New rules aimed at protecting financial services (FS) customers mark a step towards outcomes-based regulation in the UK that could help other sectors of the economy raise their game.
Some 60,000 banks, insurers, asset managers and other FS companies have until July 31 to comply with the Financial Conduct Authority’s Consumer Duty, which aims to establish higher standards of protection for clients.
Specifically, the Duty introduces a Consumer Principle requiring firms to ‘act to deliver good outcomes for retail customers’. Rules and guidance, laid out by the regulator in 2022, help to clarify what is meant by good outcomes. These include three cross-cutting rules obliging firms to act in good faith, to avoid causing foreseeable harms, and to enable and support retail customers in the pursuit of their financial objectives.
Although it applies to financial services, the Duty has lessons for firms in other sectors in terms of ensuring that their customers’ outcomes are good.
The Duty’s transformational elements
We have worked with firms over the past couple of years to pin down what the Consumer Duty means for them and have identified five ways in which the Duty is changing how firms approach customer outcomes.
- Shift in mindset: The Duty requires companies to consider the outcomes that customers actually experience and not just their own inputs, such as product design or marketing. This has compelled a significant change in mindset. While it is relatively easy to assess whether inputs are designed with customer outcomes in mind, it is harder to make evidenced judgments about whether or not good outcomes are actually achieved. The Duty does not specify what a good outcome is in each instance, and so firms also need to be able to articulate what good outcomes are, and are not, and put them in the wider context of competition and product economics. To embed this shift in mindset, firms are required to appoint a Board Champion for the Consumer Duty.
- Fair value assessments: The Duty obliges firms to explain why they believe their product provides value to customers, taking into account monetary and non-monetary costs and benefits of the product. Importantly, the assessment should consider both typical customers (using the product as intended) and non-typical customers. In other words, firms must bear in mind “outliers” whose behaviour or price may result in outcomes that may not be good and take corresponding action.
- Customer understanding: The Duty requires firms to ensure that customers understand their products and the communications relating to them. This obliges companies to go beyond their inputs (i.e. ensuring communications are sent on time in a legally compliant way) and to think about how to demonstrate that they are actually understood. This means firms have to analyse how customers behave in response to communications, and to assess whether this behaviour indicates that they have engaged with it and understood it. Firms should also consider how behavioural biases may affect customer understanding and avoid exploiting these biases through what are termed “sludge practices”.
- Requirement to evidence outcomes with MI: Under the Duty firms have to show evidence of the outcomes that customers experience, using Management Information (MI). In particular, they need to identify where there are risks to good outcomes and make sure they have clear MI to assess this. This requires MI on customers’ behaviour, prices paid and sentiment, as well as the firm’s inputs. Data must be scrutinised by senior decision makers.
- Vulnerable customers: The Duty puts a strong emphasis on the differing needs of vulnerable customers. Firms must consider what kinds of support and communications these customers might need. They must also take into account whether vulnerabilities make certain harms more likely and monitor whether such customers experience worse outcomes.
Lessons for other sectors
So what might other industries learn from financial services firms’ experience of the Duty?
Several sectors, particularly those with long-established products, have customers whose behaviour means they may not be experiencing a good outcome, such as energy customers who do not shop around or switch suppliers. Applying a Consumer Duty approach, energy companies would need to focus on these outcomes, and not just how they communicate to customers or price products. They may need to identify potential foreseeable harms, develop MI on these harms, articulate when these outcomes are ‘good’ and take actions when they are not. In implementing the Duty, FS firms are trialling different modes and styles of communications to understand what techniques work best in engaging customers.
The Consumer Duty fair value assessments oblige firms to justify whether or not their pricing is fair for all customers, not just the typical ones. This would, for example, require mobile phone companies to explain how the pricing and length of their contracts provide value to those non-typical customers. This could mean explaining whether certain charges, say for mobile use abroad, are fair or whether they generate disproportionate profits. Similarly, it would require telecoms providers to justify that bundled broadband and TV deals with long contract terms represent value, while energy companies would have to explain price differentials between fixed and standard variable tariffs.
Cutting across these examples are consumer understanding and vulnerability. Firms would need to show that customers understand the charges that form part of their tariffs, along with the alternative options that are available, and think about how vulnerabilities might affect this understanding. As energy pricing becomes more complex (e.g. time-of-use tariffs), the importance of consumers’ grasp of the product will increase. Similarly, social media companies would need to show whether customers understand how their data is used and the value exchange implicit in the free service.
Three useful Consumer Duty standards would apply here. The first is to display the important elements of any communication clearly. Secondly, the Duty requires firms to apply a similar standard to all their communications and customer service support as they do to sales and marketing materials. Thirdly, the Duty requires firms to avoid unreasonable barriers, such as making it difficult for customers to exit a product or achieve their objectives.
Finally, the appointment of a Board Champion would help firms to scrutinise customer outcomes at the highest level. However, in order to monitor and challenge these outcomes, different kinds of data would be required. Specifically, companies would need to collect data on how customers behave (e.g. usage of the product, engagement with communications) as well as data on their inputs (e.g. the prices they charge). The identification of vulnerable customers is another area for which new data is required and has proved challenging for some firms.
Most companies will consider that they do these things to some degree already, and that they do act to deliver good customer outcomes. That is also the experience of most FS providers. However, the Consumer Duty represents a drive for higher standards. It has been hard work for firms, and some may still wish the FCA had taken a different approach. But for those in other sectors, there is an opportunity to learn from the experience of the Duty and to pick the best bits that can help improve outcomes for customers.