The impact of the new consumer duty on T&C Schemes

It has been asked why new consumer duty regulation is needed so soon after the senior management and certification regime has been introduced. The consumer duty changes that are proposed have been in discussion for some time. A discussion paper was issued in July 2018. The regulator was looking at the introduction of a Duty of Care. This led to one of the papers more recently which was the paper the guidance on vulnerable customers. In April 2019 there was a feedback statement based on various companies feedback. HM Treasury also got involved by requiring the FCA under the Finance Act 2021 to carry out a public consultation as to whether or not the FCA should make more general rules providing authorised firms to introduce a duty of care.

HMT requested that that consultation was completed so views were known by the beginning of January this year. Also, with the proviso that the rules would be introduced by August this year. Firms are still not following what’s expected. There is still evidence of firms designing and marketing products and selling these to customers who were not specifically targeted. The current structure of the handbook and the rules and principles themselves create uncertainty and loopholes. Companies have perhaps managed to escape through so perhaps satisfying those requirements closing those loopholes down and making it clear what the FCA expectations are would be a benefit.

The FCA fines that have been implemented over the last three years tells a story. If you look at the details most of the regulatory fines applied are under principle 3 – the systems and controls requirements. That being the case when you look at the principle six and seven TCF and customer communications together they represent a third of fines under Principle 3. In financial services the FCA turns to a financial lives survey in 2020 where less than 10% of consumers had confidence in the UK financial services sector. This is clearly something that the regulator wants to improve upon.

At this stage we should stop just to consider the following points. What in your view are the key differences between customer satisfaction and TCF? Possibly the easiest way to look at this is a company might be able to satisfy the TCF outcomes (Treated Customers Fairly) but when you look at it that doesn’t necessarily mean automatically the customer is satisfied. The two things are separate. One of the things worth noting is as we move forward customer satisfaction is an integral part of achieving good consumer outcomes. How does TCF connect to T&C?

The easiest way to connect the two is through the behaviours that need to be demonstrated to satisfy the six consumer outcomes and the behaviours that need to be satisfied to demonstrate competence of the individual. Under the terms of the T&C scheme the same behaviours that support TCF also support the values that support the culture of the firm. You should understand the relationship between those behaviours, the values of your firm. The new Consumer Duty has been described as TCF with teeth more effectively TCF on steroids. Do you agree or disagree with this?

I think in fairness it’s not a bad description of what to expect. The TCF Outcomes haven’t disappeared from the scene. There are many new rules to satisfy on top of the 6 TCF Outcomes.

The strategic objective of the FCA try to make financial services markets work well but that’s clearly something that they are trying to achieve but the consumer duty regulations are also designed to support two of the three operational objectives. Particularly the consumer protection one and also the competition one. The regulator believes that by doing the right things they will encourage healthy competition.

Products and services to represent a fair value and for companies to understand that they’re not doing that they should remove those products from sale service to the consumers. The regulator will expect fewer complaints about value and unexpected charges levied by companies. As regards products and services – these are designed to meet the needs of characteristics particular customer types so there should be fewer complaints about the products and services not working as expected. As regards treatment that’s about good customer service; fewer complaints about switching policies or cancellation difficulties, the service levels of getting hold of companies in the first place and generally a higher level of customer satisfaction.

Finally, confidence. This relates back to the 10% of people that were satisfied with financial services companies. Regulators expecting to see an increasing confidence making sure that people are equipped with the right information to make timely and informed decisions.

In addition to the success measures the regulator has also stated that firms must focus on consumer outcomes effectively put themselves in their customers shoes. Firms need to extend their focus beyond just satisfying the rules of the FCA. They need to think little out of the box to make sure that they are doing everything possible to create the right consumer outcomes and not be driven by the tick box mentality of satisfying compliance rules. Sometimes of course there may be a need to change the company culture. The challenge is that there might be a difference between what you think you are and the way you behave.

Some firms will need to dig a little bit deeper to find out how they truly stand. The final element that they regulator is asking you to look at is that you will need to think about how you will evidence the extent to which you are delivering may consumer outcomes. You should expect to be challenged on this to produce the evidence at some stage.

The FCA has stated that this new approach will enable them to respond more quickly to situations they discover whether it is to take action against the company or individual. They will act swiftly to resolve matters. This new approach will also potentially provide situations where the regulator will be able to fine companies more than in the past. If you recall we talked about the pattern of fines in the past concentrating around principle 3. This new approach will open up for fines to be levied against the new principle 12.

When we talk about consumer duty we’re actually talking about the three elements. The new principle and the cross cutting rules together with the 4 new outcomes. The new principle 12 states a firm must act to deliver good outcomes for retail clients. If you are firm where this new principle applies principle six and seven will be dis-applied for all retail business in scope. To be in scope you need to be currently subject to the conduct of business sourcebook such as the conduct of business, the insurance conduct of business, mortgage conduct of business etc.

If you are in scope of those particular source books you are affected by principle 12 for your retail business. Other parts of your business that are not subject to these source books will still be subject to principles 6 and 7. The new wording is clear it tells firms that they must act to deliver good outcomes. The wording of principle six and seven (TCF and the customer communications principle) refer to pay due regards. The wording now is much stronger. We also told that the guidance published over the recent years relating to TCF and more recently vulnerable customers still applies.

You can’t turn a blind eye to these requirements either. Another point to bear in mind is this new principle focuses on the consumer outcomes of a product to wherever the firm stands in the distribution chain whether you are the manufacturer or the distributor of the product.

The existing guidance that is out there for principles 6 and 7 still applies and this is the actual reference point where that is stated. You can see whilst existing formal guidance will remain relevant to a firm in considering their obligations under the principle it’s has got limits in helping fully achieve the requirements of Principle 12.

Principle 12 is clearly focused on the customer- helping the customer achieve good outcomes. The regulators also said as well as requiring a high degree of protection we mustn’t forget that they are also trying to create more effective competition between companies competing for the customer’s business. They also say the protection is typically resulting from how the customer is not in the strongest bargaining position. They are susceptible to behavioural biases. They indeed may lack experience in dealing with the products that they are trying to buy or investing in.

Often the regulator comes across at what is referred to as informational symmetries. What are these things?

Behavioural economics are playing an increasingly important role in the world of financial services. The regulator has taken an interest in the subject for many years and expects firms to understand the impact of behavioural economics on their product design and services and the way they interact with customers. The best reference point for this is the occasional paper published by the FCA in April 2013 ‘Applying behavioural economics at the Financial Conduct Authority’ to give you an insight into their thinking. There are three main things that we need to get a heads round.

One is Heuristics – the rules of thumb that used by individuals in making a decision. Asymmetries where one party has more information and can take advantage of the other person as they are privy to that information. The third is biases. These are used by the individuals to persuade individuals to make a purchase. There are various biases we need to think about. There’s attention bias or confirmation bias, recency bias there’s an optimism bias where people are overly positive about their finances, there’s herd mentality where there is the fear of missing out or loss of version where people are holding onto an unprofitable investment.

Firms need to understand these. They also need firms need to develop tactics too to deal with these particular aspects. They need to recognise that these things exist, they need to ensure that they approach the financial advice arena objectively to make sure that they take emotions out of it, and the other side of it is adopt strategies to make sure that they remain objective.

The next element of the consumer duty are the cross cutting obligations or rules. There are three rules. Firms have to follow effectively helping to develop and amplify conduct expected within the firm. Firms must act in good faith towards retail customers, to avoid foreseeable harm to retail customers and to act to ensure and enable support for retail customers to pursue their financial objectives. These things are fairly self-explanatory. The important point to note is that the same rules will be added and applied to people subject to the new code of conduct rule which replaces the existing conduct rule 4 which talks about paying through regard to customers and treating them fairly.

You do not want companies to exploit emotions or behavioural biases. They have an ongoing relationship and what they have to think about is it through the whole product life cycle is the whole term the customer is with you. Communication- we need to make sure that the products are designed to meet the needs and objectives of specific customer types and make sure the customers have the information and support they need to be able to make informed decisions .

The next part of the consumer duty are the four consumer duty outcomes. You can see from the screen what they are and they number rules that have been introduced that firms have to comply with. However it’s important to note that for the products and services and pricing value outcomes (Numbers 1 and 2) firms that currently comply with different rules within the product and collective investment sourcebooks. PROD 3 is financial instruments four is the insurance products and seven is the funeral plans and COLL 6.6 relates to collective investments. If you comply with those already you’ll be OK as regards one and two.

It’s important to note that new rules for consumer understanding and consumer support – things that firms have to comply with under the new consumer duty. These cover all communications throughout the firms interactions with the customer before during and after the sale – communications for customers take into account the characteristics of vulnerability and of course the finalised guidance published by the FCA in February 2021 including the four drivers availability which were health life events resilience and capability. Firms communication strategies and communicate with customers at suitable points throughout the lifestyle of the product.

Finally check that the customer understands the information taking all possible steps to make sure that the customers are equipped to make effective decisions.

The FCA is not proposing that firms report on any specific metrics although they are stating what they expect of a firm. They must be able to determine that products have met the customers needs representing fair value taking decisions to remove products that are not offering that fair value effectively making sure that the customer is supported to make effective decisions and can receive support as they expect.

From a governance perspective it has been stated that they are expecting a report to go to the board from the firm and assessing whether delivering good outcomes has been achieved. The report needs to be produced at least annually.

The FCA expects that customers are kept informed of the appropriate information and as well as receiving the support they need to make any changes. They refer to the customer journey and expect firms to identify all the customer touchpoints. These are important -Why? They encourage customers to make the initial purchase this actually covers things like the marketing material issues or the quality of the service that they receive. It will encourage customers to make repeat purchases but it really depends what their experiences are with the firm or making use of the website was easy to navigate and make the decisions and the final one was helping you in understanding customer experiences because by understanding the customers feedback their likes with dislikes you can decide how to improve the service and hopefully increase satisfaction which of course is one of the key elements that the FCA is trying to achieve the trust in financial services.

Here’s some examples just for information of the types of touchpoints that exist. In this particular list is for before the actual purchase decision has been mad. You can see it’s a wide range of disciplines are actually covered. During the purchase decision as well depends on how the purchase has been made whether it’s a physical location. The final one is after purchase to make sure that the customer is satisfied with the service, understands information is able to contact support services where necessary. If these is a general examples let’s think about the touchpoints for an adviser.

The general list can be before during and after the purchase decision and can include the clarity of the documentation and the suitability of the advice that is actually being provided. You can measure immediate customer satisfaction. The relationship doesn’t end there .So what we have to think about is the ongoing reviews the touchpoints like annual statements, whether there’s been any complaints that have been made. All these sorts of things of likely important to the ongoing relationship with the customer. So what does all this information about touchpoints actually tell us?

The customer life cycle is far wider than the remit of the financial advisor themselves so to be effective what we have to consider all the touch points that are involved in the customer life cycle. From a T&C perspective we could ask whether or not we may need to consider the ruling the systems control sourcebook 3.1.9. What it’s saying is that if you are a firm is carrying on activities that are not subject to T&C which means you’re not performing activity listed in appendix one of the T&C sourcebook you may wish to take into account T&C in complying with the competence requirements in SYSC which is people had the necessary skills knowledge and expertise to perform their job.

In effect is it’s not a bad idea to have a T&C scheme for everybody that’s involved in these customer touchpoints. What you need to do is make sure that they are fit for purpose they appropriate to the audience.

So what about our own T&C schemes? Why should we stop and start think about any changes that we might need to make to the operation of our T&C schemes? Please take a couple of moments to gather your thoughts and I’ll share with you some of the views I have at this end.

The first thing to think about is you may need to shift the focus in how you approached T&C requirements so that you’re focusing on how you’ve achieved good customer outcomes rather than satisfying compliance rules. Look at what drives your T&C and the measures that you actually have in place. Are you sure that within your culture the customer is at the centre of what you do? How the behaviours that support your values support this so how do you actually define a measure of good consumer outcomes. You need to define the expected behaviours that you expect me to see in order to measure whether a person is competent.

During this short presentation we’ve looked at things such as vulnerable customers we’ve mentioned behavioural economics. Ensure that your advisers and other staff within the various departments do have an understanding of how they deal with customers and how behavioural economics might have an impact on the role that they play. They need to understand whether or not there accidentally using customer biases to persuade people to buy products. You need to think about re calibrating your competence or your excellent standards that you operate within your business.

Another thing to bear in mind is that customer experience. The easiest way to think about it is a new advisor that’s recently gone through training they often come out and when they are working with customers the best way to describe their performance is wooden. That they can do the job but they have to think about all the compliance requirements that they have to satisfy rather than focusing on whether or not they are achieving a good outcome for the customer. Another thing to think about is linking the feedback from customers to the T&C activities.

It’s not just a matter of getting customer satisfaction questionnaires completed it’s how you can ask meaningful questions to make valuable or create valuable insights into the operation of your T&C scheme. One of the ways you can do that is to review your observation aids. Think about a situation where if you were to ask a customer what they expect to get out of the meeting with your firm they would probably say something like they want to meet somebody that knows what they’re talking about but can talk to me in a language that I understand that reflects my experience.

Someone who doesn’t talk to me in jargon but gives me confidence that we’re working with the firm knows what they’re talking about. When assessing a call ask the supervisor to put themselves in the customer shoes to determine whether or not the adviser is providing something that represents a good consumer outcomes and then you can link some of the feedback you get from customers to the same observations made by supervisors. You might need to refresh your supervisor skills to incorporate their ability to identify both vulnerable customers and those showing signs of behavioural economic indicators as well to make sure that the buying decisions are made in the right way.

You need to make sure you also revisit your advice standards to capture vulnerability indicators and behavioural economic indicators and make sure that the product being sold by relevant to the people for whom they were designed.

Setting our attention now to the monitoring and governance requirements of the regulations T&C will play an important part in what the regulator expects to do. It clearly says that the regulator expects firms to monitor the outcome of their customers and whether what they’re experiencing is compatible with the expectations under the consumer duty. You’re expected to do this throughout the life cycle of the product customer. Within the consultation paper the regulator has indicated the types of management information that firms should or could produce to measure consumer outcomes.

What we’ve got here is the list from the consultation paper and will see a number of those are very familiar to people operating with T&C. File reviews. customer feedback, complaints you’ll see there it also says T&C staff training and gap analyses to identify any shortfalls in knowledge and skills. There are two new ones in there as well possibly outcome reviews or behavioural insights again another reference to the behaviour economics. So in respect to the types of things that you measure maybe one of the things you need to think about is which are the ones who don’t currently do and what changes do you need to make in order to set them up.

Things like behavioural economic indicators or the customer outcomes making clear that you’ve got the measures in place. The consultation paper on consumer duty the consultation period ends on the 15th of February so if you have got any observations to feed them back to the regulator by then at the complying with HMT’s timeline the policy statement and new rules are expected to be in place by the 31st July and fully implemented by the end of April 2023. Time to get things moving