Financial services firms have found focusing on price and value “challenging” during the first year of the Consumer Duty, according to the Financial Conduct Authority (FCA).
The FCA will be publishing a programme of its coming Consumer Duty work and undertake thematic work across the sectors it regulates to address harm, or potential harm, to retail customers.
The regulator is also launching an AI sandbox to test and improve new artificial intelligence-based financial services and products, similar to its digital sandbox initiative.
Speaking at a webinar marking the first year of the Consumer Duty, FCA executive director of consumers and competition Sheldon Mills (pictured) welcomed improvements firms have made to deliver better consumer outcomes since last July.
He added the outcomes-based nature of the duty will allow the regulator to streamline its rulebook to support competitiveness and growth, while ensuring good consumer outcomes.
And following today’s anniversary, the FCA will continue to focus on how firms are embedding the duty and acting to address harm.
Price and value focus has been challenging
However, Mills highlighted that the regulator’s focus on price and value is an area firms have found challenging, emphasising problems stemmed from firms non-compliance with customer understanding or using opaque fees.
“Our role is not to set prices,” he said.
“But rather to ensure that firms are robustly assessing whether they are offering fair value to their customers and ensure firms take appropriate action where their assessments indicate that their products and services may not offer fair value.
“Many of the harms of poor value are exacerbated by firms’ lack of compliance with consumer understanding or customer support requirements, for example by using complex product terms and conditions, or opaque fees.
“Ultimately, we are seeking to ensure that value overall is provided – price is one element, but service and understanding are also key components. We will be taking a holistic approach to the application of the Consumer Duty.
“We will not stand in the way of a well-run business making profit in a well-functioning market, where there is effective competition that is in the interests of consumers. Profits drive innovation and better consumer services.
“What is important is that these profits are not at the expense of consumers receiving fair value. The price a customer pays must be reasonable compared to the overall benefits they receive,” he added.
Addressing harm
Mills also noted that the regulator will publish a grid of its forward programme of Consumer Duty work.
“In this programme, we have prioritised initiatives where, first, there is a need to act to address harm, or potential harm, to retail customers.
“Second, we want greater understanding of how you’re embedding the duty, the outcomes your customers are getting, and where potential issues are emerging. Where we need more data and information from firms, we’ll only ask for what we really need.
“And third, we believe sharing more information on good practice and our expectations will benefit industry and help drive better outcomes.
“Under this work programme, we’ll do thematic work across sectors, work on specific sectors, products or services, and we’ll keep our focus on the price and value outcome.”
Positive and impactful changes
But Mills also pointed out that the regulator has seen “many examples of positive and impactful changes”, with the duty already having a “tangible impact” on consumer outcomes.
He said: “We’ve shared much of this great practice so others can learn from it. And we’ve also said where firms need to do more.
“And it has been driving improvements in firm culture, conduct and governance, too, which over time will drive better outcomes still,” he continued.
“Firms we’ve spoken to have developed new data and metrics to better understand their customers, for example to track customers who fall outside of their target market, allowing them to conduct outreach or implement intervention measures.
“Others still have improved the way they capture and record information about customer vulnerabilities and expand support to better meet customer needs by adopting a ‘tell us once’ approach.
“Some firms have changed their employee bonus structures to make sure that incentives are right, and employees only get good outcomes when their customers do.
“We are also seeing firms being more proactive with their communications, contacting customers to provide information on what better products may be available, and monitoring the impact so they can learn and improve.
“And many are rewriting those communications to make them simpler and easy to understand.
“This is just the beginning of the journey not the end. And it’s clear that there are a number of areas where firms need to continue to make improvements. So, we know there is much more to come.”
AI Sandbox launch
Looking ahead, Mills revealed the regulator is set to launch an AI sandbox with the new technology presenting opportunities for firms who are thinking creatively about innovation and efficiencies.
He noted the FCA had been working with other regulators in the Digital Regulation Cooperation Forum (DRCF) to run an AI and digital hub where technology innovators can get free and informal advice.
“We’ll also be launching an AI Sandbox in due course too,” he said.
“Our aim is to enable product developers to bring their products to market safely and quickly.”
Mills continued: “We were the first regulator in the world to promote innovation in financial services through our innovation sandboxes and pathways.
“And we created a space for start-ups and fintech’s to test new ideas and products with our support. We have supported around 900 firms to date.
“Last year we made our digital sandbox permanent after a successful pilot. Nearly 60% of participants took off in a better shape including launching new products, securing funding and partnerships, or receiving industry awards or recognition.”
Not all risk eliminated
Mills added that there will be risks with innovation and changes and the duty cannot and should not eliminate all risk to consumers from financial services.
He highlighted the desire to empower consumers to make the right decisions for their own risk appetites and enable firms to better support people who can save and invest, with that being the basis for continuing work on the Advice Guidance Boundary Review.
But Mills also acknowledged some stakeholders had concerns about the implications for redress and the approach other authorities, including the ombudsman, will take on complaints.
“The Consumer Duty is one of the issues being managed through the Wider Implications Framework,” he said.
“The framework provides a structure for its members to work together to find the best way to deal with issues that could have wider implications across the financial services industry.
“We continue to work closely with the Financial Ombudsman to ensure alignment and consistency in how the duty is interpreted.”
And Mills argued the regulator will continue to be proportionate in its approach to supervising the duty, especially for smaller firms.
“We will continue to work with firms to get the duty right in response to practices we are seeing,” he continued.
“This is particularly so for smaller firms. I have talked about innovation as a clear factor in growth, and the same goes for a thriving small business sector.
“We want smaller firms to feel confident in their application of the duty and to deliver good outcomes for their customers. At the same time, we want to support firms that do the right thing to innovate, flourish and grow.
“The duty allows for smaller firms to take an approach that fits their size, the activities they undertake, the market they operate in and of course, to the needs and circumstances of their customers.”
Mills noted firms of all sizes, but particularly smaller ones, often raised concerns about the length and complexity of FCA rules and there was a perception that this complexity can be a bar on innovation and growth.
“That is one of the reasons why we published on Monday this week our call for input – to explore how we can simplify the requirements on firms dealing with retail customers,” he said.
“And it’s the introduction of the duty and its outcomes focused approach that gives us the opportunity to take stock.
“We want to address areas of complexity, duplication, or over-prescription which create regulatory costs with limited consumer benefit. And we want to provide flexibility and for our rules to be responsive to future changes and innovation.”