The new Consumer Duty feels different
The changes we are implementing under the new Consumer Duty (‘the Duty’) feel very different to the usual big regulatory change projects we have been used to in previous years.
The FCAs three-year strategy, of which the Duty forms part, is drawing a harder line to put a stop to consumer harm. That 3-year strategy is shifting away from prescriptive (rules-based) regulation. In favour of more of an outcomes-based regime. FCA intends applying greater responsibility and accountability to business leaders for meeting these outcomes.
The Duty relies on a significant cultural and behavioural shift, further supported by proposed amendments to the Senior Manager and Certification regime on senior management including board accountability to deliver consistently good outcomes for customers. Changes to governance, data and management information will underpin the new Duty and drive businesses to be proactive, agile, innovative, insightful and mindful of their customers’ needs, support and understanding.
The Duty will embed the foundations for upcoming regulation
The FCA ESG strategy is one area of regulatory change coming that recognises that firms will need to move fast to meet their sustainable objectives and creating a more flexible regulatory environment that supports these changes and growth is absolutely vital. If designed properly the changes being implemented under the Duty can form the foundation for future regulation. Those changes will support the shift towards an outcomes focussed regulation driving innovation, resilience and enable businesses to respond quickly to harm in a fast-changing world.
One critical piece of regulation under the ESG strategy, which has culture and trust at the core, is the Sustainable Disclosure Requirements (SDR) and investment labelling. SDR will focus on tackling greenwashing and building consumer trust by providing clear, understandable, and substantiated sustainability information to support consumers in meeting their sustainability objectives.
SDR and investment labelling will be heavily reliant on frameworks embedded under the Duty, including:
- identifying foreseeable harms in relation to greenwashing risks.
- clear and accurate SDR disclosures and investment labels supportive of good customer outcomes.
- testing of communications on the use of sustainability-related terms in product naming and marketing.
- customer understanding to ensure they can meet their sustainable financial objectives.
How to embed the duty whilst future-proofing the business?
Failing to create appropriate, proportionate and functionable robust frameworks will impact not only the Duty but also future regulatory implementation. By impairing a business’s ability to proactively identify risk and align business activities to customer outcomes. Placing consumers at greater risk of harm and preventing businesses from exploiting opportunities and efficiencies.
Businesses considering the following approach when implementing the Duty may also help to future proof for the next wave of regulation that is dependent on the same frameworks.
Tone from the top
Business leaders nurturing a culture that place customers best interests and outcomes at its heart. They should additionally encourage improvements in data quality and innovation. And continually challenge, adapt and improve implementation plans, strategy, operating models, risk frameworks, technology and data etc.
Agility
Businesses should design their systems and processes to enable agility. Agile businesses are more responsive to changing or anticipated customer needs, or to adapt where outcomes fail to be met. This ability to be agile will be challenging for businesses, particularly larger and more complex ones. But will be vital as we enter a more volatile uncertain complex and ambiguous environment.
Extend oversight
Extending supervisory oversight practices, including management information, to include customer interests and outcomes at every stage of the customer and product journey.
Meaningful data
It goes without saying that value is derived from meaningful data. Creating enhanced, comprehensive and insightful data-led and assertive capabilities enables proactive identification of risks and give customers more power to make better decisions. For instance, businesses can use this data to anticipate client needs and provide timely support. Or monitor and adapt products and services to improve client outcomes etc.
Improving the quality of customer communications and services
By interacting with, and having a deeper understanding of, customer base and target markets, the firm can tailor its communications and services to specific audiences. This information assists businesses in ensuring their customers can easily access the information and support they need. In a clear and understandable way. As well as build trust and transparency.
Regulation is shifting and moving towards assertive supervision models. Thereby placing greater emphasis on businesses to implement the Duty correctly from the outset. In addition, the frameworks and processes designed, will create a firm foundation for future regulations that share similar objectives. If businesses don’t invest in their implementation plans, the Consumer Duty could divide firms. Those that drive data, innovation, and opportunity vs those that don’t and are unable to predict and weather the storms ahead.
