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Treating customers fairly is not a new concept in financial services; it has always been part of the expectations of authorised firms, reflected in regulatory principles for many years, and launched as a specific initiative by the Financial Services Authority in 2006. However, the Financial Conduct Authority’s (FCA) Consumer Duty, launched more than 15 years later, has elevated the expected standard of care, conduct, and culture of retail financial firms beyond existing regulation in the UK.
The new requirements for firms to act upon to deliver good outcomes for retail customers goes beyond a compliance requirement. It is a significant and complex undertaking, in many instances requiring changes to or strengthening of existing structures including business models, systems, and processes such as customer segmentation, pricing structures, and distribution strategies, to ensure fairness to consumers, protection from foreseeable harm, and support in pursuit of their customers’ financial objectives.
This July signalled a major milestone, when Consumer Duty regulations came into force for new and existing products and services that are open for sale or renewal. Another deadline looms large in July 2024, at which point firms will be expected to have also reviewed closed products and services, i.e., those that are active but no longer on sale for compliance with the new rules. Arguably, this final deadline will prove the most challenging for many.
A transformative time for retail financial services
The clock, reset for another 12 months in the summer, may be counting down once again, but this is not a “once and done” exercise with a finish line in sight. Companies are expected to embed the Duty’s principles in their operations far beyond next July, which highlights just how transformative it is proving to be.
New compliance requirements form the backbone of the regulations, in respect of many factors including governance; stress-testing; operational risk and resilience; capital frameworks; organisation and culture; and data. However, the residual implications of the Duty for firms stretch into critical territories that are at the heart of ensuring ongoing commercial viability, all the while enabling better outcomes to be delivered to customers.
Customer re-segmentation, cost-to-serve analysis, pricing, and profitability curves must be reevaluated in close concert with the complexities of measuring and monitoring customer outcomes, redirecting legacy systems, data, and meeting regulatory expectations against a backdrop of volatile economic conditions. In other words, the economic model for some products, services and segments will have to change dramatically to maintain profitability.
Increasing scrutiny – and a wealth of opportunity
Beyond the FCA’s messaging that enforcement of the Duty will be a top priority, the reputational risks for firms that misstep when the spotlight is shining brightest upon them will also be front of mind. Analyst scrutiny is intensifying, and the investor community is watching with interest too.
With much work ahead between now and July, the longer-term opportunities for financial services firms should not be lost on business leaders working through the intertwined Consumer Duty outcomes and associated operational challenges ahead. If well-embedded by firms, the Duty can catalyse the retail financial services business model of the future and, in turn, embed ethical and profitable business.
Customer-centricity, enhanced trust and loyalty, and greater operational efficiency should be the foundations of any business strategy, irrespective of industry focus. Now, finding that sustainable path to value for operators and consumers alike must be accelerated, as the FCA’s Consumer Duty asks the financial services sector to face up to these realities, fast.
Contact us to find out more about how we are supporting firms via our multi-disciplinary approach to solve the challenges presented by the Consumer Duty requirements.
