms are looking at how their customer data feeds decisions and how customers are supported. Some firms need to update their customer relationship management (CRM) systems and other decisioning models and systems. However, the goal is not a specific defined technology system change, but rather a revised technology architecture to better integrate disparate data sources and provide holistic decision-making insights. These insights should allow firms to make better decisions across the customer lifecycle, including when supporting customers through periods of stress and difficult life events.

Improvements to technical environments will also help boards gain confidence that the requirements of the duty are being met, primarily by providing evidence both internally and to the FCA as required. Lastly, advanced technology will allow firms to more effectively manage and use larger data volumes, drawing out insight from customer’s experience to enhance processes and controls and ultimately better serve similar consumers in future. In the absence of suitable and well governed systems, the push to better serve customer needs may instead lead to inconsistent decisions and incorrect use of sensitive or personal data.

Improvements to the technology and data management infrastructure will extend beyond the implementation date. We expect that firms will attempt to use existing data wherever possible, even as they seek to identify gaps to be filled through the use of proxies or manual interventions until these longer-term solutions are established. Such proxies and workarounds will be common, but will require significant effort to maintain, increasing the urgency for firms to develop viable solutions for the long-term.

Consumer Duty

Financial Services firms need to look beyond compliance to strategy, data and technology.

Find out more
5

Chapter 5

Drive culture change from the top down and bottom up

Setting the tone from the top and providing appropriate training will help change mindsets.

Related article

How the financial services industry is preparing for Consumer Duty

After years of talking about customer centricity, firms will be required to show evidence of it in all interactions and operations.

Christopher Woolard CBE

    For many firms, the Consumer Duty requires culture change, and ensuring that customers are always at the centre of the business. The first steps are to embed customer insight at the heart of product design and customer communications and identify where different customer groups are not achieving good outcomes. Ideally, the more firms learn to view things from the perspective of their customers, the more opportunities they will find to deliver more value. In this sense, the duty can prompt firms to fully embed customer-centricity within their cultures, provided firms don’t adopt a minimalist, one-time approach to implementation.
     

    Culture change should start at the top. The duty is designed to promote board accountability by requiring directors to approve implementation plans, appoint a board champion and annually review and challenge reports on performance against the duty. These prescriptive requirements for leadership can cultivate critical mindsets among board directors and help ensure that strategic decisions are considered through a consumer-focused lens. 
     

    The tone at the top must be supported by training for individuals through all levels of the business, from product designers to salespeople to customer support staff. This training should be tailored to each employee, and help them to understand how, in the context of their role, to question whether good outcomes are being delivered and offer steps to take if the firm is falling short of the duty’s requirements.
     

    High-profile strategic and regulatory initiatives in the past show us that, while difficult to embed, cultural change is fundamental to success. That’s especially true of the Consumer Duty, given its emphasis on core principles. As such, cultural change is likely to be a long-term process, not something that will be complete by July 2023.

    Conclusion

    Both industry executives and regulators recognise that Consumer Duty work will continue after day one. As Sheldon Mills of the FCA has acknowledged on the EY Consumer Duty webinar, while substantive compliance by the implementation deadline is required, but as firms continue to mature their capabilities, their “journeys may continue for many years afterwards to continually improve the outcomes for customers.”

    Firms can view the duty in terms of the opportunity to better understand current delivery models and monitoring capabilities and to design innovative approaches to improve consumer outcomes. Meeting the implementation deadline of July 2023 will be challenging enough, but firms should remain focussed on the long-term benefits of embedding customer-centric principles at the heart of their business. 


    Summary

    Achieving compliance with Consumer Duty by the end of July 2023 will be challenging for firms. This article sets out several key elements firms are grappling with. It is important however that while the initial deadline for Consumer Duty is July 2023, firms should not lose sight of the long-term benefits of embedding customer-centricity within the organisation. 

    About this article

    Authors

    • Christopher Woolard CBE
      Partner, Financial Services Consulting, Ernst & Young LLP; EY UK FinTech Leader; EY Global Financial Services Regulatory Network Chair; EY EMEIA Financial Services Regulation Leader
    • Heather Alleyne
      Partner, Financial Services, Ernst & Young LLP
    • Brendan Gilroy
      Director, Financial Services, Ernst & Young LLP
    Related topics
    Financial services
    Customer
    Strategy by EY-Parthenon
    Digital
    Innovation

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