180 days of Consumer Duty

Depending on when you’re reading this, it is approximately 180 days since the Consumer Duty (the ‘Duty’) came into force. For fans of darts, particularly following the recent World Dart Championships, 180 is an auspicious number. It’s not, however, a score achieved by hitting a single bullseye. It’s achieved by consistently hitting a triple 20. The paradigm shift demanded by the FCA isn’t a one-off event (or a bullseye to be hit!). It takes consistency. Key to embedding the Duty is the ability of firms to define, monitor, evidence and stand behind the outcomes their customers are experiencing on an ongoing basis. That means a continuous, sustainable, robust and reportable process.

The FCA is taking a strong and pro-active approach in areas where it has concerns. This includes: (i) closely examining the cash savings market and requesting associated product fair value assessments from firms, (ii) reviewing historical motor finance commission arrangements and sales across firms, (iii) setting clear expectations for firms’ treatment of vulnerable customers and the management of claims, so as to avoid unreasonable delays to claims processing and to enable fair claims settlements¹.

In the light of this, we surveyed the life and pensions sector for their views on progress with the Duty requirements, the challenges, and the work still to be completed, especially with regards to the closed products deadline of 31 July 2024.

In this blog, we take you through the key responses to the survey and where firms should focus their time.

What did we find?

Consumer Duty Programmes

Over 70% of respondents agreed that there is still a significant programme of activity required to achieve compliance across open and closed products, and that this includes the need for strategic or technology enabled solutions to bring greater control and efficiency.

Consumer Duty Programmes are evidently still active and engaged, which is consistent with our experience that many firms acted quickly to address areas with the potential for greatest harm. However, it will take longer to complete the change required to fully align all products, customer communications and journeys to the Duty, and implement technology to assess, test and monitor compliance against the Duty effectively and efficiently.

We have summarised below the five key areas that we explored with survey respondents.

Putting consumers at the heart of your culture

90% of respondents reported that their organisation has established and communicated clear accountability, transparency and oversight of customer outcomes, and c. 70% of respondents felt that appropriate remuneration schemes had been established, including key performance indicators and quality measures that supported the delivery of good consumer outcomes.

In our view, it is critical that firms have a Framework² for assessing culture and connected appropriate outcomes with all the structures that drive culture and behaviour, namely, governance, performance management, remuneration and purpose. Culture takes time to embed and must align to delivering good outcomes for all customers and the wider obligations under the Duty.

Data and Management Information

Over 70% of respondents positively indicated that they had adequate management information (MI) to demonstrate compliance with the Duty. The MI challenge should not be underestimated. Not identifying harm or identifying it months or years after it has occurred will not meet regulatory expectations under the Duty.

MI must be timely and effective and driven, to the extent possible, through automated data-driven analysis. Quantitative and qualitative data is critical to firms being able to test and understand whether customers are receiving good outcomes, to act where poor outcomes are identified and to demonstrate compliance through their MI. Firms should also be able to use their data to analyse different customer segments to assess the outcomes they are receiving.

Firms need a robust outcome testing methodology to demonstrate that products and services offer value to customers, they understand the products they hold and receive adequate support in a timely manner. Outcome testing requires a robust methodology and approach to meet the requirements of the Duty. The industry response indicated that nearly all firms had developed a framework and process for outcome testing customer journeys and products.

If firms want to benchmark their approach, Deloitte has developed a practical guide³ to outcome testing to assist firms.

Board report and attestation

The FCA has said that “When the Duty comes into force, firms need to make sure – and be able to show us – that they are acting to deliver good customer outcomes and protecting consumers from harm.”⁴

Under the Duty rules firms need to prepare a report for their Board setting out the results and actions of monitoring of retail customer outcomes. The Board is then required to:

• review and approve the firm’s report on customer outcomes;
• confirm it is satisfied that the firm is complying with the Duty; and
• assess whether the firm’s future business strategy complies with the Duty obligations.

Boards approving the firm’s report on customer outcomes should also agree on the actions to address weaknesses and areas of non-compliance with the Duty and any changes to the firm’s business strategy necessary to ensure continued compliance with the Duty.

The effectiveness of the Board report will be driven by the quality of underlying data and management information. The FCA has stated that firms will need to use their judgement to identify appropriate data sources to evidence compliance with the outcomes of the Duty⁵. Consequently, poor or inadequate data will create challenges and discomfort for Boards when approving the annual report, particularly this first iteration.

The first annual Board report must be finalised by 31 July 2024, however, in our view, Boards will want to satisfy themselves that the immediate deadline has been met. Boards should be challenging the business and given the regulatory significance and profile of this first report, may request some form of assurance far sooner.

Our survey indicated that most firms were confident in their approach and resourcing to produce the Board Report by July 2024. Aligned to the previous finding (70% positive) around quality of available data creates a picture of an industry that is well-prepared to deliver a robust Board report. However, around 50% of the firms surveyed indicated that their Boards had requested further assurance work on compliance with the Duty.

Our findings suggest a level of optimism around the Board report and the required data, we still encourage firms to consider the sufficiency and breadth of data aligned to the outcomes, and the value of independent assurance and benchmarking.

We believe that firms should focus on building the foundation of and circulating the first annual report now with time for iterations and enhancement based on feedback and assurance work.

We provided our thoughts on the challenge with producing and finalising your Consumer Duty Board Report in our recent blog⁶.

Third parties

Our survey suggested that firms have had differing experiences with third parties. Some firms considered third parties and outsourcers as a barrier to completing the work required by July 2024. This may be driven by the extent of exposure to third parties in individual business models.

The FCA has been clear that the Duty applies to all firms that material influence customer outcomes, including those with no direct customer relationship. It will be essential for firms to work together across distribution chains deliver good outcomes for the end retail customer.

In our view, it is critical that firms and third parties work together to share information and to ensure that customer outcomes are delivered. A comprehensive view of your third-party relationships and dependencies is essential. OneView⁷ is our proprietary tool that has transformed the way a number of our clients manage and report on their third-party relationships.

Closed products and services

Some firms have run closed and open book reviews in parallel, but others will be starting to consider the challenges, potentially leveraging and /or replicating the work already delivered on the Duty for new and existing products.

Our survey respondents were generally confident, with over 70% reporting that their closed book will be compliant with the Duty in the timescales required. There was, however, a mixed response to the level of effort expected to make the closed book compliant, and we would suggest that firms not under-estimate considering how closed-book products continue to offer value to their customers when a number of years have passed since they first bought the product.

To an extent, we expect the lessons learnt and the work completed (readiness work, and assessment and testing frameworks developed) for the 31 July 2023 deadline to be an accelerator. However, firms need to be mindful of the additional challenges that could arise and take care not to underestimate the challenge:

• Obtaining and collating data from multiple legacy systems can be complex; especially if the closed book has been purchased from another provider.
• The accumulation of multiple legacy books regularly involves the use of outsourced service providers, leading to data challenges and potential costs involved.
• Legacy pricing and terms can present challenges for demonstrating fair value in today’s environment, for example, where early benefits are paid for in later years.
• Customer segments can be markedly different within closed books for certain products, which can create a different set of challenges for consumer understanding and support.
• Duty compliance is required even if the strategy is to rationalise or sell a closed book. In certain circumstances, a sale will require that firms consider the enhanced information needs of a purchaser.

Consequently, firms should focus on the following actions:

• Firms must explore what led to a decision to close a product or service, to assess if it impacts customer outcomes. Do the records, or corporate memory exist to understand that?
• Firms must consider other means of analysis, such as analysing past complaints to understand issues and how these compare with open book products.
• Firms should test their customer communication strategy – are there customer segments that do not receive adequate support, and can this be changed through a better contact strategy?

Actions identified will need time to be delivered in a timely fashion, particularly where communication with customers, or more significant action to address a book, or customer segment, could be required.

Look deep into the possibility of harm in your closed book products, and address this as soon as possible.

Conclusion

The FCA has acknowledged that a large amount of work has already been completed. They reiterated in a speech⁸ in November 2023 that The Duty is not a once and done exercise. Firms need to make sure they are learning and improving continuously and must be able to evidence this in their annual board report.

We asked firms about the overall impact of the Duty on their business model and strategy, and over half of respondents indicated that no significant change had occurred and therefore believe they are well-positioned to deliver compliance with the Duty.

With this in mind, we recommend that firms should ensure that the approach to compliance is robust, considering the key points and actions outlined in this blog, particularly with regard to the closed book. Firms should also not under-estimate the time and effort required to embed the right culture into their firm, how the business strategy aligns to this culture and what are the key performance indicators / MI to evidence that a firm is delivering good outcomes for all customer groups.

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References

¹ Consumer Duty: Not once and done

² Embedding the Consumer Duty into your culture | Deloitte UK

³ Improving Customer Outcome Testing | Deloitte UK

⁴ Speech by Sheldon Mills, FCA, “Countdown to the Consumer Duty”, 10 May 2023

⁵ Consumer Duty – information for firms

⁶ Preparing the Consumer Duty Board Report | Deloitte UK

⁷ OneView: Third Parties | Deloitte UK

⁸ Consumer Duty: Not once and done | FCA