On 31st July, the FCA’s Consumer Duty comes into force for all regulated firms that give advice or guidance to retail clients. We acquire a new Principle 12:
A firm must act to deliver good outcomes for retail customers
With it, comes a new individual conduct rule, rule 6:
You must act to deliver good outcomes for retail customers
I will not repeat the cross-cutting rules or the four FCA outcomes here, instead, I want to focus on the how businesses will demonstrate how they have implemented the consumer duty and work they did leading up the various deadlines.
MI: Management Information or Management Intelligence?
A long time ago, I attended a seminar in which the facilitator suggested that MI as Management Information is just that, it can go in a drawer and be forgotten. MI as Management Intelligence will be acted upon, and recommendations implemented.
Many firms already have MI to help them assess conduct risk or treating customers fairly, but how do you develop MI to satisfy the conditions of the Consumer Duty?
Measuring compliance with Consumer Duty is likely to require a single, coherent and current view of every client which may require a review of your CRM and how you use it
MI is a term that is used a lot. Here, we will explore what it means, how to approach developing MI and how to apply this to the new Consumer Duty.
Management Information (or Management Intelligence) is where data is used to provide insight to help better understand organisational performance. In the context of the Consumer Duty, this means how the firm is performing in delivering good consumer outcomes. Where good outcomes are not being achieved, MI should also help to reveal ‘why’, so that improvements can be made. The first challenge for a firm is to define what a good consumer outcome means for it, given its size, complexity and which market it operates in, be it, for example, general insurance or wealth management.
A risk management approach also complements an MI framework. With good outcomes defined, firms can then identify threats, establish thresholds in line with the Consumer Duty and risk appetite, put in place mitigating actions, and track on an on-going basis.
The FCA Consumer Duty expects firms to:
- monitor and regularly review the outcomes that customers are experiencing;
- identify sources of poor outcomes and harm; and
- act to better enable consumers to achieve good outcomes, including making changes to products and services where appropriate.
There is no one-size-fits-all, MI should be appropriate to the size and complexity of the firm ensuring all products, services, touch points and customer types are covered.
What does the Board need to know?
Up to now, Boards have been expected to oversee implementation of the Consumer Duty, and challenge where necessary. The Board should have reviewed progress towards implementation and signed off any milestones as appropriate. The FCA has made it very clear that the Consumer Duty must be a top priority for the Board and the Senior Management Team (SMT) and that ultimate accountability for compliance with the Consumer Duty will sit with the Board and Senior Management (holders of SMF designations). The FCA has stated that “Firms will need to pay as much attention to good consumer outcomes as they would any other significant aspect of their business, such as their level of profit and loss”. Serious stuff, but how will the members of the Board and the SMT know the effectiveness of the firm’s delivery of good customer outcomes?
Information (data) is the key
The start point for designing MI is to carefully define what is to be measured. One of the marked differences of the Consumer Duty is the responsibility of firms to achieve good outcomes and not just to demonstrate that certain processes have been followed. Articulating outcomes as opposed to processes will demand thought, and this is critical to developing effective consumer duty MI.
Once the desired outcomes have been captured; at all stages, for all target customers, across all products and services, firms can then start to develop their MI framework. This will include the sources of data that will be used, the tests that will be used to measure, and how these will be captured and reported.
Who is MI for?
Different groups will have different requirements from MI. While it may be derived from the same sources and core analyses, how it is presented should be specific to its purpose.
MI is critical to governance and executive decision making. Boards are most likely to want to see a more aggregated view to assess organisational performance, show trends, and so they can be satisfied in the management of risks and issues. In addition, there is an annual requirement for Boards to review whether consumers are receiving outcomes consistent with the Consumer Duty, the three rules and the four outcomes.
Others in the business are likely to want a more segmented view, whether specific to a senior manager function or to risk, audit, or quality. Dashboards and analytical tools will be useful for those who are monitoring so that they can dive deeper into the data. Greater granularity, such as capturing root cause analysis and detailing remediation actions, will also be important.
Maintaining records of MI, analysis, issues, and actions is important in demonstrating active and ongoing monitoring of consumer outcomes.
What data can be used for Consumer Duty MI?
The FCA suggests several sources of data that can be used to derive MI such as complaints data, persistency, and claims ratios. Each business will need to define the data points pertinent to its size, complexity, and target markets. A financial advisory firm will have different data points and MI an insurance broker.
There can be a tendency to derive MI only from the data available rather than from what actually needs to be measured. Where existing sources do not fulfil measurement of all defined outcomes, gaps need to be addressed. This may mean that systems or processes need to be developed to capture new relevant data.
The role of technology
The FCA has stated that it is ‘a data-led regulator’, meaning that firms will need to harness technology to consolidate consumer data that may sit across different platforms and in different formats. Expect another return within the RMAR suite to measure good consumer outcomes from your firm. Measuring compliance with Consumer Duty is likely to require a single, coherent and current view of every client which may require a review of your CRM and how you use it – there may be more power within it than you are currently using – and keep in touch with your software provider for updates and enhancements that will help you monitor MI in respect of Consumer Duty. It is important to remember that the information you pull out of the system will be entirely dependent on the information put into it.
It is said that 31st July will only be the start of the journey and having the correct MI at the correct time will enable your Board and Senior Management to demonstrate how your firm complies with Consumer Duty to the FCA and other stakeholders. It is important to identify any potential shortfalls in the implementation of Consumer Duty with the business, to document how you will address the shortfalls, and prioritise them accordingly.