The Consumer Duty: The time for FinTech firms to act is now
The Consumer Duty: The time for FinTech firms to act is now.
Partner, Ernst & Young LLP
Partner, Ernst & Young LLP
In late July, the Financial Conduct Authority (FCA) announced the final rules for the new Consumer Duty (PS22/9), representing one of the largest regulatory shifts in financial services for over a decade. These new rules introduce a higher standard of conduct and create a clearer focus on customers’ interests. All of this is centred around getting to the heart of protecting and supporting customers to achieve their financial objectives and avoid foreseeable harm.
The FinTech industry has a track record of introducing innovative new propositions for customers and adapting rapidly to change. While much of this work has been highly customer-centric, the Consumer Duty raises the bar in terms of the regulator’s expectations of the emphasis put onto this area.
Released amongst a backdrop of increasing economic pressures and the rising cost of living, the FCA has endorsed this change as even more important. With accompanying phrases such as ending ‘rip-off charges and fees’ and a need to ‘focus on the real and diverse needs’ of customers, the regulator has set a clear tone from the top.
In our recently conducted Consumer duty readiness survey across financial services, 94% of respondents stated that ‘they do not yet know what level of change is required’, to deliver against the FCA’s expectations. Firms now have as much clarity as they can expect from the regulator and need to focus on delivery.
As expected, the underlying final rules have not changed significantly since the last consultation. The biggest exception is the implementation deadline, which has been extended by three months to the end of July 2023 for new and existing products, and to the end of July 2024 for closed book products. However, any firm or individual applying for authorisation (and those applying to vary their permissions) will have to demonstrate that they can meet the requirements of the Consumer Duty, as they relate to them, from now on.
This is a clear signal from the FCA that firms need to take this seriously and a recognition that, for many, this will represent significant activity which will require iterative change.
The FCA extension comes with specific interim deadlines that firms will need to meet to demonstrate that sufficient progress is being made. A further indicator that FinTech firms need to make sure they keep up momentum and deliver against expectations.
This includes requirements for Boards (or equivalent management bodies), to set out and approve their implementation plan by the end of October 2022, and for all ‘manufacturers’ to complete their outcome assessments by April 2023, so that information is provided to distributors in a timely manner.
Since the first consultation, EY has been working with several firms to understand the implications of the duty on their businesses, assessing their current position and developing action-oriented plans.
What has become clear throughout these interactions is that firms recognise that, despite the complexity of the task at hand, the duty represents an opportunity to differentiate and unlock future value by orienting around the customer, moving away from tick-box compliance.
We have summarised our thoughts below on the final rules and steps FinTech firms can take as they prepare for implementation.
Implementation deadline and what should firms prioritise
Firms should be making full use of the extensions provided, but also ensure that they do not lose sight of the task at hand. The FCA’s deadline for Board level sign-off on implementation plans by the end of October, will be a critical milestone. firms should be doubling efforts to challenge themselves that their plans will set them up for success, that they take account of the full scope of the duty and are proportionate for their business. Prioritisation centred around the customer will be key.
Defining ‘what good looks like’
To date, some firms have found it difficult to articulate how their products and services deliver good outcomes, which has led to challenges in prioritising the areas that need the most focus. In our latest readiness survey, only 16% firms had defined what ’good outcomes‘ would be for their business and customers. The new rules provide tangible examples, giving firms a clear starting point on which to base their assessments. For example, ‘making people wait for so long for an answer that they give up’, does not meet the customer support requirements.
We have also observed challenges where elements of the duty are being managed in silos, resulting in well-intentioned approaches generating sub-par outcomes. To truly tailor their products and services, firms will need to improve their understanding of customer personas, how to meet the financial needs of these personas and how they monitor and react when these needs are not being met. There will also be instances where firms will need to consider specific, individual customer circumstances as part of this activity as well.
FinTech firms need to define ‘what good looks like’ for each of the four outcomes. Conducting an end-to-end holistic assessment focused on the customer is critical to understanding the product lifecycle and developing a monitoring approach. We expect all FinTech firms will have customers who at some point experience vulnerability and will need to consider systems, processes and tailored customer support available.
They will also need to ensure that they have well documented governance and interpretation panels in place that will provide an overarching view across its business to ensure that customer treatment is consistent.
Governance and accountability
The publication clearly states that Senior Managers are accountable for the outcomes their customers are experiencing, in line with their accountability under the Senior Managers and Certification Regime (SM&CR).
The FCA has been explicit about the need to ensure an appropriate change in culture and behaviour. This onus is on the Board or the equivalent management body for embedding this across people management policies, including ongoing monitoring plans and performance management.
It will be crucial to set the ‘tone from the top’, with the FCA encouraging firms to adopt this approach via its proposed new ‘Champion at Board level’. This will ensure the duty is placed at the centre of the firm’s strategy and Board discussions.
The FCA has also confirmed the requirement for an annual report reviewed and approved by each firm’s Board, which assesses whether the firm is acting in line with the duty. The first Board report should be completed by end of July 2024, at the latest, within twelve months of the rules coming into force.
Leveraging data and developing a technology led approach
The FCA is transforming to become a data-led regulator and expects the firms it supervises to take a similar approach. Unlocking meaningful data on customer activities to help inform customer understanding, improve customer experience, enhance decisioning and support the ongoing monitoring of outcomes will be key to the long-term successful implementation of the duty.
For FinTech firms, effective technology and data naturally sit at the heart of most business models. These tools provide a range of opportunity to monitor processes, customer interactions and outcomes. The regulator will look to firms to deploy the tools available to them to serve customers’ interests including understanding the customer base, identifying patterns of emerging vulnerability, tracking performance against desired outcomes and ensuring effective governance.
The FCA’s publication signals the start of the countdown to implementation. Despite extensions, this remains a challenging timeframe given the scale of change needed. However, we believe that this is achievable, particularly for FinTech firms who are able to mobilise quickly and adopt in an agile fashion.
Firms should not delay in setting out realistic and action-oriented plans to achieve compliance for ‘day one’, as well as assessing the longer term, strategic opportunities beyond implementation.
Through driving meaningful improvements centred around the customer, FinTech firms will achieve better outcomes, secure customer loyalty and drive business growth as a result.
For further insights, please join EY for our next Consumer Duty webinar on Wednesday, 5 October 2022.
We will hear from distinguished industry panellists, including Sheldon Mills, Executive Director of Competition and Consumer at the FCA, as we discuss the FCA’s approach to supervising the Consumer Duty, industry readiness and the impacts of the final rules and implementation deadline.
The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organisation or its member firms.