Now the Consumer Duty (CD) regulation is live and the project teams, so busy for the last year or two, disband, we are left with the realisation that CD is finally in BAU. Cue sighs of relief all around the industry! Indeed, given all the focus CD has consumed in most firms, those sighs are well earned.
However, I use the word ‘most’ with good reason because in May, the FCA published the results of two pieces of research it conducted into preparations for CD in different parts of the industry and the results which, whilst encouraging in many areas, were far from universally glowing; Consumer Duty: Review Of Fair Value Frameworks and Consumer Duty: Firms’ Preparedness.
And paying attention to these pieces of research is important because senior managers and the CD Champion have considerable obligations post live to embed the behaviours and processes aimed at delivering good outcomes. In particular, they should have CD ‘front of mind’ in their business decision making, and actively use the MI provided to them which monitors their firm’s performance against the standards set by the four outcomes and three cross-cutting rules. Furthermore, the firms governing body should be reviewing and approving the firm’s assessment of whether it is delivering good outcomes for its customers which are consistent with the Duty and agree any actions required in remediation. And on this last point, when completing this annual sign off, boards will need to be sure they have the evidence available that supported their decision, whatever that may be. As this is an annual duty, I suspect that what we are likely to see, and what the regulator might expect is iterative improvements to products and processes linked to any shortcomings found in the annual report backed up by the decisioning that was made in support of the changes.
Given this ongoing obligation, the headlines from the FCA’s recent research provide useful insights into where boards should be focusing their attention, and the questions they should be asking, in the forthcoming months.
Given this ongoing obligation, the headlines from the FCA’s recent research provide useful insights into where boards should be focusing their attention, and the questions they should be asking, in the forthcoming months.
The first piece of research is the FCA’s Review of Firms’ Preparedness For CD, which was carried out by IPSOS in spring of this year across 1,200 plus firms, in 17 portfolios and 6 sectors. The key portfolios were advisers and intermediaries, wealth management, high-cost lenders, personal and commercial lines insurance intermediaries, retail finance providers, payment services firms, credit brokers, debt advice firms and motor finance providers. So, whilst some major portfolios were excluded, e.g. retail banking, general insurance etc., the survey sheds considerable light on the preparations from a significant swathe of the industry. And IPSOS’s report threw up some very interesting findings.
Firstly, although 92% (only 92%?) of firms had heard of CD, only 86% thought CD as being relevant to their firm – with debt advice (58%) and retail finance (50%) firms being significant outliers. Indeed, these two portfolio types remained outliers in their responses across almost the entire survey and must remain a concern for the FCA. Although not as marked in their responses, motor finance and high-cost lenders were also divergent from the rest of the survey respondents in their answers to most questions. These four portfolios aside, the survey identified some interesting responses to more detailed questions, for example:
- Customer Journey: Although 27% of respondents said they had finished mapping the end-to-end customer journey, 62% said this work was still in progress. For me, this is important because understanding the customer journey is a precursor to other necessary work such as developing the metrics and datasets for monitoring outcomes.
- Supply Chain: Discussing and supplying the essential data to partner firms up and down the supply chain was also an area where firms were still hard at work, e.g. 67% of firms said this work was still in progress (with only 14% saying it was complete). And when asked about supplying partner firms with the information to enable them to complete their obligations, only 57% said they had done so.
- Readiness For 31/7/23 Deadline: Although 86% of firms said they would be ready for go-live, when probed on this, the answers were revealing, e.g. although 54% of wealth management respondents said they would fully ready, a further 31% said they would only meet most of the CD requirements by 31/7/23. This pattern of partial readiness was repeated across with survey with some portfolios providing some worrying responses, e.g. 18% of debt advice (22% of retail finance) firms didn’t know whether they would be ready because they hadn’t started work on preparing for CD!
- Firm’s Capability In Their Preparations: when asked about their capability, most firms felt they had sufficient expertise, 81%, although only 76% felt they had sufficient resource.
- Benefits And Costs: Perhaps the most telling results come when asked about cost – benefit. Firms were asked whether they felt the long-term benefits of implementing CD outweighed the short-term costs. Across all respondents, only 46% felt the benefits would eventually outweigh the costs, with only payment services (56%) and motor finance (59%) firms scoring above 50%. For me, this tells a story of a reluctant industry complying, rather than embracing the incoming regulation. And that’s a major warning sign as, in my experience, it’s this attitude which sits behind firms’ taking a ‘do the minimum possible’ approach to the regulation, i.e. ‘tick box’. Not good!
- Support From The FCA: The survey concluded with asking questions about what areas the FCA could best provide further support in. The top two areas were outcomes monitoring (including data and metrics) and price and fair value. These responses come as no surprise to me as they confirm my experience from talking with trade associations and from delegate questions when running webinars.
The second study is the FCA’s Review of Fair Value Frameworks. This looked at a more specific aspect of firm’s preparedness, namely the fair value work undertaken by 14 firms in the retail banking, consumer investments, payments and digital assets, and consumer finance sectors. The FCA requested reviews from these 14 firms, then analysed them in detail. Therefore, although the research is not representative of all firms in the industry it does provide detailed insights into the preparations undertaken in different areas of the industry compared with the IPSOS survey.
The first, general, finding from the research was the sheer amount of work that firms had put into understanding and assessing fair value. That said, the FCA found a number of shortcomings in some firms’ preparation, notably:
- A number of firms had “high-level or unevidenced arguments that their business models or ethos are inherently fair value” rather than using rationale, supported by ‘ground up’ data to evidence and explain their arguments. Some also didn’t fully understand the distinction between manufacturers and distributors causing their understanding of the costs and benefits associated with each party in the distribution chain to be skewed.
- Although there was encouraging evidence of firms’ ability to break down and explain the costs and benefits of their products in different markets, some firms had a generic template for assessing fair value that had insufficient detail on how value would be assessed across different market sectors and customer types and some firms did not make reference to profit margins on products even though this should be relevant to any fair value assessment.
- Some firms focused solely on the financial value received by customers and failed to take contextual factors into account, e.g. behavioural biases in the sales process and how other products or services held by customers with the firm may affect value.
- Although some firms had undertaken a large amount of work on how fair value would be assessed across different customer groups and distribution channels, others were only able to explain how costs were aggregated in relation to the prices charged, not an evaluation of whether this led to fair value or not. Other firms relied on average outcomes, rather than a more detailed analysis by product/service, customer type and distribution channel. The FCA questioned whether this gave decision makers sufficient information on differential pricing and mark ups to make balanced decisions.
- Finally, some firms had clear plans for what data would be collected, how and when. However, this contrasted sharply with some firms who had no more than high level plans for gathering, analysing and presenting information on fair value, whilst others had no plans for how data on fair value would lead to remedial action. The FCA also noted that many firms proposed using RAG or points summaries and whilst agreeing this was an acceptable process in general, warned against using these summaries without providing the detailed evidence that led to these conclusions.
Taking a step back from these results, two things should be made clear. Firstly, both studies were conducted in the spring. Therefore, things could be very different now. Also, these surveys are snapshots from different parts of the industry and may not be representative of the industry as a whole.
That said, I started this article thinking myself into the shoes of senior managers of firms now CD is live. If these surveys are indicative of the industry and its preparedness for CD in any way, and if I was a board member of a regulated firm, I would be asking my central teams some searching questions about the datasets being provided to me, my fellow directors and the CD Champion. For me to put my signature on an attestation of my firm’s compliance with CD next year I would want to see detailed MI from across the customer journey summarising performance by product / service and customer group at each stage of the journey. I would also need to see regular updates on the fair value of my firm’s products / services as circumstances change and the data my firm was sharing and receiving from partners up and down the supply chain. Finally, I would need to see what data triggered remedial activity, what that activity was and the effects of this remediation. (For guidance on what data can be used to monitor CD, see FG22/5, 11.33).
I understand this a difficult area, but this is the standard the FCA is promising to hold the industry to. Assuming all the analysis of fair value and customer journey has been completed, the focus needs to move onto data and without having strong systems that can deliver the datasets required, I can’t help but think boards will be in a vulnerable place next summer. I know I work for a company that supplies RegTech solutions, but I genuinely can’t see how firms can ensure good outcomes and evidence compliance without systems that provide detailed, real-time information on performance against these standards. And as the CD project teams wind down, I wonder how many people are thinking ahead to the challenge boards will face next summer.
