The new Financial Conduct Authority (FCA) Consumer Duty is now live and applicable to all new products and services - though companies still have some time (until the end of July 2024) to make closed products compliant. We previously discussed the implications of designing digital products that comply, but here we delve deeper. We scanned published materials and spoke to leaders across financial services to get the bottom line on what Consumer Duty means for your business, and what you can do today to comply. We found many companies have been (and still are) struggling to understand what practical changes need to be implemented. We’ll summarise the challenges you might face, break down the outcomes the FCA are looking for, and outline what steps you can be taking now.
Firstly, why does the Consumer Duty have teeth?
The Consumer Duty now rests on four main outcomes, but what attracts attention is how far-reaching they are. The expectation is that companies must analyse their processes and activities, from high-level strategic planning to individual customer interactions. The end goal must be to ensure that good practices and customer-centricity are embedded into the very culture of the company. Failure to do so could result in investigations and fines. And, fines issued by the FCA more than doubled in the last financial year, proving that the FCA means business.
While this new Duty doesn’t represent a departure from previous principles, it is more rigorous. As Nisha Arora (Director of Cross Cutting Policy and Strategy at the FCA) put it, compliance requires a cultural and behavioural shift in a company’s DNA - it isn’t a “comply and goodbye” exercise. This shift towards the ongoing demonstration of evidence gives it bite.
In short, the Consumer Duty requires proof that good customer outcomes have been achieved. It does so through a far-reaching set of principles that address people, processes and technology. Its implementation, if done properly, requires a mammoth effort. But in the long run, it can only be seen as a good thing, especially given new forms of micro-debt, such as Buy Now Pay Later (BNPL), are rapidly expanding posing a risk to individuals’ financial wellbeing and the wider economy - and will soon come under the microscope.
But the FCA have not made it easy to comply
The new guidelines constitute the biggest push from the FCA in a decade. Advocators of user-centricity, as well as customers, welcome the initiative, for it aims to halt what the FCA describes as ‘sludge practices’ or ‘negative friction’: tactics designed to retain customers or nudge them into making decisions that are not beneficial to them. However, it’s important to remark - and the regulator makes this clear - that such practices are not always necessarily deliberate, and can arise through inadequate attention, or more generally a lack of true consumer centricity.
Exactly how the guidance is to be implemented in practice, however, constitutes the main challenge. Its principles are high-level and difficult to translate into tangible actions. Also, there remains a considerable amount of ambiguity about how far the FCA wants companies and independent financial advisors (IFAs) to go to demonstrate compliance. One individual we spoke to remarked how at a recent Consumer Duty event, many in attendance voiced uncertainty about how actively the FCA will police it. In response to this uncertainty, some organisations are shifting an extraordinary volume of their workforce to work on the Consumer Duty, with an obvious impact on business-as-usual operations.
But is all the extra effort worth it? The FCA believes that companies will hugely benefit from implementation of the new regulation, for example by receiving fewer complaints, lowering costs and gaining customer loyalty.
Businesses are expected to redesign themselves from the inside out to place customers at the heart of everything, proactively limiting unintended consequences. We welcome this. Adopting a product strategy that actively involves end-users not only creates harmony between your product or service and the market, with obvious benefits to users, but also fuels both growth and revenue. But we also know that for as much as this is a favourable transition, it is a challenging one, and you guessed it - one that relies heavily on the sum of its parts.
How it impacts your entire business
The Consumer Duty is incredibly wide-reaching, requiring an assessment of every single piece of communication that your business puts out. This means it potentially touches departments such as product, design, marketing, management information, sales and more. Compared to 2018’s GDPR, which itself generated panic when first introduced, the duty involves far larger numbers of individuals, and depending on the product and when it was sold, transcends departments and potentially decades.
The shift in FCA regulations from rules-based to outcome-focused means companies are expected to create new rules for designing and delivering products and services. Every team will need to ask themselves some key questions to achieve the prescribed outcomes. For some teams the changes needed will be obvious, for others, such as non-customer facing teams, less so.
To bring this to life, we’ve created a template that details the high-level view of the types of questions different teams ought to ask at each stage of the customer journey, highlighting the interconnection between frontline teams (design and technology) with backstage teams (business model, leadership and operations).
There’s still always time for companies to improve their processes to offer fair value to customers and to demonstrate that their processes are fit for purpose regardless of deadlines or the risk of enforcement. Adapting workflows and processes to allow research and design to drive decision-making could simply mean that no new features can be added to a backlog, prioritised or launched without solid evidence from user research or testing.
How often do your teams ask “Is this what our users want and need? Will this benefit them?”, at every step of a product life cycle? Zooming out to get a look at the wider view of decision making, structure and processes can be a good place to start.
So why are companies struggling to comply with Consumer Duty?
We’ve looked at the scale and ambiguity of implementation, and although some companies seem to be doing better than others, compliance is understandably proving challenging for everyone. Later on we explore the steps you can take to meet the FCA’s desired outcomes, but first we must take a closer look at the 3 common stumbling blocks that have emerged from our conversations across the sector:
- Low customer-centric culture and design maturity
- Underestimated scale and complexity of implementation
- Panic and legacy
Low customer-centric culture and design maturity
For years, the focus of large enterprises has been on 'digital transformation'. This has seen large-scale structural and company change with a focus on delivering output, faster. However, 'more' doesn't necessarily equal 'better' if you are delivering the wrong things. Instead, focus must shift from high output to positive impact.
Customer-centricity is a key building block for a successful consumer experience, which is essentially what Consumer Duty requires. But while most companies have it on their agenda, it’s not something that can be applied overnight. The most difficult task is not only having to review products and services from policy all the way to production and their ongoing lifetime to avoid causing negative impacts, but changing the entire organisation’s culture, to build a continuous commitment to customer centricity into the heart of everything.
We’ve seen that adopting a customer-centric culture and process often gets put onto the 'too difficult’ pile. This is because it involves realignment across different business functions that cannot happen overnight, from pricing to product design, to communications and beyond, its ripples are far-reaching.
In short, this is what we found to be stopping companies fully adhering around the theme of customer-centricity and design maturity:
- Measuring success by volume as opposed to a change or impact on consumer behaviour.
- Roadmaps driven by sales which leads to poor product longevity. Business focus changes frequently.
- Companies have a structure that siloes products into 'feature' teams, who lack a shared vision/strategy.
- Product teams are not empowered with strategic decision-making. They deliver feature lists dictated by senior management rather than insight-informed business and customer problems.
“The FCA helped to move us from an industry of sales into an industry of advisers. It got rid of lots of cowboys” - Interviewee
Underestimated scale and complexity of implementation
The demand of the Duty is enormous. Some companies we spoke to disagreed with the proposed implementation time frame, arguing that it’s not long enough for the industry to properly embed a change of this magnitude and complexity. Others admitted having underestimated the required effort, which resulted in large last-minute workforce replanning with obvious impact on business-as-usual; that in turn impacted targets, leading to even greater trickle-down effects on the workforce, business operations and results.
They highlighted issues such as:
- The scale of implementation work, due to the number of business areas impacted and the number of products, services and communications that need to be reviewed and potentially amended.
- The complexity of the system changes needed (e.g to collect data and manage information to track outcomes) as well as the need to negotiate with third parties across the distribution chain.
- Regulatory reform, the challenging economic situation and the labour market making it difficult to apply additional resources to implement Consumer Duty.
- The risks of unintended consequences, for instance:
1) Superficial implementation to meet the deadline.
2) Increased operational risk if companies rush system changes, resulting in loss of services, security issues and an erosion of trust.
“Consumer duty is very broad ranging. Every piece of communication that goes out has to be reviewed (...) for us that means 5k individual potential communications that need to be assessed, reviewed and changed if necessary” - Interviewee
Panic and legacy
From some of our conversations, we learned that organisations are having a hard time interpreting what the Duty actually means in practice, for example “What does good value for money mean?” and “How much should we rightfully charge for our services?”. But the greatest fear arises from the ability to document and evidence compliance. For some, there is a practical barrier around inadequate IT systems that make the task difficult. For others, it is a political issue and conservative approach to change. Some organisations failed to design a holistic, coordinated response simply because they did not put the right people in the room and persisted with top-down approaches. We found that this impacted the largest, most siloed organisations.
This led some to panic and to “do everything we could think of” to play safe. Whilst the FCA encourages organisations to come forward and collaborate, we saw that organisations do not feel comfortable being so transparent nor do they wish to open themselves up to scrutiny and criticism, especially knowing they are not compliant.
As if the air wasn’t heated enough already, some noted how clients started to proactively come forward to demand more transparent and understandable communications; whilst good, this added even more pressure to a disordered response, which caused duplication of efforts and inconsistent changes to infrastructure, processes, systems, pipelines - especially in siloed and fragmented organisations. The greater level of scrutiny sparked healthy conversations around technology investment, customer reviews, product charges, board dynamics, etc - but for some resulted in an impact on performance and share prices, only adding to anxiety.
Challenges relating to panic and legacy can be summarised as:
- Wrong “people in the room” to consider the Consumer Duty from all angles and give it the right direction.
- Persisting with top-down approaches to decision-making.
- Translating the high-level principles in practical terms, resulting in disordered or exaggerated actions.
- Lack of accountability of the Duty implementation.
- Legacy IT systems that support collection of evidence to demonstrate compliance.
- Conservative approaches to organisational change and operations.
“From a shareholder perspective it is a terrible thing, because it's having an impact on their gains” - interviewee
The FCAs four outcomes and what to do about them
As described in the rules surrounding the new Duty, the FCA require you to act in a way that delivers 4 key strategic outcomes for retail customers:
- Products and services outcome
- Price and value outcome
- Consumer understanding outcome
- Consumer support outcome
Each outcome represents a key element of the business-consumer relationship. Namely, how you design, sell and manage products and services across critical customer touch points within the lifetime of a financial product.
Now that you’ve seen the challenges companies are having implementing the new Duty, we’ve distilled what the FCA are actually looking for, with practical advice on what action you can take today, and how you can create a more cohesive roadmap to compliance.
Outcome 1: Products and services
The first outcome requires all products and services for consumers to be fit for purpose. That means, being designed around the needs, characteristics and objectives of the relevant target group.
In order to be compliant, a firm must have a clear definition of the target market, customer needs and a distribution strategy. All (new and existing) products and services must be reviewed continuously, to ensure all customers understand it and utilise it appropriately.
Documentation, evidence rationale, approval and compliance are key deliverables.
How to demonstrate consideration and compliance:
- Organise the workflow: Establish information sharing procedures between parties involved in design and distribution; define key metrics to measure compliance; craft new governance and review processes; establish escalation routes and change management procedures; establish cross-functional Consumer Duty teams.
- Talk to customers: Define the customer needs, characteristics and objectives of your target market; implement continuous user research processes to benchmark compliance, collect feedback, identify pain points and risks; undertake ad-hoc research with vulnerable customers; run pilots to test prototypes.
- Shift your culture: For companies seeking to become more adaptive and innovative, culture change is often the most challenging part of transformation. Innovation demands new behaviors from leaders and employees that are often antithetical to corporate cultures, which focus on operational excellence and efficiency.
Outcome 2: Price and value
Consumer Duty requires companies to ensure reasonable relationships between the price paid for a product or service and the overall benefit a consumer receives from it. In other words, giving customers value for money.
That means assessing direct and indirect costs as well as providing qualitative considerations for non-monetary costs and benefits. To assess value against the costs, a company should consider the nature, benefits and qualities of a product or service, its limitations and the market rates of competitors. Such reviews are to be undertaken regularly so as to identify and mitigate potential new harm and ensure fair value throughout.
How to demonstrate consideration and compliance:
- Audit: Undertake risk analysis of foreseeable harm; assess market prices; benchmark features against target groups for suitability and usability; list comprehensive cost breakdowns for products and services.
- Strategise: Devise definitions and metrics of value, quality and benefits - and their relation; consider mitigation, escalation and change management strategies.
- Learn from data: Continuously monitor whether needs are being met and identify pain points; undertake regular reviews of value assessment; A/B test product variations and new pricing strategies; collect data from surveys, net promoter scores, social media rating analysis, focus groups, mystery shopping or other customer research and synthesis and use to inform new product roadmaps.
Outcome 3: Consumer understanding
Consumers must be given the right information, at the right time, presented in a way they can understand - so that they can make effective decisions at key points in their journey.
That means establishing what a good customer outcome looks like and putting yourself in the shoes of the customer to tailor messaging to them. Product and service options should be explained transparently so that customers are given the information they need in a way they can understand.
It also entails communicating more often and in a timely manner using the right medium. For example, long policy documents are unlikely to be read on mobile devices.
Finally, special care must be given to vulnerable customers and include the concept of vulnerability not only as a constant, but as a state that people can enter into and come out of depending on the situation or circumstance of the individual. These people may require tailored communications, different channels and augmented experiences. Companies also have a legal duty under the Equality Act 2010 to anticipate the needs of disabled customers and provide reasonable adjustments to enable them to use products and services. This can include providing information in an accessible format. For example, it may be reasonable to provide information in braille, audio or another format rather than by letter, for a customer with a visual impairment.
How to demonstrate consideration and compliance:
- Capture customer behaviour insights: Undertake in-depth interviews, design ethnography, diary studies, role-playing, prototyping; identify if and when customers fall off the happy path throughout the customer journey; consider the impact of complex, life changing, events like unemployment or divorce.
- Work with stakeholders: Bring customers together with internal stakeholders for design sprints and workshops to generate ideas and aid the discovery of internal issues that affect customer experiences.
- Communications testing: Test which channels work best for which customers, what type of messages works best for specific target audiences; experiment with messaging, gather feedback and iterate.
Outcome 4: Consumer support
Companies have to provide a level of support that meets consumers' needs throughout their entire relationship.
That means enabling customers to act without facing unreasonable barriers at any given moment. For example, by making it easy to switch or cancel a product or service, or by ensuring the quality of any post-sale support matches the pre-sale one.
Companies should make sure their support processes avoid causing foreseeable harm and help customers towards pursuing their financial objectives by ensuring support channels are resourced and easy to navigate.
Customers with any characteristics of vulnerability must also be able to access support as easily as every other customer.
How to demonstrate consideration and compliance:
- Benchmark your support: Examine customer support interaction points and identify areas of friction; undertake root-cause analysis of complaints; measure resolution rates and average time to resolution; monitor call centre wait times and call abandon rates; benchmark speed to answer email; internal quality assurance; customer call listening exercises; collect customer feedback with satisfaction surveys and net promoter scores.
- Test new solutions: Prototype, pilot and roll out new features that tackle pain points, service dead-ends or any potential issue identified by exploring a variety of conditions, use cases and scenarios.
- Stress test: In addition to offering accessible and quality customer support, you should ensure your IT system is up to the task. An inadequate, buggy or slow system can cause irreparable harm, so make sure you test your systems against bugs, outages, cyberattacks and reported anomalies.
How does the FCA measure progress towards compliance?
In order to be compliant, it’s also important to understand how the FCA measures progress. Here are some examples of what the FCA monitor based on their stated key data sources that could influence perceived compliance with the four outcomes:
FCA Financial Lives survey
- Do consumers perceive reasonable prices and fair value?
- Are consumers sold suitable products and services and receive good treatment?
- Is there an increase in consumer satisfaction and confidence and participation in markets?
- Is there a reduction of customers who had problems with a product or service?
FCA and Practitioner Panel survey
- Are market participants able to make well-informed assessments of value and risks?
- Is the regulatory framework well-understood and trusted?
Financial Ombudsman Service
- Reduction of complaints about mistreatment, charges, customer support, admin and unsuitable advice.
Financial Services Compensation Scheme (FSCS)
- Stabilise and then reduce over time Financial Services Compensation Scheme (FSCS) compensation, claims and payments.
Measuring the effectiveness of your unique response
There’s some evidence that the FCA are applying pressure to ensure compliance to Consumer Duty; there have been a number of companies or individuals that have been struck off for failing to provide evidence of fair value or clarity about their charging structure. Nobody wants that.
Given these examples, and knowing that every company and product faces different challenges, we suggest approaching the problem in the following ways to measure both your business’ and your customers’ response and understanding of any changes relating to the Duty:
- Standalone research: Conduct customer sentiment testing on prevalent attitudes to the Consumer Duty.
- Attitudinal tracker: Form a process for long-term testing to measure changes in attitudes and levels of understanding relating to the Consumer Duty.
- Deep-dive research into outcomes: Run deeper studies into the four outcomes and provide a recommended approach to monitoring them.
- Measurement support: Conduct a detailed review of metrics, data collection processes and methods to establish best-practice research on financial services consumers.
- Improved reporting: Ensure that all documentation and reporting for the FCA includes data to prove compliance with the Consumer Duty.
Could AI be your ally when it comes to Consumer Duty compliance?
Given all of the above, there’s no doubt that Consumer Duty requires a lot of consideration, time and concentrated effort to pinpoint the sources of value for your business and your customers. However, perhaps the new dawn of generative AI could be your ally. By combining AI, composable architectures and insight-led product design, augmentations to the design of everyday digital products and services that meld to individual customer needs, could become a reality.
Of course, this in itself is another exercise in compliance and complexity that companies would need to understand, but embodying the spirit of Consumer Duty and new and emerging technologies to offer better service is an aspirational vision to have.
With AI by your side, product and compliance teams can create and manage much more varied design and technical architectures that could pinpoint a smaller subset of customer needs and behaviours, thus responding to Consumer Duty in a way that goes far beyond ticking a box.
Consumer Duty: Seize the day
The Consumer Duty is here to stay, and despite some scepticism, it needs to be considered as an ongoing effort across a sustained period of time and not a box-ticking exercise. This means embracing the spirit of it, rather than viewing it as a delivery milestone to be hit.
Work is already being done. In a sea of compliance and regulation many have already made steps, however, we encourage you to think deeper and smarter about the potential of what can be done wherever you are on that journey. In some ways, this may go against the traditional model of banking and the way in which money is made, in other ways it is being mandated by bodies who represent the people. Now, more than ever, there’s a genuine opportunity to use Consumer Duty to bring other elements like GDPR, the Equality Act and other acts and statutes to life in a way that betters the provision of digital products and services for everyone. Raising the standards of poorly performing companies and individuals who are not transparent with customers.
Only time will tell if Consumer Duty will be the ‘sword of Damocles’; having a preventative effect without active policing by the FCA. But, irrespective of this, happy customers will engender loyalty, and remain with their existing financial services companies or advisors. Ultimately, if the consumer is happy and able to live a flourishing financial life, then Consumer Duty will have served its purpose.
Writing and research credits: Alessandro Medici, Ross Tulloch, Ian Burdin and Jennifer Thompson.