Consumer Duty – it is not going away any time soon!

As we move into 2025 the challenge, or is it motivation, to deliver the very best in customer experience will continue to be at the forefront of the regulators thinking. It is accepted that customer awareness of what ‘the very best’ should look and feel like is also on the rise. So, the time to fully embrace the Consumer Duty world is now overdue.

Introduction 

This month (on 11th December 2024), the FCA issued its latest findings following the completion of a thematic review of the board reports of 180 regulated firms, of which 55 are noted as ‘smaller’ firms…this blog focuses on key findings in relation to those smaller firms.

What have the FCA said?

Extract from FCA report:

‘Smaller firms

We want all smaller firms to feel confident in delivering the Duty. The Consumer Duty rules, and guidance should be interpreted in light of what is reasonable in the circumstances, considering the size, activities and available resources of a firm.

We found areas of good practice from firms of all sizes, including those with fewer than 10 employees. As such, much of the good practice and areas for improvement cited here applies to firms of all sizes. All firms should be able to monitor customer outcomes, take actions and implement a business strategy that aligns with the Duty to ensure those outcomes are good.

However, we know that smaller firms have different challenges. We have set out suggestions for how smaller firms might meet our requirements below and are open to considering more targeted work where that would be beneficial.

To summarise:

·         Governance

·         Monitoring and Outcomes

·         Actions taken to comply with Duty obligations

·         Future business strategy’

Governance – The Highlights

Good Practice

·         Clear processes for production of the report - it was clear some reports had been produced over a sufficient time period to allow for relevant business areas, forums, and committees to be involved in the production of the report. Positive evidence included:

1.  Clear input of key business areas into the analysis including departmental updates.

2. Evidence of the full involvement of 2nd line of defence (2LOD) and 3rd line of defence (3LOD), including independent assessments from both lines, giving the firm’s governing body assurance about the content and conclusions of the report.

Areas for Improvement

·         Business input into production of the report - in some cases, reports appeared to be produced almost solely by Compliance teams or a dedicated Consumer Duty function. This risks the report missing the scrutiny and input of key stakeholders with subject matter expertise and risks business ownership of any identified issues. Reports should be produced with the involvement of, and input from, relevant business areas, forums and committees. This ensures the board is not the sole layer of approval and that other stakeholders with subject matter expertise have been able to provide scrutiny.

Smaller Firms

Governance considerations differ considerably between firms depending on scale. The smallest firms will lack dedicated compliance and audit functions as well as boards, so observations above regarding e.g. 2LOD and 3LOD may not be applicable. We said during our Consumer Duty webinar in December 2023 that smaller firms might consider asking a ‘critical friend’ with sufficient understanding of the Duty to provide impartial feedback on a firm’s approach and report. 

Monitoring and Outcomes – The Highlights

Good Practice

·         Good quality data - Some firms effectively used a range of quantitative and qualitative data from internal and external sources, including comparator and benchmarking data in their reports, covering each of the 4 outcomes. Good reports accompanied this with clear commentary, drawing conclusions based on the data and explaining risks identified across the business.

For example, we saw firms include data on complaints as well as the source and root cause analysis of any upward or downward trends. Some reports were able to link trends to events such as technical incidents, changes to complaint handling processes, and changes to the sales strategy. 

Some reports detailed what constituted a good outcome for customers, providing opportunity for review by the governing body. One firm broke down good outcomes in their report by providing a series of positive statements from the customer point of view, alongside the MI that was being used for monitoring and any planned actions.

·         Comprehensive view across distribution chains - some reports gave a clear overview of the firm’s third-party relationships and described the processes in place to ensure relevant information was shared and received across the distribution chain.

·         One insurance firm referenced its repeated monitoring of third-party administrator (TPA) calls with dates and ratings provided.

·         The same insurance firm also described foreseeable harms customers could suffer in certain circumstances and early indicators of TPAs not running their processes correctly. This included delayed reports and payments to policyholders.

Areas for improvement

·         Clear outcomes focus and data quality - some reports failed to give clear definitions of good outcomes across different products and services that could be tested against the available MI. Linked to this, some reports failed to include thresholds that were being used to monitor MI.

The results of monitoring in some reports did not provide assurance that adequate data strategies were in place to effectively track customer outcomes.

In order that boards can effectively monitor implementation of the Duty, they must have sufficient reporting to help them assess whether products and services are delivering outcomes in line with the Duty. We did not see this evidenced in some of the board reports we reviewed.

Smaller Firms

Smaller firms may lack the sophisticated data strategies of larger firms and be more limited in the range of MI they can access. This will include monitoring of different groups of customers, including those with characteristics of vulnerability as in some instances firms may only encounter a single customer with a specific need. All firms, however, should be able to use data to come to a reasonable conclusion on whether their customers are receiving good outcomes.

Two important metrics, for instance, that should be available to most firms are general customer feedback and complaints, the latter of which can be particularly insightful when coupled with effective root cause analysis. Data could also be drawn from external sources such as the Financial Ombudsman Service.

Actions taken to comply with Duty obligations – The Highlights

Good Practice

·         Good quality data - some reports explained changes that have been made to the firm’s data collection to improve its monitoring abilities and to mitigate the risk of undetected issues. For example, 1 firm explained how it had added QR codes to its paper communications to increase the amount of customer feedback received.

·         Consumer Support - some reports provided a comprehensive view of the firm’s approach to the consumer support outcome with details of positive actions taken since the Duty’s introduction.

For example, details were given on the improvements made to training frontline staff who have direct interaction with customers.

·         Consumer Understanding - good reports supported their claim to be meeting their consumer understanding obligations by including results of positive actions they had taken over the year.

For example, one firm explained how an external organisation had reviewed its online logged in sections and public-facing website, being awarded seals of excellence for readability, website navigation, functionality, design, accessibility, and audience suitability.

·         Closed Products and Services - the Duty came into force for closed products and services on 31 July 2024. Where relevant, it was positive to see some firms had carried out reviews and given the Board an overview of actions taken to ensure compliance.

For example, one firm sought approval from its board for additional funding to remediate harm following an Internal Audit report. This plan was clear in terms of purpose, actions and timescales.

Areas for improvement

·         Taking effective action - some reports outlined issues that had been identified but did not provide assurance that there was a clear plan to resolve the issues. Some reports stated that actions had been taken but provided little or no evidence to confirm that the remediation had been effective.

Smaller Firms

We would expect all firms to be able to identify actions to ensure they were meeting their obligations under the Duty and evidence their effectiveness. Given their limited resource, it’s understandable smaller firms may have taken fewer actions over the course of the year. Where issues have been identified, external experts, where available at proportionate cost, can be helpful in advising on effective action.

Future Business Strategy

Good Practice

·         Strategic Change - we saw examples of firms incorporating the Duty into their business strategy and purpose, including details of amendments made to build in the Duty outcomes. Good reports demonstrated how the strategy would ensure customers received good outcomes in the future.

Areas for improvement

·         Strategic Change - reports sometimes stated that their future business strategy was aligned with the principles of the Duty but gave no detail on any review of the strategy or if any changes were needed to ensure alignment.

Smaller Firms

While we wouldn’t expect the smallest firms to replicate the practices here which concern extensive governance structures, a positive culture that aligns with the principles of the Duty should be evident in firms of all sizes. As mentioned, it’s understandable that smaller firms may encounter fewer customers with different specific needs. This may mean extensive policies and structures dedicated to these customer segments is unnecessary but learning and recording the lessons learned during these transactions will help the firm ensure it delivers good outcomes going forward.

The thread…

Many of the broker firms we operate with will consider themselves to be ‘smaller firms’, what these findings demonstrate is that the size of the firm is not that relevant (with a few exceptions) when considering, delivering and then reporting on consumer duty.

If you are reading this and wondering, how can I ensure consumer duty is reflected in the day-to-day running of my business? Or when was the last time I checked we are correctly recognising consumer duty in our day-to-day operations? Ask us about how we can provide the ‘critical friend’ support that will further embed consumer duty into your business, and we will work with you to provide a solution that gives you the confidence and conviction that building customer trust and experience is making a positive impact within your business and on your customer relations.

And Finally

Customer - ‘I have decided to change internet provider, can you cancel my subscription with you’

Company – ‘Can I ask why you have decided to change?’

Customer – ‘There is just no connection between us!!’