The Consumer Duty A call to action

September 2021

| The Consumer Duty: A call to action1

Introducing the Consumer Duty

How the Consumer Duty has come aboutThe Financial Conduct Authority (FCA) has expressed concerns that consumers of financial services don’t always get the products and services that meet their needs or the outcomes they might reasonably expect. This can be driven by market dynamics (e.g., consumers’ weak bargaining power) and poor practices by firms (e.g., providing misleading information to customers).

Continuing the trend away from rules and towards more outcomes-based regulation, the FCA has proposed a new Consumer Duty, which will shift the onus onto firms to act in the interest of consumers. The FCA plans to bring final rules into force on 31 July 2022.

What the Consumer Duty entailsThe Consumer Duty will set higher expectations for firms’ standards of care towards retail customers and extend the definition of retail customer to most SMEs. Importantly, these expectations will apply even where firms do not have a direct relationship with the end consumer.

The Consumer Duty introduces three elements which firms will have to embed in to their end-to-end business practices:

These elements equate to a package of rules and guidance that represent a fundamental shift in regulatory expectations and underpin the FCA’s new principle. Through these, the Consumer Duty will beckon in a new era of enhanced protection for consumers of financial services.

The Consumer Duty would set clearer and higher standards for the culture of firms and the conduct we expect of them.

The Financial Conduct Authority

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Three overarching, cross-cutting rules that require firms to:

• Act in good faith

• Take all reasonable steps to avoid foreseeable harm to consumers

• Take all reasonable steps to enable consumers to pursue their financial objectives

Four outcome areas that represent the key elements of the firm-consumer relationship: Communications, Products & Services, Customer Service and Price & Value. For each of these areas, the FCA has proposed rules and guidance.

A new consumer principle1, which will either be:

• A firm must act to deliver good outcomes for retail clients, or

• A firm must act in the best interests of retail clients

1 The FCA is consulting on the wording of the new principle. Source: FCA, 2021

Why this is a fundamental shiftThe Consumer Duty sets out a higher standard of care than existing regulation and will apply to firms across the entire financial services industry. Banking, insurance, payments, investment banking, and wealth and asset management firms will all be impacted, regardless of whether they directly provide products and services to consumers.

Explicit in its requirements, it will apply to all consumers who purchase products across all financial sectors (excluding complex commercial cases).

Badged the 12th principle, Consumer Duty will add substance to existing PRIN 6 & PRIN 7 statements. Underpinning the principle will be a package of measures including rules and outcomes designed to remove harm and build consumer trust in the financial service market.

The rules will form part of each SMF role and apply across all of a firm’s activities — from strategic planning to individual customer interactions (such as analysis of dissatisfaction).

The move towards an outcomes-based approach will mean that firms still exercising a tick-box culture will have to enact cultural and organisational change to meet the requirements of the Duty.

The FCA also intends to embed a concept of ‘reasonableness’ in the Consumer Duty applying to all elements; the FCA intends to provide clarity on this in due course.

Recent consumer remedies will apply to all under Consumer Duty; for example, Insurance Fair Value and Pricing remedies will extend across all products covering each of the four key elements and planned outcomes.

The FCA is considering introducing a Private Right of Action for breaches of the FCA’s principles, including the new consumer principle. This would have significant implications for firms as the principles would become directly enforceable by consumers in court and could bring about a surge of CMC activity.

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Understanding sludge practices

The FCA is setting out to reduce poor customer outcomes driven by behavioural biases. The FCA defines a sludge practice as ‘an excessive friction that hinders consumers from making decisions in their interests, by taking advantage of their behavioural biases’. The Consumer Duty seeks to protect consumers by reducing such practices.

Case study — Mis-sold Payment Protection Insurance (PPI)

In 2017, the FCA asked for firms to make it ‘quicker and easier’ for customers to identify whether they had PPI and to file a complaint, such that customers were not dissuaded by onerous and complex processes. The FCA said that firms should have online tools for customers to check if they had PPI and simple, straightforward complaints forms.

The Consumer Duty will require firms to apply this logic to all customer touchpoints and to reduce sludge practices that prevent consumers from acting in their best interests.

Poor practice

Reduced sludge

File a PPI complaint

Forms must be printed, signed and sent via post to the Head Office.

Only file a complaint if you know that you had PPI. If you do not know whether you had PPI, call the customer helpline from 10:00 a.m. — 4:00 p.m. Monday to Friday. There may be long wait times due to high volumes.

Check if you had PPI

Check online, takes one minute. We will get back to you in 24 hours.

File a PPI complaint online

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Click here for help

Example of sludge practices

Impacts by sector

The Consumer Duty expands the definition of consumer and requires considerations of end-customers even when a firm does not have a direct relationship with them, which will have varying impacts from sector to sector.

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Firms will be expected to assess whether they enable customers to act in their best interests through clear communications and frictionless customer service throughout the customer lifecycle. For example, retail banks may need to outcomes test their approach to providing notifications about fees or expiry of introductory rates for mortgage customers. Due to the rise in the number of customers that fall victim to fraud every year, there is increasing focus on how customers are supported through the fraud claims process and whether or not they are reimbursed for their loss. Firms should consider their interactions with customers not only when fraud does occur but how they educate their customers to help them to be more aware of red flags of fraud so they are less likely to fall victim to fraud in the first place.

Most notably, retail banks will also be expected to shift to an outcomes-based focus for SME customers, with the Duty introducing a requirement to evidence that firms have acted in a customer’s best interest. Firms may have to develop robust monitoring and testing capabilities to oversee the SME customer experience alongside of those capabilities that firms will develop to monitor the personal banking customer.

Retail banking

Building on the requirements of the FCA’s General Insurance Pricing Practices market study and subsequent Pricing Remedies (PS21/5), all insurance firms will be expected to ensure that fair value for the customer is maintained across the entire distribution chain and all products, this includes consideration of financial and non-financial value. Insurers will be expected to assess their products at least annually and ensure that the customers’ best interest is considered on an ongoing basis. ‘Sludge practices’ that hinder customers from making decisions in their best interests are actively discouraged under the Consumer Duty proposals and Insurers may need to re-evaluate their current practices around customer sales & service and customer communications via all channels.

Insurance

With most SMEs gaining ‘consumer’ status as it relates to the proposals of the Duty, payments firms such as acquirers may have to assess the value and complexity of their product offerings. Firms will be expected to evidence that they have enabled SME customers to act in their best interest through clear communications and transparent pricing. In some cases, this may require firms to simplify their pricing structures.

Payments

As ‘manufacturers’ of products that reach end-customers, firms will be expected to identify the business activities that have a direct or indirect impact on retail clients and retail markets. For those direct relationships, Investment Banks will be expected to ensure less sophisticated clients (i.e. Public Sector bodies, Corporates, SMEs) are identified and controls are in place to deliver the right outcomes throughout a trade/transaction lifecycle. Firms may be required to assess the outcomes driven by products that may not always be fit for purpose for retail consumers, such as Contracts for Difference (CFDs).

Where firms have indirect relationships with retail clients and markets, such as retail exposure to Green Bonds (either directly or through other investments such as pensions), Investment Banks must ensure the issuance of Green Bonds meets green objectives, enables ongoing evaluation of bond objectives and the disclosure of information, and suits the needs and interest of direct and indirect clients.

Investment and corporate banking

Wealth and asset managers already operate under regulatory duties to act in investors best interests, arising from their role of making investment decisions on behalf of investors. The duties regulate the key inputs into investment decision making, such as doing what was promised and safeguarding assets. The Consumer Duty adds to these responsibilities, expecting wealth and asset managers to assess, on an on-going basis, the competitiveness of the service offered and the quality of outcomes provided. Firms may have to assess whether pricing differentials across complex product ranges can be explained by features of the underlying product, potentially amending product structures where this cannot be justified.

Wealth and Asset Management

Impact by business functionThe impact of the proposed changes will be significant and far reaching. The changes impact multiple business areas, make demands on technology, enhance data requirements and affect relationships across distribution networks.

• The design process must take into account aspects of product life cycles and associated processes and services that make it difficult for customers to act in their best interests. The design process should specify the expected outcome for the customer.

• Greater emphasis on price and fair value e.g., consideration on whether different or flat rate pricing structures are appropriate for the relevant customer groups

• Will not apply to products and services rendered retrospectively, but will apply to the servicing of existing products once in force

• Undertake an end-to-end product review (existing and new products) to eliminate inappropriate features and incorporate pricing and fair value expectations. Examples of this are: complex terms, unreasonable exit fees, and distribution strategies not aimed at the correct customer base

• Incorporate meaningful input from customers and consumer groups into product design and servicing processes. Put yourself in the customer’s shoes and take early feedback into account

• Expand testing to ensure that customers understand what is on offer — not just testing propensity to purchase

• Leverage data, complaint root cause analysis and behavioural analytics to effectively design appropriately aligned, compliant customer solutions

• Take reasonable steps to ensure products are appropriate for all customers in the distribution chain

Product development

• A paradigm shift and not a compliance change, which embeds across all levels of firms and is integral to senior level strategy setting

• Embed Consumer Duty considerations in strategy setting and business transformation processes and ensure that such considerations are robustly documentedStrategy

• Post-sale processes must not deter customers from accessing the benefits of their products/services. ‘Sludge practices’ that hinder customers from acting in their best interests called out specifically

• Focus on the role of distributors (including those in the chain that do not have a direct customer relationship)

• Address suboptimal customer outcomes such as different experiences across different channels, excessive costs or non monetary costs (expenditure of time/significant effort) and difficulties in exiting a service

• Seek out sludge practices and processes and move to customer focussed and meaningful treatment strategies

• Assess whether your firms focusses heavily on sales and ensure that customer service quality is maintained post-acquisition

• Understand the impact of the Duty on third party providers. Firms in the distribution chain may seek to renegotiate their distribution agreements to manage the new responsibilities

Sales and servicing

• Continuous monitoring of products and services to ensure that they remain consistent with the identified need for the target market, and deliver the expected outcomes

• Systematic documentation of the outcomes of monitoring and testing activity

• Develop a strategy to regularly monitor customer behaviour and product performance to demonstrate that expected outcomes are achieved and maintained

• Build metrics to identify suboptimal customer outcomes sooner• Digitise outcomes testing and embed in governance processes• Build ready-made solutions to inevitable regulatory requests

for evidence of monitoring. Well-placed firms will seek MI and technology solutions to reduce the burden of such requests

MI, Monitoring and testing

• Focus on developing firms’ understanding of customers, including identifying customers who may be vulnerable, in order to provide them with the most appropriate, tailored products and services. This may require assessment of platforms, data and analytics capabilities

• Determine which applications support customer engagement through the end to end client life-cycle, across channels and through to middle and back office

• Map the specific data and MI requirements needed to understand, inform and report on interactions with customers

• Plot a technology and data roadmap, to support the necessary customer interactions, and provide MI and monitoring to demonstrate adherence with Consumer Duty obligations, including use of advanced analytics and machine learning to better understand behaviour, context and recognise customers’ individual needs — and potential difficulties

• Align to wider strategic initiatives that will provide and/or could be enhanced by the technology change needed to support the Consumer Duty

Technology

Theme Regulator’s expectations What your firm may need to do

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The Consumer Duty: A call to action |

Define Define

Define

Define

Define

Define

Define

6

What firms can do today

Define Test to diagnose

Conduct a compliance monitoring review to understand any gaps against the policy. Outcomes testing, customer journey, product, pricing, communication, service and control should be considered.

Make a planEstablish a plan of action in preparation for the FCA’s second consultation and policy statement.

Clarify roles

Be clear on where responsibility and accountability sits across all customer touchpoints. For each service line, map who’s in the driving seat for achieving each of the regulatory objectives and evidencing adherence to good outcomes.

Define the Consumer Duty as a part of strategic business objectives and outline how it aligns to the broader strategy

Raise awareness

Think technology and data

Start internal campaigns so that all levels and functions understand the likely impacts.

Pinpoint the technology and data needs that enable adherence to the Consumer Duty alongside existing strategic aims.

Factor in cost

The Consumer Duty will have inevitable cost implications. Start factoring the cost of the incoming Duty into budgeting discussions now.

There are ‘no regret’ actions that all financial services firms can take today to ensure they will be prepared for the incoming Consumer Duty.

Do your front line staff have the information they need to enable customers to act in their best interests?

Firms have long grappled with producing a joined-up single customer view that will improve front line staff’s ability to judge whether products and services are right for a customer. The Consumer Duty will expect firms to improve their capabilities in this regard.

Ask yourself

| The Consumer Duty: A call to action7

How we can help

Assessing the current state — Understanding the implications of the Consumer Duty on business models will be crucial to sizing up the extent of the change required. We can test current state practices against the indicative rules to understand the magnitude and type of change that the Consumer Duty will require, through our diagnostic tool that identifies gaps from the top down and the bottom up.

Designing and implementing solutions to meet in the long-term requirements — We can assist with:

• Embedding the new principle — Advising on cultural change strategies, building the Customer Duty into Governance, training staff on the implications of the Consumer Duty, identifying drivers of poor behaviour and importantly ensuring what you do in practice is reflective of the new principle

• Cross-cutting rules — Identifying policies, practices and services that are at odds with the new rules and understanding the implications of making changes

• Outcomes — Assessing practices and developing solutions from product design to customer service to ensure you have walked in your customers’ shoes, reflected, and where appropriate addressed any sub-optimal experiences

Data-led and futureproof solutions will cut down on regulatory burden and afford senior management an improved view of performance against customer outcomes. To do this, we can:

• Map your data and MI requirements needed to understand the customer and your interactions with them

• Establish a technology and data roadmap to support the necessary customer interactions

• Leverage developments in advanced analytics and machine learning to enable your firm to understand individual needs and potential difficulties in greater depth and deliver increasingly personalised services and enriched experiences for customers of financial services

Culture

Vision

Strategy

Customers, markets, products

Financial performance

Business processes

Governance and risk

Capability Organisational structure

Technology, data and analytics

Physical and intangible assets

Partnerships and alliances

Strategy/ policy settings

Enablers

Key to diagnosing areas of impact for the Consumer Duty

Firms will have a significant amount of preparation and implementation to complete ahead of the rules coming into force next summer. We can support you in taking a phased approach to assist you with meeting the requirements in time.

Interpreting the final rules — We can leverage our experience and industry insights to help firms navigate the implications of the finalised principle, four outcomes and cross cutting rules.

Culture

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The team

We have assembled a team of professionals across financial services sectors, legal and transformation to develop end-to-end strategies for meeting the requirements of the Consumer Duty.

Christopher WoolardPartner Ernst & Young LLP T: + 44 20 7760 8166 E: christopher.woolard@uk.ey.com

EMEIA Financial Services Regulation Lead

Retail banking

Heather AlleynePartner Ernst & Young LLP T: + 44 20 7951 3827 E: halleyne@uk.ey.com

Brendan GilroyDirector Ernst & Young LLP T: + 44 20 7951 9021 E: bgilroy1@uk.ey.com

Insurance

Eamon McGinnityAssociate Partner Ernst & Young LLP T: + 44 20 7806 9299 E: eamon.mcginnity@uk.ey.com

Stephanie LordDirector Ernst & Young LLP T: + 44 20 7951 2042 E: slord1@uk.ey.com

Investment and corporate banking

Stuart CrotazPartner Ernst & Young LLP T: + 44 20 7951 9714 E: scrotaz@uk.ey.com

Rick MangassarianSenior Manager Ernst & Young LLP T: + 44 20 7951 9066 E: rmangassarian@uk.ey.com

Wealth and asset management

Uner NabiExecutive Director Ernst & Young LLP T: + 44 20 7951 6442 E: unabi@uk.ey.com

Tony HanlonExecutive Director Ernst & Young LLP T: + 44 20 7951 8423 E: tony.hanlon@uk.ey.com

Legal

Matthew KellettPartner Ernst & Young LLP T: + 44 20 7951 8095 E: mkellett@uk.ey.com

Stephen WilsonSenior Manager Ernst & Young LLP T: + 44 20 7951 9597 E: stephen.wilson@uk.ey.com

Technology and Payments

Hamish ThomasPartner Ernst & Young LLP T: + 44 20 7951 1955 E: hthomas@uk.ey.com

Customer

Cat HainesPartner Ernst & Young LLP T: + 44 20 7197 1241 E: cat.haines@uk.ey.com

SME/Commercial Banking

Lee MaddenSenior Manager Ernst & Young LLP T: + 44 20 7951 3763 E: lmadden@uk.ey.com

Financial crime and fraud

Rachel SextonPartner Ernst & Young LLP T: + 44 20 7951 1179 E: rsexton1@uk.ey.com

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