The impact of Consumer Duty on financial services

As a risk and compliance leader, I've had to adapt constantly over the years to keep up with significant changes. The Senior Managers and Certification Regime (SMCR) brought its own set of challenges, Brexit was uncharted territory, and the impacts of the global pandemic required all of us to adjust rapidly during unprecedented times.

Then, in 2022, the FCA published its final rules and guidelines a new “Consumer Duty” – a set of rules and principles aimed at raising consumer protection and requiring firms to prioritise their customers' needs.

This prompted a scramble from regulated businesses to integrate these requirements across all aspects of their operations. No simple feat! Firms did their best to understand the impacts of this new Consumer Duty and had a small window to put together their implementation plans to respective boards. 

Implementation was always going to be an evolutionary process – something seemingly understood by the regulator. While the FCA reached out to some of the more mainstream firms for their implementation plans, it broadly took a hands-off approach. That is until this summer, with many cross-sector firms being asked to provide requests for information. 

Following this, in October, the FCA released key findings from a review of 23 firms to see how well they’re meeting the new Consumer Duty standards. 

While this review focused on payments firms specifically, the FCA's expectations clearly apply to all types of firms regarding how the Consumer Duty should be implemented.

The result? Just over half received a ‘satisfactory’ rating – not an outright win, but enough for the FCA to feel optimistic. It sees these firms’ efforts as a good sign of commitment to putting customer needs front and centre.

The standout firms earned credit for:

• Recognising that delivering on Consumer Duty goes hand in hand with their long-term goals.
• Having clear, customer-focused objectives and understanding what positive outcomes (and potential pitfalls) look like for their clients.
• Keeping strong governance in place, with regular, outcome-focused MI reporting to the Board, often using RAG ratings to spot and address any issues fast.
• Clearly assessing and justifying the fair value of each product and service they offered.
• Effectively testing consumer understanding and offering detailed MI, including diverse data from regular reviews.
• Concise MI packs that were given to the Board for proper Duty consideration.

But it’s not all smooth sailing. Nearly half the firms were flagged for only partially implementing the Duty, meaning there's still plenty of work to be done.

Key issues the FCA pointed out include that some firms:

• Stuck to pre-existing processes and didn’t clearly define their target market or what ‘good’ outcomes should look like. 
• Relied on basic metrics such as complaints and reviews, without adapting these to the Duty, making it hard to know if they were truly delivering on good outcomes.
• Focused only on price comparisons, overlooking non-financial benefits such as consumer support levels.
• Used customer MI that seemed restricted to distant proxies such as email open rates or net promoter scores.
• Failed to link Board MI to Consumer Duty outcomes.

The FCA’s message is clear: all firms, especially in the payments sector, need to raise the bar with effective controls to ensure consistently positive customer outcomes and promptly address any gaps.

Like many in risk and compliance, I've been deeply immersed in the Duty for the past two years. What once felt like uncharted territory is now starting to take shape, and we can finally see how our implementation stacks up against the FCA's examples of good and poor practices. 

It’s evident that many firms adopted a ‘not reinventing the wheel’ approach, believing they already understood consumer outcomes through complaints data, email drop-off rates, returning customer metrics, and TrustPilot or NetPromoter scores. The FCA findings put those assumptions to bed – and its message is clear: all firms, especially in the payments sector, must enhance controls to ensure consistently positive customer outcomes and quickly address any gaps.

Most firms will have access to big data: how they use this data varies. Commercially-driven incentives will tend to take priority over compliance risks but I feel that firms are missing an opportunity by not leveraging this data to better understand their customers, especially with the FCA likely to continue to challenge firms on their compliance. 

As someone responsible for compliance oversight, I view big data through a specific lens: the challenge for compliance is that we either have an overwhelming amount of data that lacks clear purpose, or we don’t have enough high-quality data to confirm that we’re achieving good outcomes.

I joined the team at Bud for this specific purpose: to help bridge the gap between the challenge compliance teams face and the unique insights that Bud’s technology can offer. 

Big data can be overwhelming, but here are some ways Bud can help simplify it for compliance:

• Consumer understanding: By assessing spending patterns, firms can provide targeted financial education, offering nudges to encourage saving or alerts for spikes in specific spending categories.
• Customer support: Data can highlight early indicators of financial struggles, like recurring overdrafts or falling account balances. Firms can use this information to offer financial advice or alternative options before financial difficulties escalate.
• Products and services: Firms can monitor transaction data to adjust products, enhance services, or recommend alternatives, like higher-yield savings, that better match changes in a customer’s financial situation.
• Price and value: Dashboards can provide insights into the time and effort it takes to access, assess and act to buy, amend, switch or cancel a product. 
• Outcomes metrics for governance reporting: Open banking data lets firms track customer outcomes and satisfaction, helping them address customer needs, document positive results, and quickly resolve recurring issues.

My message to those in risk and compliance is this: you’ve got to embrace the use of data to stay on top of Consumer Duty compliance. 

The possibilities are vast, and if the FCA’s review is any indication, existing metrics may not cut it for long – so get ahead of the curve before the next information request arrives.

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