How the UK’s Consumer Duty will reshape CX

In the UK, Consumer Duty regulation is being introduced by the Financial Conduct Authority (FCA). It is designed to put the needs of consumers first and to ensure that they receive good outcomes from companies providing financial services in the UK.

In this piece, I will cover the foundations of the Consumer Duty and explore two of the big changes in detail: what the duty covers and how it impacts our approach to vulnerability.

What does the Consumer Duty cover?

The new cross-cutting rules around the avoidance of foreseeable harm and acting in good faith build on the FCA’s previous Treating Customer Fairly (TCF) regulation, but the four outcomes will be a new measure for the majority of the UK financial services market. However, some of the principles and rules are already in place in both the general insurance and financial planning sectors.

It is worth noting that this is not just about banks. The regulation will sit across every regulated piece of activity in the UK, for example an insurance policy purchased with new electronic goods, boiler insurance and even some entertainment packages.

That means non-standard financial services firms will be expected to operate within the same set of regulatory principles as a global bank.

Under the Consumer Duty, a product is not just the end result or the thing that the customer tangibly purchases. It can include the service through which the customer is purchasing the product (physical or digital) and all ancillary services offered before, during and after the purchase up to and including the end of the customer/provider relationship. It also includes customers who don’t purchase a product and leave the process prior to any purchase transaction occurring.

As an example, that means the Consumer Duty will categorise advisory firms as both manufacturers and distributors of their own product (the product being advice). Pre-Consumer Duty, advisers would typically have been classified as distributors and not really considered as manufacturers.

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The other definition the market will need to consider is that of co-manufacturer. This is where two or more firms collaborate on the design of a product or service. In that situation all firms will need to have a written agreement that clarifies their responsibilities and confirms who’s accountable for what in terms of outcomes. That could mean that firms who fund lending products and as a result set prices and eligibility criteria, are now considered co-manufacturers.

The definitions are especially important when we start thinking about AI and the role non-regulated firms have in the value chain. The Consumer Duty covers the full end-to-end process so the whole journey is captured. If there are non-regulated entities who have material impact on the outcome within that process, then the regulated party will be taking full responsibility for everything that happens. That gets interesting when we move to a position where AI created by non-regulated entities is actively managing parts of the process and/or making material decisions on customer outcomes/support and communications.

New definitions for vulnerable customers

I have spoken for several years about my concerns with digitization, CX and vulnerability. Frankly, it is never discussed enough and almost every measure of good CX seems to exclude any consideration for those who do not have English as a first language, for those whose decision-making might be impacted by life events or those who are simply unable to transact in what might be classed as a ‘traditional’ way.

The Consumer Duty will change all of that; it will expect regulated firms to document how those with characteristics of vulnerability are using their products and services and what additional measures they are taking to ensure that these customers are not being disadvantaged – receiving different outcomes than those without those characteristics.

For example, in meeting the customer understanding and customer support rules, it’s almost inconceivable that a customer with a low level of financial capability dealing with a significant life event will have the same needs – in regards to support and understanding - as someone who doesn’t have any life pressures and is employed as a fully qualified accountant.

How firms identify, assess, monitor and report on those differences in order to evidence that the outcomes are no different and that the communication, support and overall product and service are suitable, is one of the key challenges within the new regulation. If that forces firms to do more to support the most vulnerable in society, then for some customers that might mean the new rules become life-changing.

In summary, firms being clear on what role they have in the value chain, how material they are to the customer outcome and then considering how their products and services are designed to work for different groups of customers are not only good CX practices but – for the UK at least – are now a minimum regulatory requirement.

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Rules with the potential to change CX forever

Firstly, it is important that we recognise that the FCA is looking for firms to make decisions based on materiality and prudence. So, rather than looking for a specific rule that does or does not confirm requirements, a firm will be expected to consider if it believes it plays a material role in delivering customer outcomes. In making that decision, the firm will be expected to have taken a prudent approach when reading the new regulation. So even if a firm thinks it can justify a decision that services being provided are outside of the scope of the Consumer Duty – services provided by outsourcers, for example – it doesn’t necessarily mean those services can be excluded if they are material to the overall outcome for customers within the defined target market.

In short, I think it’s going to be hard to justify that any service is 100% non-material in terms of customer outcome, there will of course be some, but I think we’d all like to think that what we do has some kind of customer impact!

According to research conducted by the Financials Services Compensation Scheme (FCA), only 31 percent of UK consumers trust the UK financial services industry to act in their best interests – therefore it is fair to say there’s significant work to do around customer trust and loyalty. It should be no surprise therefore, that the FCA has put culture change at the heart of this new regulation.

In my view not only will the Consumer Duty raise the bar for everyone within the UK financial services market, but it also has the potential - over time - to raise the bar for everyone working within financial services anywhere in the world. It’s also likely to impact other regulated markets in the UK, such as energy and telecommunications. If that expansion does happen and the UK takes a lead on regulating CX in all markets, then this could be a huge influence not just on CX in the UK, but for CX and CX professionals all over the world.

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Do I need a chief customer officer?

I’ve spoken about, written and chaired a lot of sessions on the Consumer Duty and the point I often make is that it is just the job description of a chief customer officer. Customer outcomes, data-driven, insight/research-led proposition development and personalized/relevant communication and service design – that, in my mind is describing CX.

The Consumer Duty also requires a board-level customer champion – again, globally that would likely be a chief customer officer – but those roles don’t typically exist in the UK. And that’s a problem. The result is that boards are looking to see which exec is the “best fit” to be customer champion and if they don’t have a CX function they are landing on the chief risk officer – it is regulation after all.

And I think that’s going to mean significant delays in getting the outcomes the FCA are looking for. In my experience the risk and compliance functions tend to start with what they do today and then try to fit the new regulation into the existing infrastructure to ensure compliance.
I would argue the right approach would be to look at the new regulation and take note of the purpose/culture points raised by the regulator and then use that as a template for organizational redesign – and ultimately competitive advantage.

Before the event, I will follow up with a piece on customer segmentation and the new reporting requirements before covering culture and what the future might look like as we get closer to the event itself. Register for All Access: CX in Financial Services here.