Firms come under pressure to evidence Consumer Duty action

One year on from Consumer Duty, the pressure is on for firms to evidence action. Capco expert Michael Shand has outlined three key fronts on which financial services players can best adapt to the requirements.

The Consumer Duty rule put into place by the Financial Conduct Authority in 2023 sought to establish a direct link between consumer protection and effective financial crime controls. The move was intended to make it clear that firms should consider whether their systems and controls are proportionate and consistent with their obligations under the Consumer Duty. These obligations included the FCA calling on firms to review customer interactions with a focus on identifying vulnerability, clear communication and fair value.

According to Michael Shand, managing principal at financial services focused technology and management consultancy Capco, Consumer Duty has still been “a positive step for the financial services industry”. Speaking on the last year of change, he said that it has demonstrated “that putting customers front and centre” has challenged firms to be more innovative “in delivering better customer outcomes”.

Despite these positive developments, however, the journey is ongoing and it will take time to ensure the entire industry shifts its ways of working to fully achieve the cultural transformation intended by the FCA. As with any regulatory change, this has placed strain on some firms to keep pace, with some research even suggesting that some companies have even dropped advisory clients as a means to keep up with the new workload.

And that workload is set to ramp up now, too. The duty has not only passed its one year anniversary, but also introduced the regulation for closed products. This means firms will also have delivered their first annual Consumer Duty board report, evidencing that they have met the requirements of the duty and are also making progress on delivering good outcomes for their customers.

“These reports will be crucial to measuring the success of the Duty and conveying confidence to boards and the regulator,” explained Shand. “They also set clear priorities for the coming year. We believe firms should be particularly focused three fronts.”

First, firms need to focus on continued data improvements. Shand noted that they should not underestimate the need to continuously improve insights into customer outcomes using better data, as “the FCA are increasingly data-driven and are looking for firms to continue to build on and improve the data that they are using.” Management and boards should assure themselves that underlying data is sufficiently granular to provide customer-cohort-level insight, and that there are robust actions in place to address areas of customer harm.

Second, firms should demonstrate improved customer outcomes.  This will be the first annual report of many for firms complying with the Consumer Duty and the FCA will be looking to see firms’ commitment to a journey of continuous improvement. Therefore, it is “vital that firms stay focused on the areas they have set out in their annual consumer duty board reports so they can demonstrate, and evidence progress in a year’s time.”

And finally, firms should demonstrate continued engagement with the board. The ongoing embedding of the Consumer Duty into the culture of the firm is critical, according to Shand, and regular engagement with the board throughout the year is an effective way of helping ensure focus and strategic alignment. This will also “help ensure focus on the priorities for improving customer outcomes set out by the firm, and make ongoing process for the annual consumer duty board report more effective.”

Shand concluded, “While this past year has been groundbreaking in the FCA’s drive for better outcomes, the full impact of the Consumer Duty will only emerge over time. The stories and evidence that firms collect, both in their board reporting efforts and beyond, will be vital in measuring this progress - and not just at a company level - but also across the financial services industry as a whole.”