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February 26, 2024
Although the FCA has now published Sheldon Mills’ recent speech, delivered at a KPMG Consumer Duty event, there was also a panel session with Mills and KPMG, as well as a Q&A session. Much of the speech focussed on the forthcoming 31st July Consumer Duty deadline for ‘closed products’ (less of an issue for general insurance than other sectors), but other issues were discussed which we’ve highlighted below.
Within the speech Mills said that, generally, the price and fair value outcome is the most challenging for firms of the four Consumer Duty outcomes (the insurance sector has been wrestling with this since October 2021), and he repeated the increasingly-used message that the FCA is not a pricing regulator. He signposted the ‘implementation report’ (usefully outlining some examples of good practice and areas for improvement) which was published alongside the speech, and which was light-heartedly described as the “school report”.
From the panel session, the Q&As, and what is in the “school report”, our key takeaways are summarised below. With the end of July deadline fast approaching for firms’ boards / most senior management to have signed off a ‘Board Assessment’ in relation to Consumer Duty, firms might want to take the FCA’s views into account.
Price and fair value
Mills was critical of fair value assessments not having enough data and credible evidence behind them to justify the value to the customer. He also said that benchmarking against the market is not sufficient to demonstrate value.
KPMG thought that firms were trying to justify the current position rather than looking at it objectively. It had taken the asset management and general insurance sectors, which have had fair value rules for a few years, a few iterations to get this right.
Data
Mills emphasised the importance of this a number of times as being key to showing that firms are meeting the Consumer Duty outcomes. Data should be qualitative as well as quantitative, such as from customer focus groups, and should be the same data that is being used to run the business; they should not be separate things.
It is not just repackaging existing data (although complaints data and root cause analysis is very useful) as the customer understanding outcome seems to be a “new thing” for firms to measure. In the earliest days of the Consumer Duty Guidance, UKGI’s view was that Consumer Duty would be ‘all about the outcomes’, and that the understanding and services outcomes might provide the greatest challenge for insurance distribution.
Senior Management buy-in
Consumer Duty is not a compliance and risk management thing and the tone from the top is key. Consumer Duty should be regularly on the Board’s agenda to demonstrate that they are getting to grips with it and looking at things from a customer perspective.
Board Assessment Report
Mills said that this is not some form of attestation. He recognised that it was a journey, that there was uncertainty over the right level of data being presented to Boards and Senior Management, and that it was more of a challenge for small firms. However, the FCA will review a sample of the Board Assessments and will publish its findings.
KPMG acknowledged the FCA’s view that it was not a “one size fits all”, nor a “once and done exercise”. Firms should articulate the journey that they have been on, and look at the emerging trends and what they were going to focus on. The Board Report should explain what has actually changed in terms of customer outcomes.
KPMG also stressed that this needed a dress rehearsal before July, with a draft report going to an earlier board meeting as, given the magnitude of the Consumer Duty, there is little chance that this is going to be right first time.
Vulnerable Customers
“Consider the product’s purpose and where harm is likely to occur, especially for vulnerable customers.” Examples given were:
- Over 70s travel insurance with the need to think about medical conditions, how these are asked about, etc.
- Life insurance claims, where there has obviously been a bereavement and the need to handle the interaction with the customer sensitively.
- On the credit side, monitor how much credit is being given and consider whether this is an indicator of vulnerability.
Embedding the Duty, what does good look like?
KPMG said that ‘good’ is customer centric behaviour throughout the firm, and that it is the journey from project phase, through business as usual and target operating models, three lines of defence involvement, and governance, to continuous improvement. But, it is also taking a step back and doing the “so what?” test.
Mills suggested that ‘good’ is using complaints as a feedback loop; what are complainants saying? The FCA will be looking at the culture in ‘fixed’ (much larger) portfolio firms, to assess whether it has become customer centric. The FCA’s current work has been looking backwards. Hopefully, with the Consumer Duty, the FCA and the industry can become more forward looking without the need, for example, for redress schemes. KPMG echoed doing root cause analysis on complaints.
Culture
Where there is good employee engagement, this tends to lead to good customer satisfaction, with the example given of how a call from a distressed customer is handled. Physiological safety is important, that staff feel that they can speak up when things are not being done right.
Distribution Chain
In response to an ABI question about whether manufacturers have control of distributors, Mills responded that he expects parts of the distribution chain to communicate with each other. There should be feedback up the chain from those that are close to the customer. Mills also commented that some manufacturers had not done their part of fair value assessments.
Strategic Opportunities of Consumer Duty
Mapping the customer journey can identify the pain points and the friction in the process. Reducing or removing these may lead to greater customer satisfaction and growth and a lower cost to serve.
Sustainable business models
Mills said there is “nothing wrong with firms making money”! He doesn’t see the Consumer Duty as a division between customers and shareholders with products meeting customers’ needs and shareholders’ appetite. He sees it as an opportunity to grow the British financial services industry.
