Harnessing the heart of Consumer Duty

Since its inception, the Financial Conduct Authority (FCA) has set out 11 principles of business for financial services – making the introduction of the 12th principle, Consumer Duty, one of the most fundamental changes to UK retail regulation in over a decade. The duty introduces a higher standard of conduct, creates a clearer focus on the interests of customers and gets to the heart of issues that previous regulations have not managed to reach.

The FCA is asking firms to take ownership of customer outcomes, with their guidance around practical implementation issued at a high level to cover the thousands of firms they regulate. This leaves many unsure of how to apply the rules, especially given the shift in focus to outcomes rather than processes. Based on previous regulatory approaches, it is likely the FCA will follow-up with thematic reviews, such as the treatment of vulnerable customers. We also know that they are willing to use enforcement and issue heavy fines when poor practice leads to customer harm. Firms should therefore expect the duty to be backed up by assertive supervision and enforcement action.

With the new rules now finalised and with implementation expected by July 2023, faced with such tight timescales, firms are initiating targeted change programmes. The goal is to rapidly enhance the focus on delivering good customer outcomes, whilst taking proactive steps to mitigate poor practice.

Despite the short lead times, many still underestimate the complexities and scale of change required. The new duty is not just a compliance exercise. It is about firms knowing their customers, understanding their needs and meeting their long-term financial objectives. The organisations we are working with see strong, positive reasons – both ethical and commercial – for leveraging the duty to enhance their customer focus. But the resulting changes also need to make business sense if they are to be sustainable in the long term.

Several banking and investment clients asked EY to help them plan their responses. Their priorities ranged from gaining high-level insights into regulatory expectations and the suitability of their chosen implementation approach, to setting reasonable target outcomes across different products, client segments and levels of customer understanding. Identifying potential areas of customer friction, for example if it was more or less difficult to change or withdraw from a product just because the customer sought to do it in branch versus online, and understanding which products and services need to be critically reviewed was another key area of focus. They also wanted to understand how to consistently define, measure and deliver good outcomes in the context of their business and their customers. Good outcomes differ based on the situation but require the financial institution to avoid foreseeable harm for their customers, and to help them achieve their financial objectives.

Over the last few months, EY has been working closely with clients, from a global bank, a major UK retail bank, and a leading wealth manager, to help them to achieve their goals – and to reframe Consumer Duty as an opportunity, not just an obligation.

In our experience, the best approach is to avoid perceiving the new duty as a tick-box compliance exercise. Instead, firms should see it as an opportunity to better understand customers' needs, to empathise with their situation and priorities, and to integrate good outcomes into their everyday activities. There are significant opportunities to drive growth, enrich customer engagement and improve customer retention as a result.

The support EY has provided to clients varies according to the size, nature and complexity of each business. One global bank was keen to achieve consistency across multiple service lines, while a major UK retail bank wanted to focus on the customer suitability of a key product line. In contrast, a leading wealth manager was seeking to sharpen its customer focus across the business.

From working closely with C-suite executives, we have created collaborative teams that bring the relevant knowledge from product development, customer insight, data and technology, people advisory, and risk management. Our clients value our regulatory insights, industry knowledge, proven transformation skills and practical approaches. EY teams tailor recommendations to each client’s customer base and business, applying solutions that give early assurances and generate confidence.

There are a number of examples on these engagements, including:

Interviewing the heads of key workstreams to assess the overall consistency and quality of implementation. Focusing on interactions with senior leaders across the organisation has enabled us to quickly identify potential areas of risk and tailor work programmes to better measure and monitor customer outcomes.

Assessing the performance of key product lines, such as current accounts, or core activities, such as wealth advice, against the four key outcomes. This includes using industry standards to validate internal expectation levels.

Testing key customer journeys for a variety of customer personas, including the use of mystery shopping reviews. This has supported EY clients to broaden their customer perspective, identifying touch points that could create risks for different customer groups. It has also helped them understand how the duty impacts governance throughout the product lifecycle, and to leverage those insights across their portfolios.

By making sure to use data to consider things from a customer perspective, rather than its commercial materiality, and bringing together your different data sources to get a clearer understanding of the customer and their needs, it is possible to significantly enhance outcome testing and its usefulness in delivering good outcomes for customers. Using technology to help deliver real-time customer experience monitoring to demonstrate that their products and services are delivering good outcomes.

The ultimate aim for firms is that when the time comes to attest, senior management should feel confident they can demonstrate that they are delivering good outcomes for their customers. EY teams have provided clients with practical guidance and support, assuring them they are taking the right approach by effectively prioritising key risks and actions.

Consumer Duty takes the financial services sector into uncharted waters. It will have profound effects on how the industry behaves and serves its customers. Firms have a genuine desire to embrace the new principle but are often uncertain about its scope and how to approach implementation.

Working alongside EY clients, using customer data and insights, provides them with the confidence that they can monitor, manage and deliver good outcomes – whilst demonstrating this to their boards and regulators alike.

Consumer Duty is not about achieving short term compliance – although, pragmatically, to implement a change of this scale does require some short-term fixes. The heart of the duty is about viewing the business model through the eyes of the customers, whilst making strategic investments that increase their confidence and satisfaction. If the duty is implemented in the way it is intended, it will create a customer-first mindset and a culture that fosters innovation and encourages competition.

Underpinned with the right training, this will influence behaviour and set the tone for lasting change – reducing harm, protecting the vulnerable and enhancing outcomes for all customers. This will in turn boost customer loyalty and improve long-term performance for all stakeholders.  

It is easy to understand why financial service firms helping customers to achieve good outcomes is a positive, but even more so when you realise that applying these associated insights and customer understanding helps firms to support customers at crucial moments in their lives, increasing well-being and fostering financial education. While this will increase customer loyalty to their financial service provider, it will also enable the industry to implement customers’ ethical goals, generating positive social and environmental impacts for decades to come.