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After years of striving to be more customer-centric, Consumer Duty will require financial services firms to prove just how far they have come.
In brief:
- Financial services firms are off to a solid start, but are yet to fully scope the necessary efforts and costs.
- Firms that take a holistic, business-led approach, with senior-level advocacy, are more likely to generate strong returns on their investments.
- Cultural change and technology upgrades are necessary to develop empathetic customer understanding and evidence good outcomes.
The Consumer Duty principle proposed by the Financial Conduct Authority (FCA) represents a significant shift for the UK financial services sector, creating a new and higher standard for firms to protect retail customers, and serve their best interests. If that sounds like a rule with a broad impact, you are right. Covering all customer interactions — both direct and indirect — the new standard is amongst the biggest regulatory change firms have been subject to in some time.
As the FCA has said, “For many firms, this will require a significant shift in culture and behaviour.” In other words, complying with the duty will be no small undertaking. Just assessing the impact and developing action plans will require a great deal of work. Most changes may be dependent on — or complementary to — change programmes that are already underway, including technology deployments designed to automate back-office processes and enhance customer experiences. With the final rules due at the end of July 2022 and a proposed implementation deadline of April 2023, there is clear urgency to act.
To understand how the market is approaching the new duty, we spoke to 32 firms across the financial services industry. We wanted to learn about their priorities, their key transformation and technology challenges, and how their implementation plans are progressing. Our conversations included large global banks, smaller challenger and specialist banks, both life and pensions - and general insurers, as well as wealth and asset managers. Combined, these businesses have responsibility for more than 60% of the UK assets under management.
Based on our discussions, it is safe to say that firms increasingly recognise the broad impacts of the new duty. By conducting initial assessments, they have identified many of the moving parts that will have to be carefully managed to achieve compliance and see their business through the eyes of their customers. Interestingly, whilst many firms have said publicly that they will need more time to comply, the majority of those we spoke to expressed confidence that they should meet the deadline.
The most forward-thinking firms also see the value of taking a business-led approach, primarily increased customer-centricity across the business, rather than adopting a compliance-first mindset. In fact, programmes led by the C-suite or other top executives have bolder and more strategic ambitions in terms of deriving business benefits from the duty.
In this article, we highlight the key insights from our survey and recommendations on how firms can deliver valuable long-term benefits from their Consumer Duty investments.
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Chapter 1
Consumer Duty tops the regulatory agenda for firms
The profound impact of Consumer Duty, which involves all customer interactions, makes it a priority.
Most of the firms we spoke to recognise that Consumer Duty is critical. Nearly 90% ranked it amongst their top three regulatory priorities, ahead of Operational Resilience (61%), and Environmental, Social and Governance (ESG) reporting and compliance (52%). Exactly half of the survey respondents said it was the number one priority, which signals that more firms are ready to move urgently.
There are several common threads amongst these three regulatory priorities. Each requires comprehensive frameworks in response to enhanced governance oversight and monitoring requirements. They are all urgent and reflect fundamental market changes, including the increased importance of customer-centricity and the need to help protect against huge societal risks (for example, climate change). Furthermore, they necessitate holistic planning and proactive coordination amongst different business functions, with clear opportunities to benefit the business for firms that go beyond a ‘tick the box’ compliance approach.
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Chapter 2
Most firms have mobilised, but more action is needed – and soon
Foundational work is well underway, whilst firms scope the level of required change.
Many firms report that they are making progress. 77% of respondents have already initiated key activities to prepare for the new rules, with only 16% saying they have yet to start. For instance, 74% have begun their gap analysis. More than half (52%) have conducted board training and 35% have begun reviews of management information. Interestingly, 6% reported that implementation was already in progress — we can categorise this group as the first movers. A clear majority of firms (61%) expressed confidence that they will meet the April 2023 implementation deadline.
Laying the foundations for success
have initiated key activities to prepare for the new rules.
Delivering on commitments
do not yet know what level of change is required to deliver.
However, this widespread optimism should be somewhat tempered, as 94% do not yet know what level of change is required to deliver against the FCA’s expectations. Furthermore, the vast majority (90%) of firms have not yet assessed the total cost of implementation. Fewer than a quarter of firms have started to review activity across their products, pricing and customer journeys. Clearly, there are many unknowns still to be revealed.
None of the firms that we spoke to have reviewed staff awareness, or completed assessments of competency or training requirements, which are key to driving the necessary cultural change. Compliance with the new standards will require a top-down cultural shift within the organisation and the knowledge of skilled teams, rather than technology enhancements alone. Increased learning will also be critical for staff to understand the behavioural shifts required by the duty and what customer-centricity means in practice. We expect firms to increase their people, organisational and cultural activities in the next phase.
Some firms may be assuming that the deadline will be extended, as has happened with previous regulatory policies. About 23% of our survey respondents said their firms needed 12 months or more to comply with the rules and another 10% said nine months would be sufficient. From our initial discussions, it is clear that many do not expect everything to be achieved within the proposed timeframe. Still, there is a broad consensus that the time to act is now — and on a no-regrets basis. Our sense is that most firms are taking action, with the intent to meet the FCA’s stated deadline.
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Chapter 3
Programmes are largely business-led
Looking beyond a compliance-centric approach can help firms generate business value.
The scale and nature of Consumer Duty gives a clear indication from the regulator that they expect this to be a board and CEO priority. A clear majority (60%) of our survey respondents said their Consumer Duty approach is business-led, rather than compliance-driven. Two out of three respondents say business executives are accountable or serve as the main sponsors for their programmes, compared to only 21% who say risk or compliance leaders play that role. This is as it should be, for any firm that wants to leverage the duty to enhance customer-centricity in their business operations.
The extensive nature and broad impacts of Consumer Duty necessitate a business-led approach. Given that boards face attestation requirements, we expect to see the number of firms leading with this approach to increase during the implementation period.
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Chapter 4
Technology and data are key to evidencing good outcomes
Technology changes required to evidence the duty are focused on data and testing.
When it comes to challenges, 80% of the survey respondents are concerned about how to evidence good outcomes — a key requirement of the duty. The scale of change, customer data and technology challenges are the other most common concerns. This is not surprising, given that many firms are currently managing multiple, in-flight transformation initiatives, which impact their customers and could complicate their Consumer Duty efforts.
The customer-centricity challenge
are concerned about how to evidence good outcomes.
Technology and data will be key
believe technology transformation will have a role to play in meeting these requirements.
Almost nine in ten firms (87%) believe technology transformation – that is, significant work on existing systems or deployment of new tools – will be needed to meet Consumer Duty requirements. In terms of how they will provide evidence related to good outcomes, 42% of firms plan to use a combination of data and testing. Only 16% of respondents cited board-level oversight as their primary tactic. Nearly a quarter of firms (23%) do not yet know how they will provide the necessary evidence, further proof of the heavy workload in the months ahead.
Roughly equivalent numbers of firms expect significant (42%) and moderate (45%) technology change for compliance. Respondents cited client communications (26%), customer relationship management (26%) and records management (13%) as the top-priority areas and applications that need to be addressed.
Firms making large Customer Relationship Management (CRM) investments, can look to those new and updated systems to provide data to help them evidence outcomes, rather than standing up separate IT systems to evidence the new duty. In practice, this means making the necessary modifications in coordination with in-flight technology deployment. Such a flexible and sustainable approach is vital to long-term success as requirements evolve in the future.
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Chapter 5
Firms are rightly focused on customer understanding
Training and education are necessary to ensure the customer is at the heart of all decisions.
Consumer Duty represents an opportunity for firms to back up their claims that customers are at the centre of their business — but it will not be easy. More than half of the respondents (54%) believe customer understanding is the outcome that requires the most effort. Additionally, 42% say their business is unprepared. That is not entirely surprising, given that so few firms have begun to assess their customer journeys and only 6% of the firms have conducted customer research relative to Consumer Duty.
The first step is to genuinely understand how customers experience products and services — both why they would buy and how easy it is to do so. This is about customer empathy and the ability to walk in the customers’ shoes. Some firms are using research to get a genuine view of real consumer behaviour.
Training is required to ensure staff, throughout the organisation, understand how the duty relates to their roles and how they can apply judgements to promote good outcomes. Senior leaders must articulate and advocate this vision, but education and tools will be critical to ensuring customer-centricity is embedded in everyday operations.
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Chapter 6
Firms can expect to recalibrate cost estimates
Regulators are estimating higher costs than most firms have budgeted.
Cost is a significant grey area, given that very few firms have scoped the total cost of implementation. The initial budgets estimated by our survey respondents seem low, possibly because they are accounting for Consumer Duty within the budgets of other customer-related initiatives.
The FCA expects initial costs to comply with the duty across the industry, to be in the range of £688m to £2.4bn, with ongoing, post-implementation direct costs in the range of £74m to £176m annually. On average, smaller firms are budgeting between £500k to £1m for implementation, whilst firms with a larger market share identified initial budgets between £7.5m to £50m. As early gap analysis and due diligence work is completed, we expect to see these budgets expand.
Programme costs remain uncertain
have not yet assessed the total cost of implementation.
It will be important for firms to ensure all areas of Consumer Duty are included within cost estimates. For example, they will need to account for potentially costly areas that have not faced much regulatory scrutiny before (including, sludge practice, fair exchange of value and distribution chains), as well as the potential costs associated with evidencing and documenting that good outcomes are being delivered. Firms should also be cautious not to benchmark against previous regulatory programmes, as the duty will have a broader impact across the business and require a more holistic implementation approach — inclusive of both technology and cultural change.
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Chapter 7
Where firms should focus now
A few design principles can guide firms as they move rapidly to execute their implementation plans.
For years, financial services firms have aspired to become more customer-centric. Now they have less than a year to demonstrate just how far they have come. Based on our research into the industry’s readiness for the new duty, we believe firms should apply a strategic long-term approach that reflects the following:
- Customer understanding is critical and needs to be embedded in culture: By prioritising efforts around insight into customer motivations, behaviours and journeys, firms will be better positioned to win in the market based on increased customer-centricity, rather than merely achieving compliance with the duty. Even firms with well-developed customer journeys should not assume that customers behave in that way in real life. Behavioural research can help identify possible harms.
- Technology solutions should be a part of the mainstream of the firm rather than stand-alone: The main objective is to provide evidence of good outcomes for all customer interactions and to make the customer central to a firm’s thinking. We believe firms may be better served by either modifying existing technology, or building compliance into new systems to capture the necessary data — rather than seeking to deploy new compliance systems in parallel.
- Success starts at the top: The Consumer Duty is the biggest regulatory change many firms will have faced in a decade. The most successful change programmes will have senior-level accountability and advocacy, due to the firm-wide impacts of the duty. Plus, strong executive leadership is needed to seize the opportunity to embed customer-centric thinking and behaviours authentically into operations, and organisational culture.
- The Consumer Duty requires a mindset shift: Topics, such as fair exchange of value for customers, are difficult issues to evaluate. Equally, senior management can use these questions to explore the scope for innovation in their market.
- Benefits are there for the taking for firms that move now: Many regulations appear to present only risk and cost. But Consumer Duty offers clear business benefits for firms that make the most of their compliance investments. Many firms have laid a foundation for change, but those that accelerate their efforts will take the lead in realising the strategic business benefits that the new duty can bring.
We believe the industry is off to a solid start — but is yet to fully scope the necessary efforts and costs. Tactical solutions must be combined with strategic thinking — to not only meet the implementation deadline, but to foster sustainable change for the long term.
Summary
The unique nature of the challenges and opportunities related to Consumer Duty shows why firms that take a holistic and strategic approach, stand to realise tangible business value beyond mere compliance.
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