Consumer Duty: separating today from 'Day 2'

This is the more traditional 'Day 2' activity that tends to accompany every piece of significant regulatory change where there is always, despite best intentions, residual activity required to get firms to a position of being able to evidence full compliance. Whilst conceptually, Consumer Duty is no different, the focus and expectations of the regulator is heightened. As such (and as detailed in our recent article,) a formal plan will be required to provide the firm's senior management and board (as well as the FCA) explicit reassurance that all residual activity is fully understood, costed, resourced and has agreed timescales for delivery. The FCA will only derive comfort from a firm being substantively compliant on Day 1 if it is confident the firm has a robust, realistic and realisable plan to address the gaps. In our view, given the nature of the following key considerations, maintaining a programme framework will be the most effective way to implement this residual activity.  

A residual activity plan should contain the following considerations: 

• Appropriate prioritisation — as with the firm's Day 1 plan, firms should prioritise within this plan to ensure that the more material and critical elements are implemented first to have the maximum impact and bridge the bigger gap to full compliance as quickly as possible. 
• Sustainability and focus — details on how the firms will ensure that the business, given competing priorities, remains focused on completion of the residual activity and that all the changes implemented are sustainable in the longer term to maintain full compliance once achieved. 
• Risk appetite alignment — firms will want to ensure that this activity remains aligned to the firm's risk appetite. This applies both ways — that the residual activity does not hold itself to either a higher or lower bar, thereby exposing the firm to excess risks — or undue cost. 
• Rectification — the Day 1 implementation programme will have uncovered issues which require some form of rectification. The most material harms should have been addressed within the Day 1 'go-live' plan. However, firms will need to ensure all identified residual harms, potential harms and enhancements are appropriately implemented. 
• QA and validation — a critical aspect of activity will be to test and monitor how successful the Duty has been implemented and how well it is aligned to regulatory expectations. Firms are likely to want to validate that they have, in the short term, achieved substantive compliance and addressed the FCA's key areas of focus (including having evidence to address the FCA's 10 key questions). This assurance activity will be mix of internal and/or external expertise to allow firms to (i) assess their own implementation but (ii) critically benchmark their approach with peers.
• Continuation of the programme and transition into BAU — because of the residual activity, firms are not stopping their implementation programmes immediately. In fact, many firms are reassessing the programme structure to ensure alignment with the 'Day 2' plan. However, ultimately, a detailed plan about how and when workstreams and activity will be moved from the programme into the business will require carefully planning and timing. The new 'owners' will need to be clearly identified, processes developed and accountability moved or attributed. In terms of timing, if it is moved too soon, it may crystallise the sustainability risk mentioned above, move it too late and the business may take longer to transition and embed. Equally, the programme may not be able to move into BAU in a single move and some sequencing may be required. 

The knowledge and experience gained during the Day 1 implementation programme will make many aspects of closed book implementation less painful and more efficient. However, whilst there will be areas of crossover, closed products will present new implementation challenges and delivery will require careful planning. For the majority of open products, the fundamental decision was straightforward, 'how do we uplift?' to meet the Duty. The closed product approach requires a more open mindset which includes 'should we uplift?' 

We have published an article that takes a deeper look into the challenges with implementation of the closed product programme — the key points of which are summarised below. 

• Programme approach — firms should ensure they have in place a robust, costed and resourced closed products plan to deliver compliance by 31 July 2024. However, firms will need to establish the best way to deliver the programme — BAU approach versus incorporation into the overall existing Consumer Duty programme. We are seeing most firms adopt the latter approach, recognising the added complexity of this activity but incorporating lessons learned from open product work to maximise programme efficiency.
• Product profiling — once a firm established the list of in scope impacted products, it will need to develop a suite of metrics to help it determine the best course of action for each product or service. 
• Treatment strategy — developing the key criteria and agreeing the optimum treatment strategy for each product (or product grouping) will be critical. Firms will need to determine whether to (i) keep and repair (as per open product process), (ii) undertake a tactical fix, (iii) seek to migrate, merge or close or (iv) exit via a sale or transfer.  
• Remediation and/or rectification — in additional to rectifications issues flagged above, there is also an increased risk (compared to open products) that analysis identifies that the product or supporting process may not be in line with the pre-Consumer Duty expectations. Therefore, some firms are proactively preparing so that they can initiate remediation activity to address any shortfalls in a timely manner. 
• Transition into BAU — in reality, beyond the July 2024 deadline, firms will need to re-undertake strategy activities 1, 3 and 4 on the graphic to reflect the go-live position for closed products. However, there is a different perspective for firms to factor in. The FCA is likely to be less forgiving on the volume of carry over activity (if any). The FCA will also expect (and firms will want to) applying incremental improvements to the inflight closed product programme to take advantage of initial FCA findings and commentary on Day 1, as well as addressing learnings in evidencing good outcomes. Therefore, the closed product programme will need to be more agile than its Day 1 counterpart. 

All firms have implemented Consumer Duty at pace. Consequently, in many instances, firms prioritised tactical regulatory compliance over effectiveness, efficiency, and elegance of the solution. There will be a blend of known compromises that firms made along the way to reach compliance, the opportunity to embed the solution as well as develop a more strategic approach. For all embedding activity, the use of technology and tooling will enhance the robustness, timeliness and efficiency of firm's existing controls and MI. Firms are proactively identifying solutions that move them away from manual workarounds and tactical solutions in place for Day 1. 

• Target operating model —  as part of their implementation plans, firms have developed new processes and procedures — although they are unlikely to be fully developed into a target operating model. Consequently, firms are looking at how to optimise them into a more efficient and effective state. Further, firms are also deploying enhancements to their overall governance arrangements (including Terms of Reference uplifts). Finally, as part of this effective embedding, accountabilities, at an operational level, will also need to be fully articulated, agreed and integrated as the programme fully transitions into BAU.
• MI and reporting — this is where firms' thinking will be the most evolved. Firms will be able to more robustly evidence good outcomes the more data points they have. This will enable the firm to transition quickly from isolated data to a more comprehensive suite per outcome. As a result of post-Day 1 experience, coupled with additional MI, firms should plan to revisit their Day 1 reporting process (as well as content). This will identify any enhancements required to ensure it accurately reflect the needs of the relevant committee (e.g. Product, Pricing, Risk) or board, to be able to withstand more robust challenge and, additionally, be less onerous to generate. 
• Culture and learning — firms are recognising that the embedding of any cultural enhancements is fundamental to the success of their implementation of the Duty. Firms will need to better understand how the desired behaviours that the firm wants to see/hear are translating in reality, by measuring what is influencing these behaviours, assessing what employees actually do and, once this cultural assessment has been completed, making additional iterative enhancements, where required to further embed. Consequently, many firms envisage that further training and development will be required.
• Systems and controls — firms have not had the luxury of fully testing the new controls implemented for Day 1 so the practical application of these controls will provide useful early feedback (alongside any internal or external assurance reviews) on finessing the controls to maximize their impact. For example, many firms are planning to revisit all their customer Terms and Conditions and third-party supplier contracts to ensure that they are fully aligned to the intentions of the Duty.
• Customer outcomes testing — the key driver behind Consumer Duty is for firms to capture more evidence of good customer outcomes. This more holistic approach, looking at the end-to-end customer journey and assessing genuine outcomes — rather than adherence to process/quality assurance will provide additional insights. As a result of the flow of this new data, firms are expecting to undertake a range of activity to address identified poor outcomes as well as improve the testing methodology and processes. For example, customer understanding is one area that may be more materially impacted by this new flow of data and intelligence. Consequently, firms are anticipating needing to make further enhancements to their financial promotions, disclosure literature and communications.

Whilst not explicitly drawn out in this article, firms should fully anticipate that these 'Day 2' activities will impact (and be informed by) the firm's overarching governance arrangements. Whilst some of these changes will be consequential and relatively minor, the embedding and strategic considerations could be more impactful. 

As highlighted elsewhere, the short time associated with implementing the duty has limited many firms' ability to take a holistic and reflective consideration of the more strategic implications of the Duty. The Duty supports firms in creating a sustainable business (e.g. customer retention, service level augmentation) and, longer term, has the potential to achieve competitive advantage. However, Board direction and engagement on this key component will be critical.

• Business model/propositions — with the benefit of initial findings from customer outcomes testing coupled with relative luxury of being able to take a more considered assessment of the firm's business model and associated propositions, firms are likely to make broader changes to focus their activities (including product development and pricing) on those that are both commercially profitable and more straightforward in terms of being able to evidence good customer outcomes. As such, pricing and profit margin implications within the broader product, service and price and fair value context will help to shape these priorities. In this regard, we expect the cross-cutting rules to be particularly impactful. 
• Culture and purpose — successful integration of the Duty into BAU necessitates a culture that shares responsibility for ensuring the right outcomes. Firms are looking to use the findings from outcomes testing to indicate how well culture is operating and if there are indications of divergence to provide an early signal of the need for action. This shared responsibility, and built-in early warning system, can reward by creating a closer connection between staff at all levels, a greater understanding of the needs of the customer base and challenges front line staff face. This leads to enhanced customer reputation and advocacy, and an increased ability to attract and retain talent.  
• Customer-led growth — Consumer Duty 'go live' changes will have resulted in some excellent foundations for sustainable, customer-led growth. Customer-centric firms plan to use tools and approaches such as insight-led journey mapping not just to identify risks but to remove inappropriate friction, improve experiences and ultimately drive a step change in profitable customer growth whilst reducing cost to serve.
• Innovation/market opportunities — Consumer Duty provides a great opportunity for innovation and a chance to drive genuine commercial benefits. A richer data set and a deeper understanding of customer needs and wants provides the perfect catalyst to drive innovation and identify underserved market and customer segments. With the right culture and purpose, it drives firms towards developing unique and innovative propositions and away from a herd mentality mindset. 
• Digitalisation — the deeper understanding of the target market for each product or service and communications which have been designed to promote customer understanding provide a strong foundation for firms to be more responsive to increasing digitalisation. Utilising Duty learnings and ongoing Duty related MI should allow firms to fully harness the benefits of digitalisation (streamlined processes, data, reduced costs etc) at a customer and business level, whilst ensuring consideration and treatment of all customers include those with vulnerabilities. 

This article illustrates the depth and breadth of activity that the Consumer Duty still requires and will help firms segment Consumer Duty activity focusing its time, budgeting and resourcing in the right areas (and sequence). The final complication will be that whilst firms are designing and implementing their Day 2 plans, the FCA will be sharing its regulatory findings, commentary, required actions and/or opinions on how the Duty is operating in practice for open products. Inherent agility and flexibility will therefore also need to be factored into these Day 2 plans too. 

This detailed and systematic approach will help firms to meet regulatory expectations whilst identifying the significant commercial opportunities that the Duty will generate. As this article shows, some of this activity is required today, whilst others are definitively Day two considerations. Recognising the difference is vital.

To read more Consumer Duty insights from KPMG in the UK in other articles, visit our Consumer Duty Hub.

We have specialists with experience supporting firms with the development and implementation of solutions addressing the challenges detailed in this article including assurance reviews, frameworks and methodologies for remediation and rectification, supporting firms' closed product programmes as well as helping firms recognising the longer terms strategic opportunities of the Duty. We are already delivering technology and tooling developed specifically to assist firms implement the Duty — through  implementation, into BAU and into driving sustainable, customer-led growth.

If you'd like to discuss our view on the Consumer Duty Day 2, hear from one of our specialists on other insights/implementation challenges or require specific support on your Consumer Duty implementation plans, please do not hesitate to get in touch.