The Financial Conduct Authority (FCA) final deadline for Consumer Duty compliance is fast approaching, meaning the first Annual Report deadline for phase one is also due. If you’re unsure what that means, or are only starting to look into it as part of phase two, here you’ll find a Consumer Duty summary of FCA requirements.
For readers who don’t know, Consumer Duty is the newest FCA standard, aka ‘Principle 12’.
✅ It seeks to ensure customers receive ‘good outcomes’ and that firms provide evidence that these outcomes are being met.
The Financial Conduct Authority’s chief executive described it as “one of the most far-reaching, cross-cutting pieces of regulation in decades”. And now, it’s in full force.
Table of Contents
- A quick Consumer Duty overview
- When does the Consumer Duty come into force?
- How to comply with the FCA Consumer Duty?
- Board level responsibilities and the Annual report
- How can Adoreboard help your FCA Consumer Duty compliance?
- Key takeaways & further reading
A quick Consumer Duty overview
The Consumer Duty applies to FCA-regulated firms ‘who determine or have a material influence over customer outcomes – not just those with a direct customer relationship.’
✅ Firms must act to deliver good outcomes to customers.
✅ Firms must monitor, review and document outcomes and actions.
✅ Firms must produce a board report assessment at least once per year that includes evidence to illustrate their progress and showcase senior leadership’s engagement.
The FCA are being proactive in their approach to Consumer Duty compliance. Less than a year in, they targeted insurance companies with a somewhat disappointing report…
Deloitte have a great summary here, with an example finding being, “The FCA found that firms’ approaches were overly focused on processes being completed rather than on the outcomes delivered and few firms were able to provide clear evidence of where the monitoring of outcomes had directly led to the firm taking action to improve these outcomes.”
And they to take things seriously; HSBC were recently fined £6.3 million ($8 million) [Bloomberg].
Let’s take a closer look…
When does the Consumer Duty come into force?
The rollout of Consumer Duty took a phased approach, with the first deadline being 31 July 2023. The final deadline by which all financial services must comply is 31 July 2024. We won’t go into details here as the final deadline is fast approaching, which means from here on in, everyone is in the same boat.
What does it mean for me?
Firms must take all reasonable steps to avoid causing foreseeable harm to customers; they must enable and support customers to pursue their financial objectives, and act in good faith. For example, it should be as easy to cancel a product as it was to buy it.
Financial services must be proactive in delivering good customer outcomes and firms will need the right culture and governance to enable this.
“The Duty also requires firms’ management and Boards to use data to identify, monitor and confirm they are satisfied that their customers’ outcomes are consistent with the Duty. Firms must act when customers suffer poor outcomes.” –FCA
What does it mean for financial services not operating in the UK?
Only firms conducting activities in the UK are within the FCA regulatory remit and thus subject to the Duty.
However, the FCA recognises that there may be risks in distribution chains that involve parties not directly conducting activities in the UK and thus has placed the responsibility on the distributor;
“Regulated firms should consider whether including a firm that is not subject to the Duty in the distribution chain leads to a risk of poor customer outcomes.”
What this means is that if you form part of a supply chain to a UK-regulated firm, that UK-regulated firm will carry out more due diligence and risk assessments on your operating procedures etc to ensure that they meet or are at least similar to that of the FCA Consumer Duty in order to reduce their own risk.
How to comply with the FCA Consumer Duty?
Although The Duty is detailed, there is no hard and fast playbook for implementation.
However, in February 2024 the FCA published this article detailing what they observed as being “Good Practice” during the first 6 months of the phased rollout, and what they observed as “Needs Improvement”, split across 6 key areas.
Adoreboard is positioned to assist financial services be compliant in all 6 areas identified.
Below is a summary of the 3 most relevant areas where Adoreboard excels:
- Culture, Governance and Monitoring
- Consumer Understanding
- Consumer Support
✅ Culture, Governance and Monitoring
FCA desired outcome: “We want consumers to have confidence in retail financial services markets, with healthy competition based on high standards and firms focused on delivering good customer outcomes.”
These are observations the FCA made of firms implementing “Good Practice” in terms of Culture, Governance and Monitoring:
- Become more customer-centric as a whole: Revise the company’s purpose to emphasise that staff actions and behaviours should prioritise customer outcomes.
- Expedite changes to enhance customer satisfaction outcomes, such as improving attention to service level metrics like call abandonment rates, complaint root-cause analysis, and customer feedback surveys, with actions taken to raise standards.
- Ensure that the responsibility for positive customer experience is understood and embraced across the entire business, involving all roles from product design, right through the customer journey to post-sale support— ie. NOT just risk and compliance teams.
- Increase customer focus and attention at the Board level, with senior leadership teams taking the practical and cultural implications of the Duty across the entire firm into serious consideration.
- Adjust staff bonus structures to align incentivization with the goals of the Duty ie. customer experience and outcomes.
- Create a system to gain better insights into customers, including the creation of new data and metrics and establish suitable governance to ensure action is taken when issues are detected.
Over the first six months of observation, there were some areas the FCA noted as needing more attention.
Three Culture, Governance and Monitoring areas noted as “Needs Improvement”:
- Responsibility of Consumer Duty primarily being driven by ‘risk and compliance’ team: Instead of limiting the Duty to programme teams or risk and compliance colleagues without Board-level discussion, firms need to ensure that the commitment to excellent customer outcomes is woven into their strategies, leadership, and people policies across ALL levels and roles.
- Firms not proactively addressing customer issues and outcomes: Firms should not wait for the FCA to intervene to resolve customer issues, but should tackle it themselves. Failure to do so might lead to greater complexity and consumer redress down the line.
- Companies need to develop better data and monitoring strategies to improve customer experience. They should avoid complacency and the mere repackaging of existing data, and instead, critically analyse what information is truly needed to understand their customers’ outcomes and the challenges they may be encountering.
✅ Consumer Understanding
FCA desired outcome: “We want consumers to understand the information they are given and make timely and informed decisions.”
These are observations the FCA made of firms implementing “Good Practice” in terms of Consumer Understanding:
- Collaborate with specialists to enhance their customer communication across various platforms, thereby elevating customer comprehension of their products and services.
- Establish frameworks for customer understanding to promote favourable outcomes.
- Revamp customer journeys by focusing on actual consumer behaviour and potential risks, to support better understanding.
- Update customer interaction points and materials, such as call centre scripts, and provide training to ensure staff are better prepared to support customer understanding.
- Adopt a more proactive approach to communications to foster improved customer experience and customer outcomes.
- Develop methods to test customer understanding, such as surveys, experiments, and interviews.
Over the first six months of observation, there were some Consumer Understanding areas the FCA noted as needing more attention.
Three areas noted as “Needs Improvement”:
- Undermining customer trust by recommending products or services that are excessively high-risk, too complex for the customer to understand or favour the firm more than the customer.
- Hiding charges applicable to customers, including the timing of these charges and/or making them unclear.
- Not considering the Duty in promotions. Overlooking the Duty when approving financial promotions, including crypto.
✅ Consumer Support
FCA desired outcome: “We want consumers to be provided with support that meets their needs.”
These are observations the FCA made of firms implementing “Good Practice” in terms of Customer Support:
- Implement equality changes to guarantee that existing customers receive the same level of support as new customers.
- Assess and improve customer journeys by eliminating negative barriers and obstructive practices.
- Introduce proactive, positive interventions within customer journeys.
- Establish additional engagement touchpoints to encourage better customer decisions.
- Ensure any outsourced support is adequate ie. meets the Duty standards.
- Implement processes to monitor the support provided and identify areas for improvement such as feedback surveys.
There were also some Consumer Support areas the FCA noted as needing more attention.
Four areas noted as “Needs Improvement”:
- Inadequately training staff for handling complex customer conversations. Firms should ensure their staff are well-trained to facilitate positive customer outcomes by understanding individual circumstances and providing tailored solutions when necessary.
- Employing too much ‘gamification’ practices on online trading platforms, which can harm consumers by promoting risky short-term trading and unfair brokerage deals.
- Failing to adequately understand customers’ circumstances when they are experiencing financial difficulty.
- Lack sufficiently robust systems to safeguard consumers from losses of investments, savings, or personal data due to fraud or cyber-attacks. Firms must implement strong systems and controls to prevent foreseeable harm and provide quick, appropriate support for fraud victims.
Three additional areas
The other 3 areas covered in the FCA article are:
✅ Consumers in vulnerable circumstances
✅ Products and services
✅ Price and value
Board level responsibilities and the Annual report
The FCA mandates firms to produce within their Annual Board Report evidence that reflects progress and engagement at senior leadership levels to the Consumer Duty. The report should demonstrate firms’ abilities to deliver good customer outcomes, identify poor outcomes, and build a culture of accountability from the top and needs to be done at least once a year.
Firms should appoint a Consumer Duty Board Champion at an appropriate level to ensure that the Duty is discussed in a meaningful way. The “Board Champion” and a capable team should prepare, review, and present qualitative and quantitative data insights.
The report must cover all aspects of Consumer Duty, including product suitability, fair value, information clarity, customer outcomes, experience and support. Full engagement from senior management is crucial to meet regulatory expectations and improve customer trust.
The FCA does not have a specific template for the Consumer Duty Board Report, and it is for individual firms to determine what is appropriate for them.
How can Adoreboard help your FCA Consumer Duty compliance?
At Adoreboard, we work with financial services across the globe, including banking, insurance, pensions, real estate, investments and tax services to improve their customer (& employee!) experiences.
We go beyond typical sentiment analysis by analysing emotion, with a particular focus on Trust.
Our platform can quickly provide you with emotion-driven insight reports on Customer feedback surveys, reviews and any other text-based data, making it easier to monitor, review, prioritise action and present findings to the Board and evidence in your Annual Report.
As a company, our goal is to improve human experience through understanding and actionable insight gained from unstructured text; aka, natural language. We’re primarily used by patient, employee and customer experience professionals.
Improved experience, especially around the emotion of Trust, leads to increased customer loyalty, employee retention and thus long-term, sustainable profitability.
We do this using Emotion AI*, Natural Language Processing (NLP) and exploratory analysis to deliver actionable insight reports. In most cases the input data is feedback, survey or reviews, sometimes alongside a numerical/quantitative metric such as NPS or CSAT.
You can create feedback surveys within the platform or use your external platform of choice.
* Note that unlike many other AI providers, our Large Language Model (LLM) is NOT trained on customer data. We use a prompt-engineering approach and your data never leaves our secure server.
Typically, we reduce time to insight by +90% and various reports can be generated in a click, including what we call C-Level ‘decision ready insights’ report— a one-pager scorecard.
Back to Deloitte…
A quick reference back to the insurance example from the Deloitte summary; “The FCA found that firms’ approaches were overly focused on processes being completed rather than on the outcomes delivered and few firms were able to provide clear evidence of where the monitoring of outcomes had directly led to the firm taking action to improve these outcomes.” ☹️
✅ Adoreboard can help you with regular monitoring, actionable insights and clear evidence.
Oh, and you’ll probably also like this (shhh….not many know about it yet!)
Value at Risk (VaR)
It’s not exactly a ‘Consumer Duty’ related feature, but we’re excited to share.
I’m slipping it at the end of this article as you’re much more likely to grasp the VaR concept than clients in other industries…
Most recently, we have created a Value at Risk (VaR) module, which can be used to assess the financial impact of taking (or not taking!) action. It enables you to prioritise the next best action to improve customer experience metrics such as CSAT or NPS. 🥳 This is an entirely new module soft-launching late July 2024 and we’d love to show you it!
You can book a demo here.
Hellios FSQS- Certified
We’re also Hellios-FSQS certified which removes most of the compliance and risk assessment pains of engagement for members. View the post and certificate here.
Key takeaways & further reading
The FCA will oversee how firms employ data and analytics to prove compliance. In cases where there is serious harm or the risk of harm, firms should be prepared for the FCA to take decisive actions, including interventions, investigations, potential sanctions and fines.💰
Here are 3 great articles for further reading:
- Consumer Duty implementation: good practice and areas for improvement: FCA detailed guide based on findings from the first 6 months of phase one.
- Consumer Duty Annual Board Report: What the FCA expects: A great article by Tim Reed of Grant Thornton
- FCA FAQs: a list of common questions and answers covering FCA expectations, financial services operation from outside of the UK, reporting requirements, supervision and enforcement and more
Phew!
What a post!😅
As a final note, we’d love to explore how we can assist with your new FCA compliance requirements and your overall customer experience and Trust levels.
Reach out to us and say hello 👋, or book a demo.
Featured image by Joshua Lawrence via Unsplash.
