The Financial Conduct Authority's New Consumer Duty lays out the new regulations that will further benefit and protect customers. They have proposed three key requirements from firms:
We spoke to Risk & Compliance Advisor Erik Porter about the changes customers and businesses can expect to see as the new regulation comes into effect.
Abi: Hello and welcome back to Break the Cycle Today. We're very excited to welcome the lovely Erik Porter onto the podcast, Erik is one of our advisors here at Ophelos, would you like to introduce yourself Erik?
Erik: Yeah, thanks, Abi. "Lovely". Hmm, okay, I don't get called that very often, so I'm going to try and live up to that today. So I'm Erik Porter. As Abi said, I'm an advisor with Ophelos and I do a number of other things, advising a number of fintechs and other organizations around compliance, regulation, risk and control.
I'm also a financial coach, really big into financial wellbeing and helping people be better with their money, feeling in control of their money, which is really important given the cost of living pressures that we're going through now.
And when I'm not busy doing all of that, I'm also a member of the FCA's Financial Services Consumer Panel.
Abi: And this is the big topic of the moment, the FCA's New Consumer Duty, could you tell us a bit about what that is?
Erik: Yeah. New Consumer Duty. So how many hours have I spent talking about the new consumer duty recently? But it's actually great to talk in this forum because I think this is where it really matters in the kind of implementation and what are firm's actually going to. We've got this big document that says "Do all of these things", what does that really mean to firms and what does that mean to the customers of those firms?
People will be familiar with TCF or "treating customers fairly", and then what used to be called principles 6 and 7, or still are called principles 6 and 7 and the kind of uplifting, upgrading, whatever you want to call it, the changing of that into Principle 12, which is a consumer duty.
And that's really taking things a major step forward in terms of the responsibilities that firms have to avoid harming customers, "avoid foreseeable harm" if we use the words of the FCA. And it's really about bringing the ethical and good treatment of customers to the centre of the organization, embedding that into the culture, embedding it into the process, moving it away from just being something that maybe we measure once a month and have a committee meeting and everybody says, "oh yeah, that looks really good", but really thinking about who are the people that we're working with in terms of customers, what are their needs and how do we ensure that we deliver positive outcomes for those people?
Abi: What would you say would be the main differences between the two?
Erik: The main differences? TCF was okay, but it really focused on a lot of process and it became a bit of a metric reporting activity, as opposed to really shaping how businesses were set up, the governance of businesses. It was also a compliance activity. It's often with these types of things that a rule or some guidance comes in from a regulator, in this case the FCA, but it can be any regulator really, and it gets handed to the compliance person, and that compliance person is told "well just go off and make it happen". And that's the last time that the senior management ever think about it until maybe they're sitting in a meeting or something and have to look at a dashboard.
This is a real shift from that to really make sure that the boards of organizations, the senior managers of organizations, are embedded in that process, that they've really spent time thinking about the products that they offer, the price that they charge for those products, the support that they offer to consumers as they transact and use those products, the consumer's understanding of those products - and I think that's a really, really important one because we know that financial services are complicated. Doesn't matter who you are, it's complicated. Even people who consider themselves to be really well educated, really financially savvy in a lot of aspects. You may know everything there is to know about a pension, but you might find yourself in debt one day and knowing about how to navigate the world of debt; a completely different world.
Probably a world if you've never been in it that you'll know nothing about, and you start getting letters and calls and texts and all these different things. And so it's really impossible for anyone to be savvy across all types of financial services. So I think that understanding element is super important.
And then it's about making sure that when people do contact organizations or engage with organizations in whatever way, in whatever channel, that they get the right level of service, that they get the right level of support, whether that's signposting to people who can help them in certain situations or whatever that may be. And really just continuing that conversation so that it's not just the conversation that happens when the compliance team says "oh, it's time to do this dashboard or this attestation", but it's actually part of the everyday conversation and embedded in the culture and the DNA of the organization.
Abi: It's a big cultural shift within organizations.
Erik: It's a very big cultural shift, and I think the first thing that said cultural shift when we look at what's been coming out from the FCA is that need to appoint a board champion. So the 31st of October has just past us and that was the first deadline day for organizations to come up with an implementation plan, and part of that plan is to begin thinking about who your board champion will be.
Abi: Could you just explain who could be a Board Champion?
Erik: So it needs to be a board member, and that's rare for organizations because most organizations will say, "our head of compliance is the champion", or "we have a chief customer officer who's the champion", or this other person might be a champion. It's rare to have explicit language that says "someone at the board level needs to be in charge of overseeing this". And so that's the FCA drawing a line in the sand and saying "we expect you, board members, one of you, whoever it is, to a) be the champion, but also b) have some oversight, challenge, question, make sure that your CEO and the senior managers in your organization are actually doing what they're supposed to be doing.
Abi: So something that stood out to me is that a lot of the language is relatively subjective… just looking at it now, there’s this one for example:
"Principle 12 focuses on customer outcomes, and requires firms to proactively act to deliver good outcomes for customers generally and put customers’ interests at the heart of their activities".
You know, that’s all good, but it is prone to being read in quite a few different ways… so I guess my question is how are firms going to go about putting subjective language into concrete numbers?
Erik: Yeah. So I think subjective language is, you're absolutely right and that is by design because if you think about the types of firms that are regulated, the FCA regulates something like 59,000 firms in the UK and that ranges from one and two person businesses who maybe are credit brokers all the way through to massive banks and insurance companies that we all know, you know, from the high street or from TV.
So they have to leave the language to be somewhat open to interpretation or subjective because how I measure that in a firm of two people that only does credit broking versus how I make sure that customers receive positive outcomes in a firm of a hundred thousand people like a high street bank that has 110 different products. Very, very different. And then you look at a firm like Ophelos, that is involved in one very specific activity, which is debt collection, but again, collecting from different types of customers, right? Whether that's energy customers or credit card customers, personal loan customers, and then not just those types of customers, but also from the lenders or creditors that they have.
You know, a credit card customer of a subprime credit card where that person might be more vulnerable in terms of financial resilience, financial capability paying very high interest rates for whatever reason is different to a customer who has a very prime credit card product.
And so it has to be subjective. And it's really about, again, going back to the senior management and the board, them defining for their organization what's appropriate. What's appropriate in terms of governance, so do you need different governance forums, committees, whatever it is, or do you just need to change or enhance the way that you practice governance today? How do you measure it? What are the metrics? Sitting down and articulating "what are the actual outcomes that you're trying to achieve?". And actually, I think we talk about outcomes a lot, and we have talked a lot about it in the last few years. It's actually a really hard job to sit down and define "what are the outcomes I want to achieve for customers?". We're used to talking about objectives. We're used to talking about different goals like, I'll take an easy one, "in my call centre I want to have an abandoned rate of less than 5%". Easy for all of us to get our heads around. Easy for us to measure. Everybody gets it. Fine.
If I write an outcome that sounds something like "I want all of my customers to have access to high-quality money guidance", that's hard to measure, right? And you probably need a number of different metrics to measure that, to tell yourself, yes, we're achieving it or no, we're not. We're delivering those outcomes.
And you probably can't just do all of that with stuff that you pull out of the machine in terms of production metrics. You have to do more in terms of asking customers, whether that's through surveys, through customer satisfaction, through interviews, a lot more qualitative analysis than what we've historically seen.
And I think that is gonna be one of the biggest things that organizations grapple with. That mindset shift from just measuring the production, whatever the production is, the processing of the widgets to actually what's happening as a result of the processing of the widgets.
Abi: Which will presumably drive much better outcomes for customers...
Erik: One would hope, one would hope that it either drives better outcomes or identifies where good outcomes are not being delivered so that activity can either be changed or in some cases stopped, and I think the tone that you read in some of the regulation is very clear, the FCA probably believes that there are some products or services out there that when compared to the responsibilities in the New Consumer Duty probably would need to be withdrawn. And then there's a whole bunch of processes around making sure that those are then withdrawn from the market in a safe way.
If we think back to what happened to payday lending a few years back, there were lots of rules in the payday lending space, which we probably all agree is really good in terms of helping and protecting customers and driving good outcomes. But if we didn't do that in a controlled and helpful manner... the need for those individuals to get credit didn't disappear. But where did they end up? And had that not been handled well, you could have seen people going to more illegal money lending, which did happen in some cases, but sometimes the unintended consequence of regulation is as bad as the harm the regulation was trying to fix in the first place. So it's a really tricky balance.
Abi: It's all happening quite quickly though, isn't it? It's next July it's got to be done by, do you think that'll have knock-on effects?
Erik: It's very quick and I think this is, when you think about the industry, firms of all types have said "we need more time". They're basically being given about 12 months to get things together and get this implemented. For closed books, I think it's 24 months. Is it happening quickly? Officially, yes, but I think it's also important to remember that the consultation process has been going on for quite some time for a couple of years.
The finalized guidance came out, I can't remember now if it was the middle of last year or the end of last year, but it's been floating around out there for a while. I think people, now, it's when they get that date that says you must be compliant by the end of July, that kind of sets people into motion.
Some larger organizations clearly were working through this long before, because they saw the writing on the wall, they knew what would eventually come. But others are absolutely scurrying around trying to figure out "what does this mean for us?". And it's particularly challenging for small and medium-size organizations who are very busy, who are used to delivering at pace, especially in the FinTech world, and some of those organizations like Ophelos, who don't have hundreds of people sitting in risk, compliance, whatever other types of teams, just waiting to work on the next piece of regulation. And at the same time are trying to grow the business and service customers and do all the things that they're doing. So it is particularly challenging.
And actually, I think one of the other challenges, and I see this in my work, is there are actually a limited number of people out there who can help organizations, right? We always think that there are tons of compliance consultants and things just floating around in the market. We're all busy. Because of this and all of the other stuff that's going on. So even getting time from all of those organizations or individuals is quite tough. Similar to the problems that Ophelos already faces and things like trying to attract collectors at the moment; really, really difficult, right?
It doesn't matter who you are, there's a labour shortage. And there's a skilled labour shortage, and that's affecting this as well as day-to-day business.
Abi: This has been part one of our conversation on the New Consumer Duty. Join us next week for part two, where we’ll be looking at what it means for younger businesses like Ophelos. Thanks for listening!
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