Detail is in the data for car retail's FCA Consumer Duty compliance, opinion

When the initial consultation for Consumer Duty was announced in May 2021 by the Financial Conduct Authority (FCA), it divided opinion.

Many felt that it simply rehashed existing regulation and needlessly reiterated behaviours that firms were already adopting. After all, the FCA’s new Principle 12 largely replaces Principles 6 and 7.

However, as the Consumer Duty has been fully digested, firms are now realising that the size and scale of the regulation has far-reaching impact and requires fundamental changes to business models.  

Firms now need to pro-actively act to deliver good outcomes for customers and put customers’ interests at the heart of their activities.

They also need to focus on the outcomes customers get, demonstrate that the outcomes that would reasonably be expected are being achieved, and where they identify that good outcomes are not being achieved, act to address this. 

Crucially, firms are expected to challenge themselves to ensure their actions are compatible with delivering good outcomes for customers.

The Consumer Duty will lead to changes in how institutions collect, collate and evaluate data. Without robust data, how will firms proactively and retrospectively demonstrate that they are achieving the four Consumer Duty outcomes? (1. Communications, 2. Products and services, 3. Customer Service, 4. Price and value).

One Consumer regulation to govern all

Upon its announcement the FCA was clear that all firms will be covered by the Consumer Duty where they have a material influence over the customer outcome. 

The Consumer Duty would not only cover the people and departments selling to customers, it would also “extend to firms that are involved in the manufacture or supply of products and services to retail clients, even if they do not have a direct relationship with the end customer.”

Anyone in the financial services supply-chain needs to think very carefully about their role and the extent of their influence in the customer’s decision making.  If something goes wrong, it might not always be clear where precisely the fault lies and firms need to be able to understand this. 

The FCA wants the new duty to achieve and demonstrate “fair value” and “value for money”, but like much of the principles-based regulation it does not provide explicit definitions or parameters.

This principles based approach gives firms and the regulator latitude and proportionality, but crucially it allows for evaluation and evolution.

The downside, of course, is that what seems fair and reasonable today, may not be the case when viewed with the benefit of hindsight. 

As you will see, such an approach to regulation puts the onus on firms to demonstrate that positive outcomes are being reached and this can only be achieved through the effective use of data.

Data is information, and information is insight

You can’t improve what you don’t measure.  Firms should put processes in place to collect, collate and evaluate data effectively. This may require fundamental alterations to data infrastructure and management information.

A root and branch approach is needed to capture how products are manufactured and distributed. From governance and design at inception, through to the sale process, settlement and closure, firms will need to capture the relevant data points to understand the consumer journey. This is a truly holistic strategy.

Commission, interest rates, pricing, fees, term, cancellation rates, consumer survey feedback and complaints data will all need to be analysed. This wide range of data needs to build a picture of evidence, to be used to inform next steps and show that the firm is acting to ensure good customer outcomes. 

We have seen that not all firms that are covered by the Consumer Duty have started to put these mechanisms into place. Nonetheless, when the Consumer Duty comes into force in July 2023, they will need to be compliant. Responsibility for ensuring this compliant status rests largely on the shoulders of the senior managers; as the FCA states “the more senior and more relevant the role, the more we will expect of them to deliver good outcomes to customers”.

The house that the Consumer Duty built

There is some good news.

The FCA views this as an opportunity to increase “public confidence in the regulatory process and show that misconduct will be uncovered and dealt with.”

As the Consumer Duty requires much more and reaches much further than existing regulation it will require change, but the new structures will bring benefits. For instance, the structure of product manufacturing teams will have to be reviewed so that they are continuously collaborating throughout a product lifecycle. This could include collaboration with the distributers as well as a review of metrics such as cancellation rates and complaint volumes. This collaboration should create more appealing products that are proven to deliver for consumers.

At a first reading it would seem this is another regulation for retail banks that tightens previous regulation, however you will now see the changes are far broader, deeper and demanding – and it directly impacts the motor finance sector.

Most firms’ Consumer Duty programmes will be well underway. Data requirements may not have initially formed part of your planning, but we feel that the collection, collation and evaluation of data will become essential and this will mean fundamental changes to internal systems and management information.

Author: David Robinson, regulatory director at Konexo