Reading the FCA’s Business Plan 2021/22 published in mid-July makes it clear that the regulator remains determined to do what it can to ensure better consumer outcomes. No doubt many of you will have spent time responding to their consultation paper CP 21-13 ‘A new consumer duty’ initially published in May. Although there will be a further round of consultations before changes to the rules are enacted, the paper indicates a very clear direction of travel and puts additional pressure on the industry to effect “a significant shift in culture and behaviour”.
Given the regular conversations we have with the industry’s customers, we are only too aware of the challenges they have in understanding products and content aimed at them and of the behavioural and cultural biases that lead to some customers walking away from long-term saving and investing as they just don’t feel it is for ‘people like them’. It is essential that customers (and potential customers) have trust and confidence in the industry to do the right thing, and for many that trust is just not there. It was an obvious step for Team TWC to submit our own reflections on some of the benefits and challenges of strengthening the duty firms owe to consumers.
Here’s a snapshot of our submission:
1. We welcome the FCA’s focus on customers, and believe that the new duty could bring greater clarity around responsibilities towards consumers. However, we are concerned that if not implemented effectively this additional legislation will reduce the appetite of firms to reach out to consumers – and from our own research we know all too well that without encouragement most consumers are unlikely to engage with their financial needs.
2. In our experience, the vast majority of firms come to the retail market with the best intentions but do not always have a deep enough understanding of their customers to be able to tailor communications effectively. It is important for firms to ensure the customer voice is represented in their governance process. Thoughtful product design, clear communication and effective targeting can all go a long way to overcoming barriers and ensuring that customer outcomes are met.
3. There needs to be a clear steer on where any new rules cut across existing regulation or guidance and clarity around the roles of individual firms along the value chain (some of whom are invisible to customers).
4. A firms’ ability to do the right thing is often hampered by the complexity of the value chain. For example, product manufacturers do not have sight of customer data to evidence that the fund is being distributed to their target market. We would like to see frameworks for standard data exchanges that would facilitate all firms in the value chain complying with the new Consumer Duty.
5. The phrase ‘consumer outcomes’ is problematic for consumers (we tested it with The Wise Society and this was their view). It can be decades between a customer buying a financial product and the final outcome. There is greater logic in putting the onus on firms to consider customer interests from the outset. It feels more immediate and more tangible for customers.
6. The FCA maintains that ‘consumers best understand their own circumstances and financial needs’, but this is not always the case. Articulating clear needs and objectives is something that some customers find very difficult, particularly where the outcome is some years away and intangible. Customers also struggle with the concept of investment risk, which can have a detrimental impact on their ability to meet long-term savings goals. Firms need to acknowledge from the outset that concepts the industry takes for granted can prove problematic for customers.
7. We already see very little in the way of product innovation in the industry and we would be concerned if additional regulation meant that firms felt they could not innovate or develop new business models. For example, this could have implications for the regulatory drive for more inclusive products.
8. Appropriate targeting is an important issue. We feel strongly that firms should have a clear picture of their target market and appropriate strategies for reaching that market. The challenge for some areas of the value chain is a lack of visibility in who owns their products.
9. There are still too many examples of firms struggling to articulate products in a clear and meaningful way and we believe that the focus on clear communication is an important pillar of the proposed Consumer Duty. Firms assume a level of knowledge that simply is not there – or the context for the communication is not clearly articulated meaning that customers do not understand the importance or relevance of what they are being told.
10. Our overriding concern would be any regulation that ultimately acts as a constraint or deterrent to innovation in product and service design. Anything that drives firms to safer, lowest common denominator, cookie cutter approaches to design and delivery would (in our view) be to the detriment of innovation and customer choice.
The key is for firms to understand more about the specific drivers and motivations of their own customers so that product design, targeting and communication become more effective, which in turn should improve long-term outcomes for customers.
If you would be interested in finding out more about our take on Consumer Duty or any of the work we do around product governance and embedding the voice of the customer you can find more information here.