The UK Consumer Duty: key themes to watch

In Part 1, we provided an overview of the UK Financial Conduct Authority (FCA)’s updated proposals on the Consumer Duty. For regulated firms involved in product origination and distribution (including post-sales servicing), the new regime introduces an obligation to ‘act to deliver good customer outcomes’. Australian financial services companies with subsidiaries or branches in the UK will need to assess whether the proposed Consumer Duty applies to those entities, as well as what operational, technological and cultural changes may be required to meet any new obligations.

Australian firms not directly regulated by the FCA should also take note. The Consumer Duty’s ‘higher and more exacting’ standard of care for retail customers sets a new global benchmark for consumer protection regulation. It also signals a notable shift towards an outcomes-based approach that is likely to be mirrored in other jurisdictions.

The impact of the UK FCA on global regulators

We expect the Consumer Duty developments to influence other regulators in the following areas:

Product performance

• The proposed Consumer Duty intentionally targets both the design of a product or service and the fair value it represents for customers, requiring organisations to have a good understanding of customer needs to ensure products are fit for purpose.
• The FCA has been explicit in its expectation that organisations regularly review the outcomes customers experience to determine whether it is delivering ‘good outcomes’ on an ongoing basis. This will include conducting regular reviews and taking action to reduce the risk of harm crystallising, where the harm was not foreseeable at the outset of the customer journey but manifested at some point later.
• Identifying appropriate data sources to support this will no doubt be one of the significant implementation challenges and will likely require new system builds for many organisations.

What Australian financial services providers need to consider at this point: 

• Do your product design principles currently account for the evolving concepts of ‘value’ and ‘benefit’?
• How are these considerations reflected in associated product performance assessment criteria?
• Do the system and process enhancements associated with your Design and Distribution Obligation (DDO) implementation enable you to generate insight of sufficient depth and breadth to proactively track customer outcomes?

Expected regulatory trend: A shift beyond just driving out bad practice to proactively driving good practice. Firms may be encouraged to get their products and services right from the outset and there may be a significantly enhanced focus on fair value pricing that will require evidence of a range of pricing factors such as costs, margins, competition and risks.

Compliance and assurance

• With the higher standards of care mandated by the proposed Consumer Duty, the FCA has also set higher expectations for monitoring frameworks. The need to evidence compliance with the requirements of the new Consumer Duty for most organisations will not simply mean more monitoring, but a fundamental shift in monitoring methodologies. For example, compliance plans will need to incorporate testing frameworks for complex concepts such as ‘foreseeable harm’. 
• The FCA’s continued focus on cognitive and behavioural bias brings a challenging nuance to risk and compliance frameworks for many financial services providers. In particular, organisations will need to ensure teams across the 3LoD have the skills and capability to reach judgements on these subjects. Locally, the Australian Securities & Investments Commission (ASIC) has previously stated its belief that ‘enhanced behavioural understanding’ can help to significantly improve market and consumer outcomes, so it is reasonable to expect that this skillset trend will influence the shaping of risk and compliance teams in Australia. 

What Australian financial services providers need to consider at this point: 

• Do your risk and compliance teams have the depth and diversification of skills needed to meet evolving regulatory expectations and areas of future focus, such as the influence of behavioural science disciplines?
• Are you able to generate the types of data required to adequately identify and monitor cognitive or behavioural bias risks inherent in customer decision-making processes?

Expected regulatory trend: Regulators applying behavioural science disciplines within their remit.

Customers experiencing vulnerability 

• Financial services providers will be expected to understand and respond to the needs of customers at all points of the customer journey to ensure ‘good outcomes’ for individuals experiencing vulnerability.
• The new Consumer Duty aligns with the FCA’s 2021 Guidance for firms on the fair treatment of vulnerable customers, but the FCA has now sought views on whether the proposed rules and guidance on the Consumer Duty go far enough in ensuring that firms consider the diverse needs of customers, or whether more explicit guidance is required (e.g. relating to product manufacturing and customer communications). So we may yet see even stronger regulatory expectations on this topic.

What Australian financial services providers need to consider at this point: 

• Do your products, processes and systems enable staff to respond flexibly to the needs of vulnerable customers?
• Do you have adequate financial and non‑financial data to capture, develop and report insights on outcomes for customers experiencing vulnerability?

Expected regulatory trend: Increased focus on vulnerable customers broadly, including pressure on regulators and policy‑makers to move away from a focus on industry codes and towards a more interventionist enforcement model.

Executive accountability and Board oversight

• Ultimately, UK Boards will be responsible for assessing whether a firm is delivering good outcomes for its customers, consistent with the Consumer Duty – and how any changes to strategy might impact this. It is expected that this assessment will need to encompass broad criteria, such as business persistence, pricing fees and charges, fair value interpretations, behavioural insights, training and competence records, customer experience feedback and complaints data (including root cause analysis).
• The FCA has been clear that it intends to amend the UK Senior Managers and Certification Regime to ensure clear individual accountability for complying with the Consumer Duty. It is reasonable to expect that ASIC will be closely observing developments in this respect as part of the Financial Accountability Regime (FAR) rollout. This personal element of the Consumer Duty and the mandate for Board oversight places further emphasis on the importance of a robust monitoring framework, as individuals will likely seek guidance and assurance on how their organisation’s frameworks, systems and processes support a demonstrable meeting of obligations.

What Australian financial services providers need to consider at this point: 

• Does your current Board and executive-level reporting on product performance and customer engagement facilitate adequate oversight of customer outcomes for all segments of the customer base?
• Does your FAR framework adequately consider and address accountability for customer outcomes?

Expected regulatory trend: New standards set for Directors’ duties more broadly, led by the in-depth and granular oversight practices demanded in the context of the Consumer Duty.

_{A&O Consulting is a global practice with deep expertise in helping entities respond to regulatory change and embed robust risk management and compliance solutions. Our global team includes former regulators and financial services industry experts located in Australia, the UK and the US. We are an accredited s166 provider for the FCA and the PRA in the UK and have experience acting as independent expert for Australian regulators in enforcement action and remediation.}