A plague of frogs, the FCA, and cracking Consumer Duty

Dawn Hyams, Head of Investor Governance, The Wisdom Council

As you will no doubt be aware, the FCA held a webinar on Wednesday (jointly with FOS) to share thoughts on what was the first anniversary of the Consumer Duty coming in to force.

There was nothing very new that came out of the call (apart from the FCA’s apparent obsession with stretching their ‘eat the frog’ analogy to breaking point!) - but it did help to pinpoint themes that the FCA are likely to be looking at in their supervisory activity with firms over the next year or so.

Healthy culture and a holistic approach are the foundation of good practice

Firms are more likely to meet FCA expectations where they can demonstrate that their business model is closely aligned to customers’ best interests. Furthermore, that this customer centricity is reflected in every aspect of how the firm is managed, from product design to value to service delivery. And that there is healthy challenge from boards and a high level of engagement from Consumer Duty champions to boot.

Not a bad one-year report card but more to be done

From our perspective, there were 3 strong, recurring themes through the presentations and panel discussion.

1.     Knowing your customers is not optional

You need to know your target market: What issues are they facing? What needs should you be meeting? What outcomes will fulfil these needs? Alongside products that didn’t line up in terms of customer outcomes, one of the key reasons for non-approval of product is the lack of a clear target market. Anecdotally, we know that firms looking at launching LTAFs are being grilled on target market and distribution strategy – so this is very clearly on the FCA’s radar.

You should understand the cohorts within your target market and their related characteristics, including around vulnerability: The FCA want to see innovation in the ways that companies interact with customers – they are particularly keen for firms to engage on data and IA-led innovation through their sandbox.

Firms should have a clear picture of the customer experience: The FCA want firms to demonstrate that customers understand their products, the value being delivered and the choices open to them through the end-to-end customer journey.

2.     The value conversation is not going away

The FCA’s top 5 factors for demonstrating the delivery of value were:

• Really good benchmarking

• Solid data and credible evidence (quant and qual); including what customers think

• Clear consideration of value being delivered to customer cohorts defined by target market analysis (including vulnerable customers)

• Clear examination of benefits to customers

• More broadly – do customers understand what they are paying and do they get the levels of service and support they need/expect?

At TWC, we see the last point on ‘understanding’ a challenging one. In our testing last year, 6 out of 10 documents on fees and charges were not fit for purpose. We have sympathy with the regulatory challenges around some disclosures, though, and are still keenly awaiting the retail investor disclosure review to see if this changes…we are also looking at work to drive out better ways to support customer understanding on fees and charges.

3.     Effective communication and support are fundamental to the Duty

 Customer communications still need to improve: FOS cited poor communication as a major factor in the complaints being escalated to them by customers – the root cause is often content for customers that is confusing, unclear, delivered at the wrong stage in the client journey, or not sufficiently tailored by cohort (so messaging wasn’t directly relevant to customer).

 There are similar issues around administration and customer service falling short of customer expectations. Individual customer needs are not always being met. This was true for wider cohorts, but also for vulnerable customers – an ongoing area of concern for the FCA.

 One of the key success measures that the FCA will be looking at is trust in the industry, as measured through its Financial Lives Survey. It might seem obvious but customers find it much harder to trust products and providers in an industry they don’t understand. Effective, open, authentic communication is critical to unlocking trust.

Finally, the FCA confirmed that the post-implementation review will take place within the next 2 years, though it is not likely to be imminent as they want to give firms more time to comply. They were keen to emphasise that they are still in collaborative rather than punitive mode – though it’s not clear how long that will last!