Consumer Duty: July Deadline Looming
The Consumer Duty July deadline is fast approaching, and many financial institutions are working frantically and allocating significant resource to get their houses in order.
Arguably the most significant regulatory reform in financial services since the FSA split to create the FCA, the Consumer Duty reform will replace the legacy Treating Customers Fairly (TCF) principles to provide a new standard for consumer protection in the UK and to ensure customers have a positive and transparent outcome to their transactions with financial institutions. The Consumer Duty is a response to concerns that consumers have been poorly served by these businesses in the past, resulting in financial harm to buyers and a lack of trust in the financial services industry.
The Consumer Duty will consist of three core elements. The first is a duty of care, which will require financial institutions to act in the best interests of their customers. The second is a duty to exercise skill, care and diligence, which will require firms to demonstrate that they have the necessary skills and expertise to provide high-quality products and services. The third is a duty to communicate clearly, which will require firms to provide clear and understandable information to their customers.
There has been some suggestion that Consumer Duty is too confusing, and this has left many businesses in a difficult position when it comes to delivering on it in time for July. The FCA did provide a 120-page guidance for businesses, however we hear from financial services leaders we engage with that there are still many questions being raised, mainly given it’s a principles-based directive, which can lead to some ambiguity. In addition, some concerns have been raised about the practicalities of implementing the new rules.
For example, many banks we have spoken with feel confident they are where they need to be, the information and systems are aligned, and they are able to manage the inputs. However, the recording of each customer outcome can be a challenge, and each outcome could be arbitrary and subjective. A continued evolution of customer services teams is certainly a by-product of the implementation.
We also hear there is concern of a disconnect between where financial institutions think they are compared to where the FCA will judge them to be. Again, whilst the FCA guidance has been thorough and many businesses have sought external advice, we won’t really know until post July and how tough the FCA will be, and equally where their attention will be most focussed. What we are certain however, given the current climate, is this will take time to effectively embed across the sector, with almost certainly some bumps in the road.
Insurance companies may well find themselves under the spotlight as many have been playing catch up with the banks when it comes to the customer. In some lines of insurance, the value chain is both long and complex, for example the Lloyd’s market, and often intermediated through? brokers, meaning possible opaque data from reinsurer to insurer to broker to the customer. The relationship between insurer and broker will require attention, where customers buy a product via a broker, the service the customer experiences will be shared by both broker and insurer, meaning greater alignment, and sharing of data.
Separately, Solvency II, an EU legislation and frankly one that has divided opinion for many years, can be restrictive for some insurers on where they can invest their capital; this all links into Consumer Duty to ensure fair and transparent investment decisions on behalf of customers (which will also include SMEs) – a row back of Solvency II post Brexit is gathering momentum.
The FCA has continually indicated that it will take a proportionate approach to enforcing the Consumer Duty, with a focus on improving outcomes for consumers rather than punishing firms. It has also been clear that it will work closely with businesses to help them prepare for the new requirements and to ensure that the Consumer Duty is embedded into their culture and practices.
However, the FCA has also emphasised that it will take action against firms that fail to meet the new standards. Time will tell what this looks like and the timeline the regulator will impose, and it will only be once some test cases have been brought to the regulators attention that we will get a clear view of what the FCA expects.
Overall, the Consumer Duty represents a significant reform of the financial industry in the UK. If implemented effectively, it has the potential to improve outcomes for consumers and restore trust in the financial services industry. However, the success of the Consumer Duty will depend on its implementation and enforcement, and it remains to be seen how firms will respond to the new requirements.
One thing we, at Odgers Interim, anticipate here is that businesses will call upon the interim executive market to help implement these changes. Many businesses are either capability or capacity constrained already and often the interim market helps to alleviate this. We have been working with many banking, insurance and investment clients to provide additional expertise on a short-term basis as they transform their cultures and structures to ensure they have customers at the heart of their organisation.