Consumer Duty – what every financial organisation should know

By Vignesh Ramesh, Head of Consumer Duty Solutions atMedallia

The new Consumer Duty rules from the UK’s Financial Conduct Authority (FCA) come at an pivotal time for the industry. Hot on the heels of the pandemic, and in the wake of market dislocation and evolving consumer expectations, the new rules stand to further tip the balance of power from the grasp of financial organisations firmly into the hands of the consumer. But what do they mean in practice?

Introducing the new Consumer Duty rules

The new Consumer Duty sets the standard of care firms should give to customers in retail financial markets. The FCA first published detailed guidance on the Consumer Duty in July 2022, giving Financial Services Institutions (FSIs) until July 2023 to fully implement the requirements from the guidance. The rules affect a broad range of firms operating in the financial services space – including manufacturers of structured products, distributors, platform operators, insurance businesses, independent financial advisors, and payment service providers.

The Consumer Duty is made up of three core components that must be satisfied if FSIs are to be classed as compliant. These are:

1. A consumer principle – this sets the overall standard of behaviour expected
2. Cross-cutting rules – these are the three overarching requirements for delivering good outcomes to customers:

• Act in good faith towards retail customers
• Avoid causing foreseeable harm to retail customers
• Enable and support retail customers to pursue their financial objectives

1. Outcomes – there are four defined outcomes around the governance of products and services, price, and value, consumer understanding and consumer support.

At the crux of it, Consumer Duty is a new consumer principle (Principle 12) in the FCA Handbook of rules and guidance. However, it is not wholly uncharted territory.

A new age of stringency in the industry

Although the FCA Handbook has existing principles for the governance of customer interest (Principle 6) and communications (Principle 7), what’s changed is that the new Consumer Duty prescribes a much higher and more exacting standard of conduct. For example, the current handbook emphasises that FSIs must follow the right processes, whereas the new Consumer Duty rules take it a step further and states that FSIs must deliver good outcomes.

In short, the new rules highlight the FCA’s move towards a more data-driven approach to supervision, rather than one reliant on anecdotal evidence. While the spirit of the law remains the same, there is a clear and apparent effort by the regulator to fix the gaps and lingering bad practices in the industry.

The role of technology in meeting some of the requirements

Mending these broken practices is not without its difficulty though. As FSIs battle for market share under this new regulation, they must continually assess the outcomes and value they offer their retail customers and prospects. They must continuously evaluate and upgrade every journey, transaction, and touchpoint in order to grow trust and loyalty. This will be crucial as they seek to attract, develop and retain customers, as well as earn their advocacy and referral.

As such, key to FSIs’ success is how quickly and efficiently they can strengthen their capabilities to capture, analyse and take action based on key insights from listening to customers across different channels. Acting on this insight will not only help them deliver the right experiences and the desired outcome at the right time, it will also save them from the scrutiny of the regulator.

With the right technology in place, FSIs can strengthen signal capture as well as automate the process of generating insights so that emphasis can be laid on acting upon them. The critical aspects of the technology stack should include:

1. An ability to listen to customers across channels – by using embedded surveys, gathering insight from contact centre interactions, digital experiences and social media feedback, FSIs can check the pulse of their customers to continually understand if the right information is being presented to them. This will help FSIs truly to “put themselves in their customers’ shoes” as per the regulation guidelines – allowing them to check that information is readily available and visible to the customer and that they are effectively communicating with them.
2. Natural Language Processing and Artificial Intelligence – these complementary technologies can be used to analyse information at scale, gathered across multiple channels. By automating the process of generating insights, automatically identifying customers who show characteristics of vulnerability, surfacing up insights around price and value outcome (customers talking about excess fees etc.), and automatically generating in-depth insights from customer verbatims, FSIs can get to root-cause issues, allowing them to see whether they are delivering effective customer service and fixing any problems identified.
3. The ability to provide a holistic view of customer journeys – it is only by looking into the entire customer journey – directly comparing the sales experience alongside the support experience, across multiple channels – that FSIs can ascertain what products and services are failing to achieve good customer outcomes. Directly assigning team members to act on these insights can quickly remedy any hurdles. Looking at the customer’s journey as a whole, can reveal unparalleled insights about unintended hindrances in customer journeys and what it takes to improve the standard of care given to consumers.
4. Digital behavioural analytics – as more and more journeys move to digital channels it is becoming more important than ever for organisations to understand digital behaviours. Part of this is understanding the silent majority – those who do not leave feedback within their customer journeys. Here FSIs can use tools such as customer journey illustrations and heatmaps to get a first-hand view into the customer journey. These tools can also help FSIs ascertain whether they are avoiding unnecessary friction, or ‘sludge’ practices, in their processes that push consumers into choices that may not be in their interests. Likewise, they can ensure that imposed friction points – placed where customers could create harm for themselves (e.g. someone cancelling a low-interest rate mortgage product) – are having the desired effect and working in the best interests of the customer.

Create a culture of customer centricity

The Consumer Duty has prompted a radical rethink in the industry, not just in terms of considerations on product development or service delivery designs, but also from a broader organisational perspective to encourage the cultivation of a customer-first culture. This can only be operationalised when every single employee – from the front-line to the board – has access to the right tools and data needed to affect customer outcomes.

FSIs should use this opportunity to move away from the traditional ‘box-ticking’ approach to compliance, and instead, embrace it from the perspective of customer-centricity. Doing so will lead to easier and more efficient compliance, and achieve other business objectives, including operational cost reduction, increased lifetime value of customers and a tangible increase in competitive advantage.

It’s time to put the customer first

For financial services organisations, the new Consumer Duty regulations present a seismic shift in traditional operations, forcing a total rethink of the outcomes and value provided to customers and prospects in their journeys with FSIs.

Technology will be essential in helping FSIs to gather insight on customers and provide a better overall customer experience, while embracing the cultural changes implied in the spirit of the new rules will help them reap further rewards. A customer-first approach isn’t just another box to be ticked, it’s a shift in mindset for the whole sector – and with the deadline for compliance looming, it’s time for FSIs to open themselves up to change.