At a glance
- With a few months to go until the Consumer Duty (the Duty) becomes effective, we consider what success may look like under the Duty in the years ahead and discuss some challenges that will arise between now and 31 July 2023.
- Culture will play a pivotal role in the successful embedding of the Duty. Firms that truly embody the cultural shift the Duty seeks to bring about are likely to be rewarded with greater customer engagement and loyalty over time.
- The right culture is a necessary ingredient for firms to comply with the Duty in a changing environment, where a dynamic approach to compliance and continuous adaptation and improvement will be necessary.
- Firms can leverage the Duty to drive product simplification programmes and innovation which can improve outcomes for both customers and firms.
Relevant to: Board members and senior executives of banking, investment management, general insurance, and life & pension firms, particularly those involved with the implementation of the Duty.
With a few months until the Duty rules come into force on 31 July, firms are focusing all their efforts on meeting the deadline. Deloitte has been actively engaged across all sectors, helping firms with their implementation, and observing what is going well and less well. As project teams focus on delivering compliance with the four outcomes, it is the right time for senior stakeholders to take stock and ask themselves “What will success look like in a Duty environment?”. This blog provides insights into how firms can answer this question over the short to medium term, drawing on our experience from our cross-sectoral work assisting firms with implementation.
What does success look like?
Most firms are working very hard to implement the Duty rules and guidance on time. However, given the subjective nature and the outcomes-based focus of the rules, complying only with the letter of the rules might not result in successful delivery of your programmes. For most firms achieving substantive compliance by 31 July will be a real accomplishment, given the tight timescales and complexity of implementation, however, the journey into the Duty will be just beginning. There are two key elements to ensure the journey is a successful one in the medium term. First, compliance with the Duty will evolve with changing customer needs and regulatory expectations. As a result, firms will need to have a dynamic approach to compliance for which embedding the expectations of the Duty into the firm’s culture will be key. Second, from a strong foundation of Duty compliance, firms can create better commercial opportunities alongside better consumer outcomes.
In the short term there are a range of issues firms are dealing with to achieve substantive compliance such as target market granularity, value assessments and communications testing. We discuss these in the second part of the blog.
A. Unlocking success in the medium term
1. Embedding expectations of the Duty into the firm’s culture
At the heart of the Duty is the need for firms to have a customer-centric culture focused on delivering good outcomes for retail customers. Firms’ strategies and business objectives must be closely aligned to the Duty’s objectives and this alignment needs to cascade throughout the organisation. We have seen that in times of economic and financial pressure firms can lose sight of customer outcomes resulting from their actions. But this is no longer acceptable, and it will require a conscious effort for firms to bring consumer outcomes to the top of the agenda when making strategic and related business decisions. Equally, risks to the delivery of good customer outcomes should be high on the agendas of risk, compliance and internal audit teams. These teams should proactively seek to identify areas of emerging customer risks and support senior management to ensure they manage these risks effectively.
In practice, to embed the cultural change required by the Duty, firms will need to ensure that employees gain a deep understanding of how their actions can contribute to or impede the delivery of good customer outcomes. There is much to do for firms in this area as the FSCB employee survey results for 2022 showed. The survey indicates there has been a decline over time in employees believing that their firm’s values are meaningful. The survey also asked four Duty‑specific questions for the first time and found that the responses differed by business area, with a significant proportion of those in non-customer facing roles answering that the questions were not specific to their role, or that they did not understand them. Firms will need to ensure all their employees understand the purpose of the Duty, how their individual role plays a part in delivering good customer outcomes and how that links to the firm’s purpose and values. Firms should focus on emphasising that the Duty is not just a one-off compliance activity but rather a new way of thinking, required by all.
Additionally, firms should consider as part of their business strategy, how their approach to performance management and remuneration incentivise all of their employees to behave consistently with the Duty. The focus for employee rewards should balance the delivery of good customer outcomes with the traditional commercial targets, so as to create an environment where staff will continue to strive for improved customer outcomes.
2. Leveraging the Duty investment and data
We understand the Duty implementation has already prompted some firms to review their current product catalogues. We know compliance with the Duty is more challenging where firms have large volumes of legacy products on multiple IT platforms – these can lead to increased compliance risks. Also, in a change environment a large product catalogue is notoriously difficult to manage. Firms in this situation may want to grasp the nettle and focus on simplifying their product offering while balancing the needs and demands of their customers for differentiated products. In the medium to long term, product simplification allows firms to remove costs and complexity and streamline their efforts to comply with the substance of the Duty.
A simple but robust product offering allows firms to focus on developing products that are better tailored to meet customers’ needs. An increased knowledge of customers and their needs and wants together with better MI and data can give firms the impetus to create innovative solutions and access specific target markets as never before. In this sense, we see the Duty as a gateway to better products. We have already seen some firms developing products that they would have been reluctant to develop before. The new value assessments and monitoring tools over the distribution chain enabled these firms to bring niche products to market with more confidence that they are meeting specific customers’ needs effectively. In the medium term, we expect those firms that maximise the new tools and knowledge arising from their efforts to comply with the Duty to better their products will be the most likely to succeed in the new environment.
Firms need to demonstrate Duty compliance and this requirement is likely to drive improvements in both quality and quantity of data. We believe Duty‑related data will be further developed as firms go deeper into their compliance journeys. Improving and enhancing the data used may allow firms to monitor their products’ performance better, while improving customer outcomes. The additional data to evidence Duty compliance can be leveraged to create a more successful commercial proposition while putting customers at the centre of the business.
B. Addressing immediate challenges
1. How to get products and services right for the target market
Products that are designed to meet the needs of a firm’s target customers, help them achieve their financial objectives and avoid foreseeable harm are the foundation of achieving good customer outcomes.
We have found that firms in some sectors have struggled to define the target market at a sufficiently granular level. Firms that have made the greatest progress typically do so by asking themselves some of the following questions:
- What is the problem I’m trying to solve with this product?
- Who will benefit from this product?
- Is my definition so broad that it includes customers I do not intend this product for?
- What is the target age and life stage of the customer base for this product?
- What level of financial literacy do they have?
- What are their financial goals/priorities/fears?
Starting with a well-defined target market makes meeting the other Duty outcomes less challenging and creates the right foundation for the rest of the programme.
2. Value assessments
General insurers (GI) and many asset management firms have had to carry out value assessments for some time now. For asset management, some firms have had scrutiny of their assessments of value since early 2023. In the case of GI, we understand the FCA has started a review of value assessments, which is at the data request stage. Results of these reviews (potentially expected later in 2023 and in 2024) will be valuable for other sectors as a foretaste of how the FCA plans to monitor a firm’s assessment of product value. One of the biggest challenges we have seen is less about compiling a value assessment and more about defining the thresholds beyond which a product is no longer good value to customers and should be modified, withdrawn or the relationship with the distributor reviewed. We expect the practical meaning of value and the ranges of what is considered acceptable to evolve as the Duty is embedded. Our previous blog discusses the lessons we think can be learnt from the GI and asset management sectors.
For other sectors such as banking and life insurance, the focus in meeting the price and value outcome centres on:
- developing a methodology for assessing value including around cost allocation on a product-by-product basis;
- identifying key risk indicators, MI and tolerance thresholds to be used as part of the value methodology;
- obtaining the right information from distributors or manufacturers to complete the assessment; and
- Acting where results are outside tolerance thresholds.
These challenges require application of judgement given the subjective nature of the assessment. Firms might want to use the learnings from other sectors that have gone through these challenges recently, ensure board and senior stakeholder engagement in key decision making and keep open and transparent communication with the FCA to ensure they remain on track.
3. Scrutinising customer communications
Undeniably, firms cannot succeed if customers do not understand the products, or are not supported to meet their financial objectives. Ensuring customer understanding can be a challenging outcome to demonstrate. This can be for a variety of reasons, including significant variations in financial literacy across and within target markets and some customers being “time poor” and therefore unable or unwilling to focus on complex information, however clearly it is expressed. Firms need to deepen their understanding of who their product is designed for and their level of financial literacy.
For larger firms, or those with a significant number of product variations, there are potentially thousands of artefacts in the communications estate including letters, contracts, Terms and Conditions, SMS and call scripts to name a few. As a first step, firms need to identify accurately the universe of communications; this can be particularly challenging for those that do not have a central repository or library. Second, firms need to prioritise their communications for review and testing with the intended target market or user demographic. Firms that have mapped their communications to key parts of the customer journey and assessed the risk of foreseeable harm are likely to be better equipped to prioritise this work. In the time remaining before go live, firms are taking a pragmatic approach to groupings of communications to accelerate the review. But, even so, firms should not underestimate the level of work required.
4. Making data work
Evidencing outcomes requires firms to have a rich suite of data, which can be translated into meaningful Management Information (MI).
Many of the firms we are working with have opted for a pragmatic approach of using their current data sets to evidence compliance with the Duty. However, we think it is highly likely there will be gaps in firms existing data and MI relative to the four Duty outcomes and that firms will need to close them. Specifically, firms should ask if their data:
- evidences that products meet the needs of the associated target market;
- evidences that products offer fair value to customers;
- shows that customers understand and use the products purchased as intended;
- shows customers are appropriately supported;
- allows comparison of customer outcomes across distinct groups including vulnerable customers (and explains any outcome differentials); and
- allows senior leadership to have confidence that the firm is delivering good customer outcomes and avoiding foreseeable harm.
Implementing the Duty by 31 July 2023 will not be the end of the journey, but more likely its beginning. In the short term, firms are working very hard to address the most immediate challenges. It is key that firms tackle issues around target market granularity, develop clear value assessments methodologies, identify and review the communications under scope focusing on those that are high risk and ensure data is in place to conduct assessments and demonstrate compliance. Beyond that, the maturity of most firms’ understanding of the Duty will increase over time as they learn more from the supervisory process and peers’ actions. This means firms need to adopt a dynamic approach, recognising that how they continue to meet the Duty will evolve over time.
In the medium term, firms with an approach to the Duty that is reflected in their culture and values and can adapt to customers’ evolving needs are likely to find living with the Duty much easier than those aiming for a minimum compliance approach. Having the right culture and values should also enable firms to leverage their efforts on the Duty to develop better products that meet the needs of specific target markets and in doing so meet their commercial objectives while delivering good customer outcomes. This is what success looks like.