Consumer Duty will drive a cultural shift
The Financial Conduct Authority’s (FCA) new Consumer Duty is fast approaching. Even if the timeline for full implementation is pushed back – as some have suggested – the magnitude of the changes required should not be underestimated.
The proposals establish a framework that will require companies to measure whether they are delivering good results to customers in a number of areas. This includes the quality of their communications, the suitability of products, the quality of service offered and whether support is provided to help customers make financial decisions about their future.
The regulator will expect companies to take all reasonable steps to avoid causing foreseeable harm to customers and to help them pursue their financial goals, while always acting in good faith.
At its core, this is an evolutionary shift for the financial services industry, raising the bar for “treating customers fairly’ to “treat customers good’ – and prove it.
Senior leaders must guide the change in approach
At the technical level, companies will focus on implementing the detailed rules in their services, processes and communications. Changes to marketing materials for suppliers will no doubt be widespread. And all of that matters. But the real change will come from culture, attitude and motivation, and these are driven from the top of organizations.
Boards and management teams will need to understand how their organization is performing its duty to customers, what kind of results they are achieving, and how the company is meeting the fundamental requirements of the new rules.
And that doesn’t just apply to life and pension insurance companies and banking institutions. It applies to all regulated financial services firms, whether they deal directly with consumers or even if they are several steps away, perhaps simply manufacturing products for wholesale distribution.
How can we learn from past mistakes
The financial services industry serves a crucial purpose in society. For example, it allows people to access markets to make their investments profitable, provides security for savings, and offers ways to pool risk so that people can protect themselves against financial shocks.
If it weren’t for car insurance, one wonders how many people would ever have the confidence to drive their car. Without retirement products, few people would have the confidence to invest directly in the markets for decades. Without mortgages, buying a home would be almost impossible.
These are essential aspects of how we live our lives with ease, or simply for peace of mind.
But the industry is far from perfect, and it’s had more than its fair share of problems over the years, from pension mis-selling to unfair pricing practices. Much has been done to tackle some of the outright scandals that have tarnished the reputation of the industry, certainly in terms of tightening controls around corporate governance, accountability and professionalism. But the culture remains stubbornly difficult to change through regulation alone.
When you think back to some of the historical examples of bad practices, it’s hard to imagine that they were driven by individual bad practices, poor marketing materials, or inefficient processes. Usually it’s culturally driven; very often a culture of putting profit first. Certainly above the importance of customer results.
The overinvestment in high-risk collateral obligations (CDOs) by banks before the financial crisis was not motivated by the need to obtain results for customers, but rather by the pursuit of profit.
Likewise, the many nurses who were offered ‘outsourced’ personal pensions in the 1980s and 1990s – in what became clear was merely a commission-selling exercise – were not sold. on the grounds that it was in their best interest. Payment Protection Insurance (PPI) followed a similar path and its demise cost the industry tens of billions of pounds in compensation.
These are extreme examples, but they should not be lost sight of because they were born out of the pursuit of profit at the expense of everything else. The irony is that, in hindsight, they all resulted in huge losses.
Consumer duty is an opportunity to reset thinking
On a more practical level, we should look at how we prioritize our resources between new customers and the help we provide to those we already have. We need to carefully consider how we support them when they need it most and when things don’t go as planned. Any business can legitimately prioritize how it deploys its resources, and it can very well ensure that its model treats customers fairly. But it can be harder to say that it helps those same customers achieve good results; treat them goodin other words.
That’s not to say the pursuit of profit is a bad thing, but it can become problematic when it’s the primary goal, and potentially detrimental to customers when it’s the sole goal.
Perhaps Consumer Duty will begin to question the short-term profit motive in favor of a more sustainable model that allows companies to pursue longer-term strategies focused on customer outcomes.
And if the industry embraces the spirit of what is intended, it will dramatically improve trust in the industry, not only avoiding the headline issues of the past, but making people’s day-to-day interactions much more engaging, more significant and with better results.
And that in itself will likely improve profits.
You can find out what advisors think of the new consumer obligation, as well as what the future may hold, on the Royal London website.
This position is funded by Royal London