The latest set of studies from the FCA about the effectiveness of embedding Consumer Duty (CD) in firms makes familiar reading. Essentially, it’s a story of mixed performance in the FCA’s eyes as far as embedding consumer duty is concerned. The fact that these studies come from different parts of financial services implies that any limitations are not sectorial, rather the ability or willingness of individual firms to grasp the principles behind the CD regulation.
The first study, published in June 2024, was based on a cross-section of firms in the insurance sector and was based on data collected in December 2023 and used the most recent board and/or committee reports from 20 larger insurance firms. This cross-section included general insurers, life insurers, insurance intermediaries and regulated third-party outsourcers which service insurers. The second study was published in October 2024 and focused on what many firms would argue are the two more difficult outcomes to assess, i.e. price and value. In this study, rather than looking at different sectors, the FCA focused on three priority products, i.e. GAP insurance, cash savings and platform cash. The study is the result of the FCA’s regular supervisory work and builds on the research published in May 2023, into 14 firms’ fair value assessment frameworks.
I think the fact that CD is a regulatory requirement, indeed priority, is insufficient for many firms
Given the different focus of the reports, these studies highlighted different data. For example, the insurance sector-based study was outcome focused whereas the price and value study looked more at internal processes. However, both studies identified some common themes:
Whilst the themes identified in the above table do not represent the full range of data collected or conclusions drawn in the two studies, they do paint a picture of mixed performance, perhaps motivation, to embracing the principles of CD across the industry.
Like previous studies, reading these reports from the FCA got me thinking about why there is such a range of performance. Certainly, it can’t be through lack of signposting from the FCA. In my view, CD represents a new standard by the regulator in terms communication, support and guidance.
So, if embedding CD can’t be put down to awareness or understanding what is it? Of course, many firms would argue resource constraints however, the FCA has been at pains to talk about proportionality and firms being asked to act reasonably.
Whilst there is no single answer to this question, I think the fact that CD is a regulatory requirement, indeed priority, is insufficient for many firms. In other words, there is a section of the industry that is treating CD in the same way as it has treated every other piece of regulation, and that is to do the minimum required to comply and nothing more. Of course, given the breadth of CD, taking this approach is trickier for these firms. However, I suspect many will try to reduce CD to a ‘tick box’ approach.
My view is that these firms, big and small, will not rethink their approach to doing business simply because it is a regulatory requirement. They need more. And that’s where a fresh approach could pay dividends.
Providing positive customer experience has been strongly linked to improved business performance for decades. It is a belief that is talked about as being as central to how things are done in most firms, but how many firms actually follow this belief into practice? I’m not sure.
The problem with the premise of ‘what’s good for the customer is also good for the business’ is that there hasn’t been too much hard evidence to back this up. However, two fairly recent studies provide evidence that a true focus on positive customer experience is also good for the bottom line. The first study, published in Harvard Business Review (HBR) in 2018 showed that people who had a positive experience in their interaction with the firm would be more loyal to that firm and be willing to pay a price premium in the future. Interestingly, this was the case, even if the reason for their contacting the firm was that they had a bad experience, e.g. poor service, charging errors etc. If you consider complaint handling as the obvious example, if complaint handlers are tasked to not only try to resolve the complaint but also speak more broadly with the customer about their perceptions of the company and the product / service they’ve bought, this could be a key piece of qualitative data to sit alongside the obvious quantitative hard data. Continuing the same complaint handler example, investing in a fuller, i.e. qualitative and quantitative, set of post-interaction data gathering would provide firms with a rich, close to real-time customer view. In short, doing so not only provides valuable evidence for analysis about conformance to CD, it also builds customer loyalty.
The second study was published by McKinsey last year. It cited that, in the face of aggressive competition, many of its clients (which it identifies as ‘the world’s most successful growth companies’) grow their business’ by optimising the financial value of their large, existing customer bases. These firms do this by focusing on something their competitors can’t do, namely providing a distinctive and positive experience to their existing customers, particularly engaging with them at different points in their ‘journey’ with the company. In doing so, McKinsey list a number of financial metrics, e.g. increased customer retention, increased spend etc., that quantify the positive benefit of proactively adopting this approach.
Like the HBR study, the McKinsey research is only one view. However, combined, these authoritative studies do make the business case for greater engagement with their customers, understanding how they view the firm’s performance with a view to enhancing their ‘business offer’. The point here is that if these studies are to be believed, and I don’t see why not, increased engagement with customers is good for a firm’s business performance. And, if that is the case, then those professionals charged with ensuring their firms stay compliant with CD can use business, not just regulatory, arguments for greater engagement with customers at key points throughout their lifecycle with the company.
Most compliance professionals see the world through a compliance lens. But that is not how most directors see things. Their focus, understandably, is more financially focused. Of course, customer experience is ‘on their radar’, but its not usually front of mind.
Compliance professionals should, and probably will, already be using many of the internal data measures suggested in CD financial guidance, (section 11.33), e.g. complaint feedback, root cause analysis, business persistency, T&C records etc. However, if compliance professionals can build alliances with their marketing, sales and operations colleagues to win support for a more 360-view of their firm’s performance, their CD dashboards will be far more rounded.
Of course, questions will remain on where in the customer journey to intervene as well as the data collection methodologies used to ensure a rich, unfiltered view. However, these are good discussions to have. And, as a by-product of getting the data that enriches the CD dashboard, there is every chance business performance will improve through better understanding of customer needs and refocusing business efforts on better consumer outcomes, which is the essence of CD. In other words, win-win!
