Driving Towards Good Customer Outcomes
There have been signs over the previous year that the way the FCA regulates is undergoing a fundamental change. The Business Plan for 2021/22 set out a raft of outcomes-focused expectations, not least the new Consumer Duty, which the Regulator hopes will plug the gap in the current Principles for Businesses.
The higher expectations in the Consumer Duty will mean a significant shift in both business practices and behaviour, with firms expected to put the customer first at every step. And the definition of customer changes with the Consumer Duty, SMEs are now included as a ‘retail client’. Significantly, firms will be held to the expectations of the Duty regardless of the firm’s relationship with the end customer, thus including product designers, for example.
The expectation is that firms will ‘put themselves in the shoes’ of customers, considering whether they would think it was fair if they were treated in a similar way, and whether they would recommend their products and services to friends and family. Crucially, firms need to be able to evidence that they have considered whether their products and services meet the needs of consumers and whether they represent fair value.
This ‘safeguard’ is one step in the FCA’s new framework to ensure a higher level of consumer protection. Faced with novel challenges to the traditional style of regulation over the course of its tenure, the FCA has had to react quickly to ever-evolving technological advancements, and an influx of smaller firms that are able to innovate in ways that aren’t always covered by Rules and Principles based regulation. The coronavirus pandemic has also highlighted that significant upheavals to a large number of customers are not just hypothetical and that firms need to be prepared for such eventualities. Including a customer outcomes approach alongside its established Rules and Principles approach is likely to reassure the FCA that its expectations, at least, will drive the industry to remain on course to meet its consumer protection objective.
In a speech on 9 October 2021, Nisha Arora, the Director of Consumer and Retail Policy, highlighted the focus on consumer outcomes and needs, citing the potential for many more UK consumers experiencing worsening financial situations.
Arora suggested that FCA regulation has meant that vulnerable customers are better protected and that the Regulator has secured over £900 million in redress for poor treatment, but that looking ahead, the FCA wants to ensure that people can access affordable products that meet their needs.
To do this, Arora says, it isn’t just a case of focussing on the good – on meeting the Consumer Duty and robustly supporting vulnerable customers, it’s also about mopping up poor practices that ‘hamper good decision-making, or that exploit behavioural biases and vulnerabilities.’ And so, it won’t be possible to meet the Consumer Duty if 90% of what a firm does is customer-focused, but some poorer practices remain, even if these are unintentional. A poorly worded call script that fails to clearly inform customers about what they’re signing up to, or a missed signal that a customer wants to submit a complaint.
Critical to meeting the Consumer Duty expectations, then, is testing. What actually happens when a customer looks at, considers, purchases, and uses the product or service? Is the customer exposed to any harm during the customer journey? If they are, Arora states the firm will need to take steps to fix this.
This means that firms will also need to make sure that their Quality Assurance, Monitoring and Audit are regularly and thoroughly tested for specific harms. Quality Monitoring, especially in firms that have a large number of vulnerable customers or those who are more at risk of experiencing financial difficulties, will need to evolve towards a robust process that covers the customer journey comprehensively. Some firms will need to move beyond randomised selection for calls only and will need to supplement this with a more targeted approach, using specific search terms to identify calls that fall short or show agents or teams that might need additional training. Supplementing more basic methods of QA with a targeted approach is just one approach that firms might find useful in demonstrating to the FCA that they are working towards meeting their duty to consumers.
Buy Now Pay Later Update
On 21 October, the Treasury published its consultation on regulating Buy-Now-Pay-Later firms. The Woolard Review concluded that BNPL products should be brought within the regulatory perimeter as soon as possible, however, the Treasury consultation concludes that there is limited evidence of widespread consumer harm, and therefore regulation should be ‘proportionate' to the level of risk presented by the products but should be designed so as not to inhibit competition, the product or consumer choice. The new regulation should cover treatment of customers in financial difficulties, and allow consumers to complain to the Financial Ombudsman Service. New rules are expected in 2022/23.