2021-06-15-KPMG_Global-Consumer_Duty_14页_622kb

Consumer Duty Summary

Core Content

The Consumer Duty is a new regulatory initiative by the Financial Conduct Authority (FCA) aimed at enhancing consumer protection in the retail financial services market. It represents a paradigm shift in the FCA’s expectations of firms, requiring them to embed a focus on customer outcomes throughout their operations, not just in policy or procedure.

The initiative is structured around three main components:

1. A new Consumer Principle: This sets the overarching expectation for firms to act in a way that delivers good outcomes for retail clients.
2. Cross-cutting Rules: These are broader regulatory standards that will be applied across all retail financial services.
3. Four Outcomes: These are specific rules and guidance that detail the expectations for firms in four key areas: communications, products and services, customer service, and price and value.

The FCA is consulting on the wording of the Consumer Principle, offering two options:

• Option 1: A firm must act to deliver good outcomes for retail clients.
• Option 2: A firm must act in the best interests of retail clients.

While the wording may differ, the regulatory intention is likely to be similar, emphasizing a shift from process-based to outcomes-based regulation.

Main Implications

• All retail financial services sectors will be impacted, regardless of the firm’s size or structure.
• Firms must consider the end customer even if they are not directly engaged with them.
• The Consumer Duty will require firms to reassess their current practices, including:
  • Conduct risk frameworks
  • Product governance processes
  • Financial promotions
  • Pricing and value assessments
  • Customer service interactions
• Compliance costs and unintended consequences are potential concerns, and firms should engage early with the FCA's consultation to influence the final rules.
• Existing business models may need significant adaptation to meet the new expectations, especially those that do not prioritize customer outcomes.

Key Questions for Self-Evaluation

Firms are encouraged to evaluate their current practices against the following key questions:

• Do you have a conduct risk framework that captures customer outcomes?
• Does your product governance framework benchmark against the proposed holistic approach?
• To what extent do you engage with retail customers when developing new products or services?
• Do you use complaints root cause analysis and data analytics to assess products, services, and processes?
• Do your current processes and procedures create customer detriment from behavioural biases or sludge techniques?
• Do you factor customer understanding into your assessment of financial promotions?
• What level of genuine outcomes testing is currently taking place?
• How appropriate is your management information for evidencing good customer outcomes?
• Are you prepared for the enhanced reporting required to evidence consumer outcomes?
• How effective are your existing controls in the areas of product governance, customer vulnerability, financial promotions, and pricing?

Drivers and Context

Ongoing Customer Harm

The FCA has identified consistent failings in firms that lead to consumer harm, such as:

• Misleading or hard-to-understand communications
• Products and services that do not meet consumer expectations
• Practices that exploit information asymmetries, consumer inertia, behavioural biases, and vulnerabilities

Impact of COVID-19

• Exacerbated poor customer outcomes, especially for SMEs with Business Interruption insurance that did not cover pandemic-related claims.
• Highlighted the financial vulnerability of many consumers, increasing the need for greater consumer protection.

Digitalisation

• The shift to digital engagement has increased the need for flexible and future-proofed regulation.
• The FCA is seeking to ensure that digital tools do not undermine traditional communication channels.

Associated Initiatives

• The Consumer Duty is part of a broader cultural and outcomes-based approach.
• It aligns with the Senior Managers and Certification Regime (SMCR), which increases personal accountability.
• The FCA is also exploring the Private Right of Action (PROA), which would allow consumers to take legal action against firms for breaches of principles, potentially increasing the FSCS's capacity to pay compensation.

FCA Supervisory Approach

The FCA is transitioning to an outcomes-based supervisory approach, which will:

• Embed customer outcomes into the core of regulatory supervision.
• Require firms to demonstrate that their business model and strategy are aligned with delivering good outcomes.
• Move away from a process-based to a culture-based approach, ensuring that firms not only follow rules but also understand and act in line with the spirit of the rules.

Case Studies

Communications

• Firms may need to proactively engage with customers on variable rate mortgages, providing guidance and reminding them of alternatives.

Products and Services

• Asset managers may need to simplify their fund offerings and rationalize legacy share classes to ensure they deliver good value.

Customer Service

• Firms must ensure that customer service processes do not create barriers to action, such as cumbersome exit procedures.

Pricing and Value

• The FCA is focusing on fair pricing and value for money, especially in areas like home emergency insurance and pension transfer advice.

Conclusion

The Consumer Duty is a significant step in the FCA’s journey towards outcomes-based regulation, with far-reaching implications for all firms in the retail financial services sector. It requires a cultural and strategic shift, moving beyond compliance to proactive customer-centric improvements. Firms are encouraged to engage early in the consultation process to influence the final design of the rules and ensure they are prepared for the increased regulatory expectations.