The new Consumer Duty feels different
The changes the financial industry is implementing under the new Consumer Duty (‘the Duty’) feels very different to the usual big regulatory change projects we have been used to in previous years.
The FCAs three-year strategy, which the Duty forms part of, is drawing a harder line to put a stop to consumer harm, is shifting prescriptive regulation towards more of an outcomes-based regime and businesses are facing greater responsibility and accountability for ensuring these outcomes are met.
The Duty relies on a significant cultural and behavioural shift, further supported by proposed amendments to the Senior Manager and Certification regime on senior management including board accountability to deliver consistently good outcomes for customers. Changes to governance, data and management information will underpin the new Duty and drive businesses to be proactive, agile, innovative, insightful and mindful of their customers’ needs, support and understanding.
The Duty will embed the foundations for upcoming regulation
The FCA ESG strategy is one area of regulatory change coming that recognises that firms will need to move fast to meet their sustainable objectives and creating a more flexible regulatory environment that supports these changes and growth is absolutely vital. It’s no coincidence that the changes being implemented under the Duty, if designed properly, will form the foundation for future regulation coming down the line. Further, they will support the shift towards an outcomes focussed regulation driving innovation, resilience and enable businesses to respond quickly to harm in a fast-changing world.
One critical piece of regulation under the ESG strategy, which has culture and trust at the core, is the Sustainable Disclosure Requirements (SDR) and investment labelling. SDR will focus on tackling greenwashing and building consumer trust by providing clear, understandable, and substantiated sustainability information to support consumers in meeting their sustainability objectives. SDR and investment labelling will be heavily reliant upon the adapted frameworks embedded under the Duty, including:
identifying foreseeable harms in relation to greenwashing risks.
clear and accurate SDR disclosures and investment labels supportive of good customer outcomes.
testing of communications on the use of sustainability-related terms in product naming and marketing.
customer understanding to ensure they can meet their sustainable financial objectives.
How can the Duty be embedded whilst future-proofing the business?
Failing to create appropriate, proportionate and functionable robust frameworks will impact not only the Duty but also future regulatory implementation; by impairing a business’s ability to proactively identify risk and align business activities to customer outcomes, will place consumers at greater risk of harm and will prevent businesses from exploiting opportunities and efficiencies.
Businesses considering the following approach when implementing the Duty may also help to future proof for the next wave of regulation that is dependent on the same frameworks.
Tone from the top – in addition to business leaders nurturing a culture that place customers best interests and outcomes at its heart, they should also encourage improvements in data quality and innovation and continually challenge, adapt and improve implementation plans, strategy, operating models, risk frameworks, technology and data etc in response to a rapidly changing environment.
Agility – businesses should design their systems and processes to enable agility in response to changing or anticipated customer needs or to adapt where outcomes fail to be met. This ability to be agile will be challenging for businesses, particularly larger and more complex ones, but will be vital as we enter a more volatile uncertain complex and ambiguous (VUCA) environment.
Extend oversight – extend supervisory oversight practices, including management information, to include customer interests and outcomes at every stage of the customer and product journey.
Meaningful data – Value is derived from meaningful data. Creating enhanced, comprehensive and insightful data-led and assertive capabilities enables proactive identification of risks and give customers more power to make better decisions. For instance, businesses can use this data to anticipate client needs and provide timely support in a fast-changing environment or monitor and adapt products and services to improve client outcomes etc.
Improve the quality of customer communications and services – interacting with and having a deeper understanding of, customer base and target market, enables communications and services to be tailored for a specific audience. This information will assist businesses in ensuring their customers can easily access the information and support they need in a clear and understandable way as well as build trust and transparency.
The significant shift in regulation and move to assertive supervision model places greater emphasis on businesses to implement the Duty correctly from the outset. In addition, the frameworks and processes designed, will create a firm foundation for future regulations that share similar objectives. If businesses don’t invest in their implementation plans, the Consumer Duty could divide firms. Those that drive data, innovation, and opportunity vs those that don’t and are unable to predict and weather the storms ahead.
