From theory to practice...

Building on our successful 2021 webinar which looked at the challenges from the proposed duty, our latest webinar focused on the practical steps firms can (and should) be taking now to prepare for the implementation of the FCA's Consumer Duty initiative.

To reflect this change of focus, we welcomed the FCA to share its thoughts, alongside an expert panel to gather a wide range of different perspectives from all affected sectors.

This resulted in a truly exceptional session. It was attended by over 500 people and provided excellent insights, questions, and challenges on how firms can translate the FCA's intentions into practical activities and how they should be prioritising them.

The FCA cited 'embedding and supervision' as the two key factors in the successful implementation of the Consumer Duty.

For firms, the onus is on truly embracing the Consumer Duty, ensuring it is a consistent thread woven into everything that firms do for customers, and extending it across the whole product lifecycle. The FCA also confirmed that the Consumer Duty fully aligns to its new transformation programme which aims to create a data-led, agile, assertive and innovative regulator. Although core supervision activities will remain, the FCA's supervisory approach will evolve. An outcomes-based approach will give it greater agility to be assertive and support innovation in markets.

Firms are already recognising the materiality of the challenges in embedding the Consumer Duty. In a poll conducted by KPMG during the webinar, 26.1% saw the cultural change required (including reducing sludge practices and behavioural bias) as the second greatest challenge, needing a long lead time to effect such a change. Underlining this, the webinar panel strongly agreed that, even if the FCA grants a slightly longer implementation period than the proposed 9 months, firms do not have the luxury of being able to await the final rules in July 2022 to commence implementation.

The time for action is now.

There was strong agreement that gap analysis should be a key, and early, activity for firms. It is likely to include ensuring that a firm has (or rapidly develops) an inventory of all its existing products and services to ensure that it can fully consider the differing level of maturity across sectors, functions, product/service lines and, if applicable, specific products/services. Similarly, it will require evaluation of many of the firms existing controls including, but not limited to, product governance, conduct risk framework and vulnerable customer policy and procedures. To maximise efficiency and effectiveness, gap analysis reviews require the following components:

• Target State - the destination the firm is seeking to achieve will need to have been considered in advance. This will require interpreting the Consumer Duty and assessing specifically the impact it has on all key aspects of the business. Whilst this does not need to be granular, generating this perspective from a small sample of relevant and indicative product or services is fundamental as it will help inform the materiality of the gaps identified during the broader process.
• Collaborative - the gap analysis cannot be driven by a single individual or function within the firm. It needs to be a joint and collaborative exercise. For example, although the compliance function may feel like the obvious choice to own an aspect of regulatory change, in order to achieve the FCA's intended outcomes, the first line needs to drive activity and be accountable. Further, purely desk-based gap analysis can sometimes lack the depth of discussion and necessary challenge. We have seen gap analysis exercises being more productive where material is prepared and then discussed in detail within a workshop environment.
• Range of stakeholders - linked to the above, a wide range of stakeholders is required (with both appropriate seniority and also understanding of the detail of their own functions). Obvious key stakeholders such as operations and compliance should be included, as well as other departments that also have an indirect impact and/or insights on customer outcomes such as legal, IT and finance. A more holistic and exhaustive consideration with all key stakeholders leads to a more engaging and positive outcomes and mitigates the risk of groupthink.
• Evidence based - whilst opinion will be valid in the context of discussion, the process needs to ensure that there is a focus on what can currently be evidenced to objectively identify the gaps. This serves two purposes. Firstly, it ensures a robustness to the gap analysis process but also provides an indication on the level of evidence the firms already maintain to illustrate good customer outcomes. If material evidence is missing, further activity may be required to collect it.
• Structure - the process needs to be managed carefully to ensure that all aspects of the new duty are appropriately considered, and the discussion remains focused. For example, the cross-cutting rules are often either overlooked or only considered in a superficial manner. In our experience, consideration of bias and sludge practices can provide significant insight to benchmark the firm's starting position. A detailed framework is required to maintain this focus.
• Detailed output - to ensure the materiality of identified gaps and resulting decisions and actions are captured and form a solid starting point, the outcomes of the discussion should be recorded with an appropriate degree of granularity. Once fully documented, these can be used as the starting point for the development of the firm's change programme.

KPMG in the UK has developed a Consumer Duty diagnostic tool which we are using with clients to help conduct this initial piece of analysis. The tool is designed to help clients consider existing organisational and business practices in light of the Consumer Duty expectations.  We facilitate workshops which in turn can help key stakeholders to identify potential pain points and/or thematic issues/gaps which are relevant across different business areas. After the session, if required, we can also prepare a detailed report for the client, with actionable recommendations to help ensure it sets up its programme for success. If you would like to know more about our approach and diagnostic tool, please get in touch.

The challenges associated with evidencing customer outcomes scored highest in the webinar poll with 52.3% of attendees flagging it as the main challenge. This obligation is wide-ranging as it is required within all aspects of the FCA's four 'outcomes'. There is also an overarching obligation for the board to consider annually whether the firm is acting to deliver good outcomes for its customers which are consistent with the Consumer Duty. Therefore, the way firms design, implement, assess and monitor a solution to evidence outcomes should be a core focus of implementation activity - at all levels of management.

Customer outcome testing is one of the core delivery mechanisms for Consumer Duty to provide assurance that firms are consistently delivering good outcomes for their customers and are aligned to regulatory expectations. Technology will enable firms to evidence that they are meeting the new standards.

For example, for product and services, rather than relying on a bottom-up approach, based on what data is available and how it can be used as a proxy for a good outcome, firms will need to invert their approach. They will need to adopt a top-down approach starting with the outcomes they are trying to evidence and working down to the data that they need. As products and services change, data needs to evidence outcomes will evolve over time. Therefore, firms are (rightly) not thinking of these as narrow hard coded regulatory returns but more of a data lake which can be configured fluidly. This is time consuming and more complex but will have longer term benefits.

The effective use of data and technology will be critical to meeting the FCA's expectations, especially with the FCA's more data led approach to supervision.

KPMG in the UK has developed “KPMG Decipher: Customer Intelligence” that brings together our people, methodologies, and technology to develop a solution that is focused on realising the opportunities of intelligent automation to evidence customer outcomes to respond to the challenge of the new Consumer Duty.

KPMG Decipher uses data analytics, pattern recognition, natural language processing and machine learning to automate the review of 100% of customer interactions in real-time / near real-time to identify any risks to good customer outcomes such as maladministration. It can also provide automated, self-service MI and reporting to evidence how a firm is monitoring customer outcomes and the actions being taken to prevent customer harm or promptly address any issues that do occur.

If you would like more information about the KPMG Decipher solution or request a demo, please get in touch.

The fair value outcome is a key part of the new Consumer Duty and one that presents a significant challenge for firms in terms of outcomes testing. Unlike most of the other changes, for most sectors, this is a new requirement. As a result, when conducting the gap analysis summarised above, a significant number of firms may conclude that they do not have an existing framework or sufficient corporate experience to build on.

Customers are the ultimate arbiter of value. Firms will need to consider how different customers use their products and services to develop frameworks to internally assess and benchmark price and value for specific user groups, including vulnerable customers. Although these frameworks can and will vary, in the webinar we provided one approach to building an appropriate fair value framework - designed through the lens of how a regulator would approach the assessment of fair value from an economic point of view.

Although labelled by the FCA as a separate outcome, fair value assessments will form an integral component of a firm's product governance arrangements. The assessments are likely to inform, and be informed by, other aspects of the product governance framework. To effectively consider fair value, the assessment should also include consideration from two differing perspectives. A top-down strategic and business model view will be as important as a bottom-up product assessment focussing on specific features and benefits, how firms administer it and the associated fair value being delivered on specific products or services.

In terms of assessing at fair value, the framework we discussed at the webinar had four key pillars.

1. Identify key metrics to assess fair value. These may vary depending on the range of products and customer segments subject to the Consumer Duty. Metrics could include measures of profitability such as contribution margins, measures of yield, or economic profits and would sit alongside other relevant information such as customer satisfaction scores, product usage data, and benchmarking data on how prices and quality compare to competing products.
2. Develop a dashboard tool to summarise the outcomes of this work and enable comparisons across products and business areas and over time. This dashboard could be dynamic with functionality to segment the information in different ways, by customer segment, service line, or by product for example.
3. Identify red flag risks to highlight those products that may not represent fair value, based on how the key metrics compare to reasonable thresholds e.g. contribution margin significantly above average, poor customer satisfaction scores, or where significant profits are earned from vulnerable consumers or customers who do not use the product as intended. The use of dashboards to combine financial metrics with other relevant information will enable a holistic assessment of risk.
4. Undertake a deep dive into red flag products. This would include undertaking a more detailed empirical and qualitative assessment of fair value. It would likely involve a more detailed assessment of the causes of the red flags identified, and whether there are other factors that need to be taken into account in an assessment of fair value. In some circumstances, this may lead to reconsideration of product pricing schedules or product features by commercial teams.

Although firms will develop frameworks to internally assess and benchmark price and value, direct interaction with end customers will also be required to understand their perceptions of value including product quality, and customer service.

Setting up a dynamic framework, as described, would help provide internal assurance that a firm is meeting fair value expectations. It will also demonstrate to the FCA that governance/procedures are in place to embed fair value.

This framework draws on KPMG in the UKs’ experience of working with a range of General Insurance (GI) firms to implement and review implementation of the new GI pricing rules. However, GI is only the latest sector to receive focused attention. Some aspects of retail banking and all retail asset managers have already been subject to specific rules on price and/or value. Where firms already have this expertise, there are bound to be components that are transferable into other sectors. This can help firms accelerate their work prepare appropriately.

KPMG in the UK has a dedicated Competition Economics team which specialises in providing financial and economic advice for firms in their interactions with economic regulators like the FCA – across a wide range of projects/sectors and with specific financial sector experience. If you would like to discuss fair value generally or discuss our experience of designing and deploying our fair value framework, please get in touch.

Unlike the majority of the regulatory change initiatives that have gone before it, Consumer Duty is distinctly different. Approaching it purely as another item of regulatory change will miss the point, and firms will struggle to meet the FCA's expectations. Instead, Consumer Duty represents a regulatory driven transformation opportunity. It is more about creating the right culture within which the Consumer Duty can operate rather than solely and narrowly addressing each regulatory requirement individually. This is truly a `hearts and minds' transformation programme.

As referenced above, firms should draw comfort they are not starting this implementation from the ground up. All firms, to a greater or lesser extent, will have several key foundations to build upon, whether through a customer-centric culture and clear purpose, an embedded conduct risk model, a fair value framework or existing product governance arrangements.

Finally, firms should keep in mind that although it will require a significant effort to meet the new requirements, there will be positives. At the end of the webinar, all panellists were asked for their summary of the potential upsides of the Consumer Duty. Responses included references to better and more consistent customer outcomes, and more confident consumers. The panel also identified positives for the firms themselves as the Consumer Duty provides a great opportunity for innovation and a chance to drive genuine commercial benefit.

However, the time for action is now.