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Consumer Duty – monitoring and governance

A key part of the Consumer Duty is that firms assess, test, understand and are able to evidence the outcomes their customers are receiving.  Without this, it will be impossible for firms to know that their products and services are working as they and their customers would have expected and in a way that is consistent with the Consumer Duty.[1]

As a baseline, a firm must regularly monitor the outcomes retail customers receive from:

  1. the products the firm manufactures or distributes,
  2. the communications the firm has with retail customers, and
  3. the customer support the firm provides to retail customers.[2]

However, firms should be aware that “customer outcomes” in this context are broader than the areas covered by the four outcome rules under the Consumer Duty. They also include the overall outcomes that consumers receive when they buy a product or service, or interact with a financial services firm, such as whether they use the products or service as expected, the benefits that they receive, and whether they are incurring harm.[3]

Firms can expect at every stage of the regulatory lifecycle to be asked to demonstrate how their business models, the actions they have taken, and their culture are focused on good customer outcomes.[4]  To this end, this must maintain records and provide the same to the FCA on request.[5]

Developing a strategy towards monitoring

Firms will need to develop a strategy to gather the relevant information and data to inform their assessment of whether they are delivering good outcomes for customers and to meet their governance obligations. As part of this, firms must have in place processes to identify the root causes of any failure to deliver the outcomes required by the Consumer Duty for retail customers.  The FCA expects firms to continually review and develop their frameworks.[6]

Monitoring objectives

Firms are specifically required to:

  1. monitor whether retail customers are being, or have been, sold products that have been designed to meet their needs, characteristics and objectives,
  2. monitor whether the products that retail customers purchase provide fair value and appropriate action has been taken to address products identified as not providing fair value,
  3. monitor whether retail customers are equipped with the right information to make effective, timely and properly informed decisions,
  4. monitor whether retail customers receive the support they need,[7]
  5. monitor and regularly review the outcomes their customers are experiencing to ensure that the products and services that firms provide are delivering outcomes consistent with the Consumer Duty,[8]
  6. identify whether for any product the firm manufactures or distributes, any group of retail customers is experiencing DIFFERENT outcomes compared to another group of retail customers of the same product,
  7. identify where customers or groups of customers are not getting GOOD OUTOMES or are suffering HARM and understand why this is the case (groups that firms could consider might include longstanding customers, customers from a particular geographical region or customers who buy a product through a particular distribution channel),[9]
  8. have processes in place investigate the causes of poor outcomes, to adapt and change products and services, or policies and practices, to address any risks or issues identified and stop it occurring again in the future,[10]
  9. be able to demonstrate how they have identified and addressed issues leading to poor outcomes,[11] and
  10. Explain (if asked) how they reached a decision on the most appropriate intervention, demonstrate how it has delivered good outcomes and, if not, what they have done further to address the issue.[12]

Action required of firms

Firm must take “appropriate action” where they identify that:

  1. retail customers do not (or there is a RISK that they will not) receive the outcomes required under the Consumer Duty,
  2. any group of retail customers for a product are receiving worse outcomes than another group of retail customers for the same product, or
  3. the firm is otherwise not complying with the requirements of the Consumer Duty.[13]

Nonetheless, this does not require a firm to take action to remove the effects of risks inherent in a product that the firm reasonably believed the retail customer understood and accepted.[14]

“Reasonableness” in the context of monitoring

The FCA’s expectations apply based on what is reasonable. Firms will need to produce and regularly review MI on customer outcomes, but the frequency of monitoring, and the nature of the information a firm should collect should be appropriate to the nature, scale and complexity of their business, considering the size of the firm, the products and services they offer, and the customer base they serve.[15]  However, even in the context of ‘what is reasonable’, some forms of monitoring will undoubtedly be more frequent than others. For example, the FCA expects firms to gather and review customer support data, transaction data and complaints data on an ongoing basis whereas file reviews, sludge audits and focus groups are more likely to be carried out at regular intervals or on an ad hoc basis.[16]

In addition, the FCA does not expect firms to exhaustively segment their customer base to identify differences in outcomes between all possible groups of customers.[17]  Moreover, it is possible for distinct groups of customers to receive different outcomes within a framework that remains compatible with the Consumer Duty (for example, because of risk-based pricing).  However, where this occurs, the firm would need to be able to evidence compliance.[18]

As with the whole Consumer Duty, one good rule-of-thumb question firms can ask themselves is whether they are applying the same standards and capabilities to monitoring customer outcomes as they are to generating sales and revenue. For example, is the firm using the same levels of segmentation and analysis to monitor outcomes as they are to target sales?[19]

Monitoring within distribution chains

The monitoring obligation applies proportionately to a firm’s role in the distribution chain.

Where a firm does not have direct contact with retail customers it should monitor the outcomes of the service it provides, having regard to any information it has about the outcomes experienced by retail customers at the end of the distribution chain.  A firm that does not have direct contact with retail customers should act reasonably to obtain information about the outcomes experienced by retail customers of the products the firm has distributed.[20]

Types of data used in monitoring

There is no prescribed format for the way in which firms evidence their monitoring of customer outcomes.[21]  The type of information firms use will vary depending on their size, client base, and the types of products or services they offer. Firms should tailor the information to these factors.  The objective for firms is to ensure that they have sufficient information to be able to identify whether they are delivering good customer outcomes.[22]

Monitoring outcomes for vulnerable consumers

Firms should produce and regularly review MI on the outcomes they are delivering for customers with characteristics of vulnerability. MI should be of sufficient quality and depth for firms to be able to identify which products and processes are working well, and which might be causing detriment and need changing to improve outcomes.[23]

firms must have the ability to capture information about customer needs (such as communication needs or information about customers’ characteristics of vulnerability).  It is highly UNLIKELY that firms will be able to meet the needs of all of their customers if they are not capturing such information.[24]

Nonetheless, firms are NOT required to systematically collect data about customers’ protected characteristics (e.g. ethnicity). However, where firms do already collect data about customers’ protected characteristics, they are expected to use this data to monitor differences in outcomes between different groups, where possible.[25]  There are a number of ways that firms can gain insight into the experiences and outcomes of customers who share protected characteristics, without requiring their customers to disclose this information. For example, firms could consider:

  1. conducting research into the experiences and needs of a particular group of customers (e.g. a focus group with older customers),
  2. working with a consumer organisation that represents a particular group of consumers in order to gain insight into the needs and experiences of that group,
  3. conducting an audit of customer journeys which could identify differences in experience or frictions that affect certain groups of customers but not others,
  4. drawing on the diversity of their staff (for example, a network of staff with a particular sexual orientation could provide insight into the experiences that this group has when dealing with financial services), and
  5. using proxy data to infer outcomes experienced by different groups of customers (for example, it may be possible for firms to use customer name and post code as a proxy for ethnicity in certain circumstances). [26]

Monitoring requirements under different regulations

Where relevant existing requirements for investment funds, insurance and funeral plans meet the FCA’s outcome rules, then the associated monitoring requirements will be sufficient to meet the monitoring requirements of the Consumer Duty for that outcome.[27]

[1] FG22/5, 11.1

[2] PRIN 2A.9.8R (see page 138)

[3] FG22/5, 11.17

[4] FG22/5, 11.3

[5] FG22/5, 11.26

[6] FG22/5, 11.21; PRIN 2A.9.11R (see page 139)

[7] PRIN 2A.9.9R (see page 138)

[8] Policy Statement PS22/9, 13.1

[9] FG22/5, 11.12; PRIN 2A.9.10R (see page 138)

[10] FG22/5, 11.4; FG22/5, 11.11; Policy Statement PS22/9, 13.11; FG22/5, 1.28

[11] FG22/5, 11.7

[12] FG22/5, 11.9; FG22/5, 11.27

[13] PRIN 2A.9.12R (see page 139)

[14] PRIN 2A.9.13R (see page 139)

[15] FG22/5, 11.19; PRIN 2A.9.3G (see page 137)

[16] FG22/5, 11.24

[17] Policy Statement PS22/9, 13.11

[18] FG22/5, 11.14

[19] FG22/5, 11.13; FG22/5, 11.20

[20] PRIN 2A.9.4G (see page 137)

[21] FG22/5, 11.26

[22] FG22/5, 11.32

[23] FG22/5, 11.36

[24] FG22/5, 11.37

[25] FG22/5, 11.38

[26] FG22/5, 11.42

[27] Policy Statement PS22/9, 13.9