Is your firm losing its way over Consumer Duty?

We’re now just a few weeks away from the implementation of the FCA’s new Consumer Duty rules. If you work in financial services, by now these regulations should need no introduction. Consumer duty has been dominating conversations and generating workstreams in firms for most of the past year. In a nutshell, it places an obligation on firms to prove they are working to deliver good outcomes for their customers. So as we near implementation, how many firms are really ready?

My observation – having worked with dozens of banks, building societies and insurers over the past year – is that there is undoubtedly a lot of work going on in most businesses. But the challenge with a significant shift in regulation like the Consumer Duty is that it can end up creating so much work, that firms lose sight of the bigger picture.

For most companies, the Consumer Understanding outcome is creating the longest list of tasks. As a reminder, firms have to prove that their customers understand their communications. In many cases, this is sparking a complete overhaul of every letter, email, customer journey and terms and conditions document in the business – a workstream that will take at least 12, and possibly 24 months to complete.

The other area where we see firms doing a lot of work is ensuring they have the right data, and internal reporting, to monitor customer outcomes.

This is all important stuff – and is absolutely necessary on the road to compliance with the Consumer Duty.

But the new rules also make a set of existential challenges to many established business models. The Consumer Duty talks about the need for firms to prevent foreseeable harm to their customers. That means taking a fresh look at some parts of their business models which rely on customers making poor decisions.

The banking market is full of these kinks. For better or worse, many banking products appear to be free to use, but make their money from customers in ways that are not always transparent. Current accounts are a great example. Most don’t charge any regular fees if you’re in credit. Instead, customers tend to pay by foregoing any interest on their balances, and by paying for overdraft facilities or overseas transactions.

Over the past couple of decades, most banks stopped paying any interest on current account balances. But that happened at a time when Bank of England interest rates were on the floor. Over the last 18 months, interest rates have risen 4900% - yet most banks still pay no interest on in-credit balances. How does this translate to fair value?

In the credit card market, there are a number of cards that offer 0% balance transfer deals with no fees. That means that they rely entirely on a sub-set of customers failing to pay off their balance by the end of the 0% term, and then moving onto an interest rate of over 25%. Another problematic truth in the face of the Consumer Duty.

In some cases, what’s needed here is simply more transparency. As long as customers understand the trade-offs and have access to a competitive market of alternatives, these business models may be able to prevail. But that means credit companies working much harder to remind customers that their offer is coming to an end, or banks working much harder to provide customers with other interest-paying accounts for their surplus current account balances.

In early May, the FCA released a statement expressing some concerns around the way firms are going about their assessment of fair value. Our experience echoes the FCA’s own findings. Some firms are finding it very hard to create meaningful fair value assessments – and are creating false narratives that don’t really pass muster.

Of course, the 31 July is only the beginning.?Those firms that see Consumer Duty as a one and done are mistaken. The FCA does not expect everyone to be ready by 31 July – but it also isn’t simply looking for firms to complete their initial workstreams and then get back to business as usual. Firms will be required to attest at board level that they are meeting the Consumer Duty every year – and once we get past the initial wave of activity, we will almost certainly see the FCA raising expectations and using the Duty as a ratchet to raise standards.

For businesses who really mean it when they say their customers come first, there should be nothing to fear. But many businesses aren’t yet being honest about the full implications of the Consumer Duty on the ways they operate.