The regulator expects every firm to do its duty
New Consumer Duty regulations firmly place the customer at the front and centre of financial services. In viewing the Duty as a customer experience imperative rather than a compliance exercise, an opportunity presents for firms to gain a competitive advantage.
By David Titterton, UK Engagement Director at Monstarlab
The Consumer Duty regulations being introduced by the Financial Conduct Authority (FCA) represent one of the most far-reaching changes to financial services supervision in memory.
While most responsible financial services businesses already place the customer within their product and service design approach, the new regulations take things a step further. It puts the emphasis firmly on delivering good consumer outcomes; ensuring their services are designed to meet the diverse needs of their customers and requiring firms to demonstrate that the resulting outcomes are positive.
This comes at a time when the FCA has written to CEO’s of firms to set expectations on the treatment of consumers who may be feeling the strain of rising costs of living.
Consumer Duty takes effect from July 2023. With less than a year to go, firms need to be taking action now. From my own recent experience in banking, I know of firms that began actively working on Consumer Duty a year ago or more.
Getting it right will be vitally important, and not just to avoid the attention of the financial watchdogs. It’s obvious – the consumer’s experience of using a firm’s products or services has the most direct bearing on whether they choose to remain a customer, when the opportunity to switch arises. Consumer Duty can be a trigger to reset product and service design and transform customer experience to seize a commercial advantage, rather than a regulatory box-ticking exercise.
In my view, technology must play a core role in implementing Consumer Duty and the digitally native financial services companies that have sprung up in recent years will have a clear advantage when it comes to changing their processes and systems.
Others will face tougher challenges, and some encumbered with unwieldy legacy systems will need a lot of help. The risk for established financial firms is that the advent of Consumer Duty means the competitive gap between themselves and the digital natives will widen.
Consumer Duty in principle and practice
The Consumer Duty regulations stretch to 120 pages, but its essence is in the new Principle 12 that will come into effect and added to the FCA’s handbook.
Principle 12 says firms must focus on being proactive rather than reactive to consumer needs; delivering good outcomes for consumers in a way that reflects the real world; ensuring that the firm has a good understanding of customers’ behaviour and expectations, and constantly challenging their own actions to make sure they help deliver those positive outcomes .
The unwavering focus here is on understanding the diversity of their customers needs, and designing financial products and services around these.
The most visible aspect of Consumer Duty will be the direct customer interface, in particular in the effectiveness of communication. But the embedded nature of Consumer Duty means it goes deeper. Monitoring consumer outcomes, not just as a one-off but as an ongoing activity, will require using data in a way previously unknown to many firms.
Even if such data exists in systems, accessing and managing it efficiently and effectively may still be a challenge for those working with legacy systems or with an immature data strategy.
The product, the customer’s experience and the outcomes are all linked, and Consumer Duty will require firms to be able to look at these elements in the round and to have processes able to make changes to improve or correct things when they go awry.
A technology challenge
Digital-native firms will likely find this whole process less of a challenge, as may the largest groups that have already invested in integrating new technology, such as moving their services into the cloud.
But for many others, the challenges may be significant. How can these new requirements be integrated into an existing business? Will they add more manual tasks for their staff, increasing cost and (most probably) errors. Will it push them towards the difficult and time-consuming step of replacing legacy systems? Or perhaps push them towards a hybrid approach that brings some cloud services into an ecosystem to work alongside their legacy back-end?
My own view is that the hybrid route is the most viable, particularly with the opportunities now available through Open Banking. A hybrid solution can be a way for established firms to close the gap with pure digital rivals and to put product design, customer experience and customer outcomes at the centre of their business.
The challenges facing firms don’t start and stop with technology though. Organisation, process and culture may not be optimally aligned to maximise the opportunity that Consumer Duty presents.
For example, many organisations are simply not structured in a way to continuously monitor, measure and improve on a product by product (or service by service) basis. Monitoring can be irregular and inconsistent in method.
An optimised model would most probably have dedicated product or service owners undertaking continuous discovery/research/testing, with sufficient delivery teams behind them to make regular, numerous improvements that are found.
And these principles apply equally to the experience delivered to distribution partners (with their own Consumer Duty requirements to meet) as it does direct customers.
Of course, finding the people with the skills and knowledge to introduce and maintain these changes is easier said than done. It is a key issue facing all industries, but particularly in financial services where demand is high and competition for product and tech skills is fierce.
Practical steps forward
Many firms’ Consumer Duty activities will be well underway. For those playing catch up, there are some practical steps that should be taken immediately:
- Self-assessment. The FCA guidance asks 39 ‘key questions’ of firms against the four outcomes within the non-Handbook guidance. Perform an assessment of current state, using a 5 point rating scale, in order to gain a baseline and identify priority focus areas.
- Product and service design review. Deep-dive into current product and service manufacturing processes and evaluate alignment to good and poor practices set out in the guidance. Identify opportunities to improve or even transform processes, enabled by data and tech for efficiency and accuracy.
- Customer journey audit. Perform review of customer touchpoints within the journeys to assess how fully they meet the guidance. An outside-in perspective is key and consider customer research to either complement or substitute analytics and voice of customer data.
Data is the primary enabler to meeting Consumer Duty requirements. Firms who do not have a data strategy or data skills in–house should seek help from a specialist in this field. A data maturity assessment would be one starting point for such an engagement.
Space for innovation
Consumer Duty also presents some real space in which firms could genuinely innovate and create a competitive advantage. For example, a suitability or vulnerability assessment could be an automated, data driven process that continuously improves through a machine learning model. The same could be said for fair value assessments. And being fully transparent with consumers on these will help build levels of trust and loyalty, and encourage consent for more data sharing.
It will be fascinating to see the changes that emerge across the industry as a result of the forthcoming regulation.
Monstarlab specialises in creating delightful customer experiences through human-centred product and service design. We help organisations accelerate their innovation and build inspiring products and services powered by data. We can support firms in taking the practical steps described above as they prepare for Consumer Duty.
Get in touch today to see how David can help your business:
UK Engagement Director
- Financial Conduct Authority. 2022. FG22/5 Final non-Handbook Guidance for firms on the Consumer Duty [online]. Available at: https://www.fca.org.uk/publication/finalised-guidance/fg22-5.pdf
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