At the end of July, the Financial Conduct Authority (FCA) presented its plans for implementing the Consumer Duty requirements – and changed the timetable. The result is that companies have been given a bit more breathing space to introduce new business requirements from the end of July 2023. But they have now been told they must have a plan in place by the end of October. of this year. The clock is definitely ticking.
In presenting its latest proposals, the FCA has highlighted four areas where it expects companies to deliver good results to consumers: on products and services; price and value; consumer understanding; and consumer support.
The challenges are vast, but when it comes to understanding and supporting consumers, there is an implicit requirement for businesses to have a much better understanding of customer characteristics and vulnerability. In fact, the vulnerability is mentioned more than 100 times in Consumer Duty regulations.
In the headline summary of its announcement at the end of July, the FCA clearly stated the challenge:
“Our rules require companies to consider the needs, characteristics and goals of their customers – including those with characteristics of vulnerability – and their behavior, at every stage of the customer journey.”
A tougher diet
In some ways, Consumer Duty builds on FCA’s long-established customer fairness program. But the new regime pushes these requirements much further. Companies will need to monitor the application of consumer duty across the supply chain as well as their own organisation, effectively monitoring their partners as well as themselves, and reporting any non-compliance to the FCA.
As early as 2015, the FCA presented some useful practical advice for dealing with customers in its occasional paper on consumer vulnerability.. This was mostly integrated with training and reinforcing the right kind of behaviors among frontline staff. But this will not be enough to meet the new requirements because:
- The way the original guidelines were interpreted essentially made it a subjective assessment of individual clients, rather than encouraging objectivity and consistency in how vulnerability is assessed.
- This implied the misconception that vulnerability is binary, reinforcing the idea that individual clients are vulnerable or not. But the extent to which people are vulnerable runs a wide gamut.
- He encouraged identification of vulnerability, while Consumer Duty corrects this to distinguish between characteristics of consumers and circumstances that make them vulnerable.
- Consumer Duty reinforces the need to record customer characteristics for ongoing monitoring and reporting to the board.
What is needed now
Consumer duty forces businesses to focus on the outcome of their interactions with customers. However, understanding vulnerability requires paying attention to consumer contributions, how companies collect the right kind of information about them and use it to minimize the risk of a bad outcome. One does not replace the other; instead, they work together.
All aspects of Consumer Duty—fair value, product design, understanding results, and ongoing support—rely on a good understanding of consumer characteristics, which helps identify vulnerable customers. Therefore, good data on consumer characteristics and the circumstances in which businesses interact with customers are essential to comply with consumer duty rules.
What should companies do now? What are the essential elements of a successful plan that they can sign in less than three months? In our opinion, it should include:
- An objective method of assessing and recording consumer characteristics to provide reliable and consistent data, not only for the management of vulnerable customers, but also as a basis for complying with the consumption obligation.
- Robust systems to record how customer characteristics may change over time and how vulnerability is a consequence of different interactions with businesses. And at all times, businesses will need to ensure that they comply with the General Data Protection Regulation (GDPR).
- The ability to recommend appropriate actions to manage instances of vulnerability consistently across businesses and maintain records that provide evidence of actions and consumer interactions.
- A commitment to management information that will ensure businesses meet the standards set forth in Consumer Duty and recent “Dear CEO” letters. This will require good, objective, consistent and digitally recorded data, so that it can be viewed, collated and reported in a cost-effective manner. For many companies, management information remains imperfect – it is too subjective, inconsistent, lacks sufficient detail and is often inaccessible.
Many companies are finding that a lack of consistency in the collection and use of information poses new challenges. MARS, the MorganAsh Resilience System, provides an objective vulnerability management methodology and provides a building block for implementing consumer duty regulations.
Andrew Gething is Managing Director of MorganAsh