Last year we all worked hard to meet the July 2023 deadline. Now in 2024, the FCA has marked out some key next steps on Consumer Duty, including some areas where firms need to improve.
We've compiled a summary from the FCA of some next steps and improvements identified on Consumer Duty. Alongside, we have been looking at each of these areas and enhancing our research methods so we can help you continue to be compliant with the FCA’s Consumer Duty.
The key messages which are coming from the FCA are:
Closed products
The deadline for closed products is July 2024 – Closed products are any products which have not been sold since July 2023. Key issues to consider for closed products are:
- Out-of-date records/ missing records - Your company may be struggling to evidence good customer outcomes through out-of-date records that you have on closed products.
- Lack of knowledge – Customers in legacy products may pay higher charges than they would for open products. Firms should make sure they don’t exploit behavioural biases such as status quo bias.
- Prioritisation – Firms need to do risk assessments to understand what closed products could cause the greatest harm to customers.
- Foreseeable harm and customer frustration: The FCA doesn’t need firms to look into sales and distribution practices for closed products but should look at any foreseeable harm and customer frustration which is being experienced for these products.
RESEARCH RECOMMENDATIONS:
- Follow the same process that you used for testing open products for your closed products.
- This should include needs testing to ensure the products meet a genuine need, and:
- Comprehension testing to ensure customers understand your communications.
Improvements and going a step further
The core message from the FCA is that Consumer Duty is not “once and done” and they expect to see firms embed Consumer Duty principles across their organisation. However, the FCA goes more specific than this in identifying several specific areas where they have seen improvement is needed, along with examples. We have outlined these below.
- Taking Consumer Duty to the board - Teams need to make sure they are bringing the duty to the attention of board members, so Consumer Duty is understood at all levels not just risk and compliance teams.
- New data monitoring strategies - Firms may be collecting the wrong data for understanding customer outcomes or they may be missing data they need to be collecting.
- Vulnerable customers -The FCA has noticed some customers are not identifying who is and isn’t vulnerable. Firms should also be mindful of how they identify this information.
- Brokers and customers – Firms must grasp their role within the distribution chain and how the actions of others in that chain impact their responsibilities.
- Justifying costs – The FCA has identified some key areas where firms are falling short of the price and value outcome. This includes, not being able to justify the costs, customers paying for services they aren’t receiving and value assessments not seen through the lens of customers.
- Clear and simple - Key areas where they have seen firms fall short are pushing products and services to customers which are too high risk or complex and a lack of clarity about costs and charges.
- Supporting customers - Many firms have used behavioural intervention to create more support touchpoints for customers. However, in some cases behavioural interventions akin to gamification which are motivated by exploiting customer vulnerabilities cause foreseeable harm to customers.
- Training - Consider how staff are being trained in dealing with customers especially those with vulnerabilities.
RESEARCH RECOMMENDATIONS:
- Set up an active monitoring process for customer outcomes, don’t just rely on customer satisfaction
- Qualitative interviews with vulnerable customers to understand how vulnerability impacts the outcomes they get from your products
- If you’re a manufacturer, interview intermediaries to understand how they’re using your products and the information you pass to them
- Use conjoint analysis to build a model of the value your products provide, creating evidence that your prices are fair
How your organisation can remain compliant
The board and embedding Consumer Duty:
- The FCA want to see the Consumer Duty embedded at board level so it’s factored into strategy, leadership and people policies. Risk and compliance teams need to have discussions at the board level so they are not constrained by the processes which come from leadership who lack knowledge of Consumer Duty.
- Critical for Consumer Duty next steps, is the annual board report. This should include the results of your monitoring on whether your products and services are delivering the expected outcomes.
Collecting new data:
- The FCA expects firms to identify where they need better data to understand customer outcomes rather than re-package existing data. The ability to monitor outcomes by collecting new data will be crucial for continuing to remain compliant.
RESEARCH RECOMMENDATIONS
- Don’t rely only on customer satisfaction – consider adding a Customer Outcome survey to your quarterly reporting.
Vulnerability
Firms need to make sure they have thought about how they categorise vulnerable customers. Firms should be able to categorise vulnerability in a more sophisticated way than just looking at one metric such as age. Cognitive, behavioural and situational factors can be used to categorise vulnerability. Firms may need to be smarter in how they collect vulnerability where they avoid repeatedly asking direct, sensitive information to customers.
Secondly, firms need to have methods to track these customers so they can identify where these groups are receiving poor outcomes and illustrate what can be done to address this.
To ensure firms aren’t asking unnecessary questions of customer vulnerability they should make sure vulnerability information is effectively passed over between employees so customers don’t have to repeat information.
Brokers and customers
It may be that the firm needs to provide additional or more effective information to brokers for them to better communicate with the end customer. If the firm still has a material influence over the end customers through its actions, they are still subject to the duty, even if the broker mediates their relationship with the end customer.
RESEARCH RECOMMENDATION
- Interview your brokers to understand how they rely on your information in communicating with customers
How to justify costs
Firms should be able to explain where costs come from. Some firms have relied solely on a comparison against similar product offerings in the market. This isn’t enough to determine fair value. Instances of firms not providing fair value identified by FCA include a long and complex distribution chain making a product more expensive simply because it has gone through more parties.
Value doesn’t have to mean financial value, the FCA makes clear that ‘peace of mind’ and other non-financial outcomes can be incorporated into fair value assessments.
RESEARCH RECOMMENDATION:
- System 3 value modelling or Behavioural Conjoint to put numbers on the value that your products provide.
Clear and simple
The FCA wants to see firms market their products in a way which is supportive of good customer outcomes. Moving away from playing down the risks of a product and instead focusing on a better understanding of a product. When it comes to costs and charges, firms should seek to provide clear examples of product and service costs so customers can have a better understanding of them.
Supporting customers
Gamified platforms can encourage risky short-term strategies which put emphasise on immediate short-term rewards which do not result in good customer outcomes. Firms should consider what is the aim of their behavioural interventions to ensure these behavioural gamifications aren’t geared towards increasing customer risk.
Training
Staff need support and training so they can help customer reach good outcomes in complex circumstances. For instance by understanding their personal circumstances, they can provide appropriate and tailored solutions. This may mean training which understands the behavioural impact of different vulnerabilities and goes beyond using a script or template to deal with customers.
RESEARCH RECOMMENDATION
- Offer a behavioural bias skills assessment for your employees followed by training to bring them up to the required level of understanding
How behavioural science helps support Consumer Duty
At Irrational Agency, we continue to develop our research and training services to help you remain Consumer Duty compliant. Some of the ways we can help make Consumer Duty compliance easier for you include:
- We now offer training workshops focused on the customer support and understanding outcomes
- Our System 3 platform is designed to help you understand what concepts like fair value mean
- Our qualitative methods are able to tackle issues of vulnerability and customer needs
- We have the capability to test new documents versions through comprehension and A/B testing
- We offer a document redesign service to help make your communications easier to understand
- We provide consulting, design and auditing on how behavioural biases factor into customer behaviour and outcomes.
- We would love to speak more about how you can continue to remain Consumer Duty compliant and how our research, training and testing can help you do that.
Explore the rest of our guidance on the FCA Consumer Duty Regulations here.