The existing framework and business principles in the financial service sector are not yielding the consumer outcomes that the FCA is gunning for. The Consumer Duty sets standards for financial services firms to go from where they currently are to the point where they will be delivering the right customer outcomes.
The consumer duty will be a fundamental shift in supervision from person-centric to data-first. The regulator has sharpened its teeth asking firms to show them a range of data proving customers are realising the intended outcome. However, what should this data be and what parts of that data will the regulator expect to see?
In our most recent Consumer Duty Solutions Series Webinar: What does a data-driven regulator expect from you?, we had panelists of former FCA leaders and Audit & Risk Committee executives; Nicola Anderson, CEO of FinTech Scotland, John Gill, Chair of the Audit & Risk Committee, Quilter Investment Platform, and Alison Gay, Consultant, the lang cat. They discussed with Aveni’s CEO, Joseph Twigg, the kinds of data they believe the regulator will request.
Watch the full webinar replay here.
Here are the 5 key takeaways from the session:
1. Current FCA supervision already takes data into account but new Consumer Duty regulation will give firms an opportunity to take ownership of data-driven innovation.
The FCA will be pressing to understand how firms are achieving good consumer outcomes. They will look at management information and try to understand how senior leaders in these firms are challenging that the right outcomes are being delivered for customers. The regulator will try to see if firms are using all the data and information available to them to ensure that they are delivering these outcomes.
In the event of crystallised risks like mis-selling or a situation where a supervisor needs to get involved to ask for a different outcome, the regulator will try to understand why and how those businesses found it reasonable to approach these situations in the way they did.
The FCA is not expecting Consumer Duty to be a regulation that only sits in compliance. It’s keen that it becomes a culture that permeates throughout and at all levels of the organisation. One of the duty’s requirements is for firms to appoint a Consumer Duty champion. For smaller firms without a board, it should be someone who has a broad responsibility across the organisation. While smaller firms may not be expected to provide the same amount of data as bigger ones, there should be proportionality with how they deal with the different stages of the process and across the organisation.
Regardless of size, the FCA will fundamentally be looking for good principles of business. Knowing and understanding your consumers, their needs and how the products and services you are offering meets these needs is key. The FCA expects firms to look into other parts of the value chain to be able to demonstrate that they are doing the right thing and achieving all four outcomes; acting in good faith, avoiding foreseeable harm, and helping consumers achieve their financial objectives.
2. Consumer Duty will see a step-change in the type and volume of information being requested from firms by the FCA.
Data has moved forward quite significantly over the last few years. The volume of data businesses have access to gives them more insight to customer changes and behaviour to inform product development and decisions. A data strategy aligned to product development has become important. As a business, you should be able to reasonably demonstrate how you are using all the different types of data you can access to inform your product development and why.
Essentially, Consumer Duty fights practices in the financial service sector that may be legal but aren’t right and do not deliver good customer outcomes. To determine what kind of data to gather, firms must understand that the goal is to demonstrate that the consumer is at the heart of what they are doing. In some ways, it doesn’t matter what information is being presented as much as it matters to reflect this goal.
Firms can start with their own consumer data to demonstrate outcomes. The data should reflect customer behaviours and answer questions like; Who are your customers? What are their needs? How are you meeting their needs? How are they interacting with you? What kind of support are they getting and when? Are there any issues of vulnerability? How are vulnerable customers supported? What is your data strategy? Can you get different insights if you are analysing data in a different way? Do you have processes in place that let staff highlight risks and build them into the processes? This is the sort of information the FCA might look at.
Data that firms need to collect/share could include:
- Internal data: Data on your customers; who you sell to, who your target market is, who’s leaving/joining and why, etc. Are certain customers paying more/less? Are they receiving the appropriate level of service or benefit relative to what they’re paying? Etc.
- Customer behaviour: Data on how people are interacting with your organisation, before, during and after they become a customer. For example, what is the experience during a front-end website interaction? Are there any issues for vulnerable customers or people with accessibility issues?
- External research, bespoke research: Commission research to inform your organisation’s actions and processes or use existing research such as the FCA’s Financial Lives research.
- Your own staff: Do you have the processes in place so if a member of staff sees an issue, they can highlight it and build it into existing processes, therefore making your firm learn from internal feedback?
- Share information with others in the distribution chain: Under Consumer Duty, there is a greater emphasis on sharing data throughout the distribution chain. For example, distributors will need to provide information on who they’re selling products to and customer outcomes to manufacturers.
3. The big challenge for firms now is how they’re going to efficiently monitor the data – over time and across multiple channels – that will prove the efficacy of their products and services.
Board members need to have agreed their consumer duty implementation plans by the end of October. They also have to demonstrate that the plans were given appropriate scrutiny. For most companies, these are just plans without an understanding of what needs to be done or how to execute them. Most firms are clear about the ‘what’ but it may be questionable how clear they are about the ‘how’.
Also, most firms and their governance bodies are clear about their own journey from an internally based set of customer scorecards. However, there’s a need for a metric that is more externally justifiable. How do they know that the internal benchmark for their processes is any good if there is no external benchmarking on it? For example, how can you determine the appropriateness of your pricing without some form of market view? Another example that could be of interest to the regulator is details of the transfer time. What is the standard transfer time in the industry and how does yours compare to it?
4. The preparedness of boards to implement the consumer duty
Boards are clear on the Consumer Duty requirements, however, there is an underestimate of where firms are and where they need to be by the deadline in July 2023. They have to be realistic and understand that even when they have new scorecards and new measures in place, data is going to continue to emerge overtime. There are lots of issues that apply across things like consumer support, outcome, harm and they will continue to develop over the years. If you have a complex product, for example, where people don’t use the features until 5 years into the product, does that mean that it provides inappropriate value? Board will also need to be able to argue their case appropriately with the FCA as it develops further.
5. Open banking and AI-driven speech automation technologies will be critical for firms to meet Consumer Duty data-requirements in an efficient and valuable way.
With the evolution of data and technology, this new principle of the Consumer Duty allows firms to take ownership of the potential and better outcome the FCA is asking for. It provides an opportunity for businesses to take ownership of innovations and utilise technology and data in different ways. Firms need to take the requirements of the regulation on board with the help of technology and adapt some of the practices they already have in place, tweaking some and fundamentally changing others.
Aveni Detect is an example of one of the technologies that help companies maximise the opportunity that Consumer Duty presents, turning the regulation from a cost to an opportunity. Understanding that the guidance focuses on consumer outcome, identifying vulnerability is a key driver. What tools do you use to identify customers whose situations have changed, making them suddenly vulnerable? Do you have a true understanding of your customers and their outcome?
Aveni’s AI-driven ‘Machine Line of Defence’ puts data-driven technology at the heart of your operating model, and machine assess all your customer interactions to drive deep insight. This technology flags risks and helps you identify vulnerable customers, understand customer needs, up-skill agents to identify and serve vulnerable customers, identify and address any shortfalls in customer treatment, and demonstrate to the regulator you’re monitoring and analysing the required data.
The innovations around open banking and the data it enables people to get access to has accelerated data insight recently and should also be adopted. Through open banking technology, firms can access more data and gain insights into questions around affordability for example. As a lender or adviser, if you can pinpoint affordability from an investment perspective and offer good solutions and advice around that, it would be a welcome and focused opportunity for the Consumer Duty.
The first pages of Consumer Duty talks about how this is an open opportunity for firms to utilise data in a different way, putting the good outcome of customers at the heart of the work they do. Approaching the regulation as an opportunity is a step in the right direction and with the right strategies, it has the potential of powering business improvement and being beneficial for both service providers and consumers!
Watch the full webinar replay here