Out-Law Analysis 5 min. read
27 Jul 2021, 10:57 am
UK financial services firms must put customers first and be able to evidence how they do so to meet the demands set by the Financial Conduct Authority (FCA).
Achieving good outcomes for consumers is a core theme of the FCA’s latest business plan for 2021-22. The paper explains how the regulator expects firms to deliver on this through the very business models they adopt, and how it will use tools such as data analytics to evaluate consumer harm.
The need for firms to take a consumer-focused approach, that improves customer outcomes, is an agenda that the FCA has pushed forward for some time, and which we have seen manifest itself through various policy, supervisory, enforcement and court actions in more recent months. One example of this is the FCA’s finalised guidance for the fair treatment of vulnerable customers, while another is its recent discussion paper on ensuring diversity and inclusion in financial services, and how firms ought to be sufficiently diverse to ensure that they are able to meet the diverse needs of their customer bases.
The ‘common thread’ that runs through the business plan and, more particularly, its consumer priorities – enabling effective consumer investment decisions; ensuring consumer credit markets work well; making payments safe and accessible and; delivering fair value in a digital age – is the central expectation that firms must put customer outcomes first.
It is important that firms are able to demonstrate through clear and compelling evidence … how their business models are geared towards meeting the needs of their customers
That means firms will have to be rigorous and proactive in how they assess what their customers want and how best to serve their needs. The FCA has made it clear that, in that regard, it will look at a firms’ business models and how these affect their products and services, to understand their ability to meet consumers’ needs, particularly those in vulnerable circumstances.
That approach echoes the FCA’s recent vulnerable customer guidance which highlights the need for firms to understand their target market and to tailor their approach to meet the needs of that market and sub-categories within it.
It is important that firms are able to demonstrate through clear and compelling evidence, such as internal management information and impact assessments, how their business models are geared towards meeting the needs of their customers; improving their outcomes; and mitigating risk of harm. If a firm struggles to show that it has done this, it may well expose itself to even greater regulatory scrutiny should things go wrong and customers suffer detriment.
The focus on customer outcomes and particularly those with vulnerabilities is particularly acute in the context of credit markets where the FCA has already been proactive in issuing guidance to support consumers faced with serious financial pressures. Looking ahead, the FCA’s plan highlights its intention to undertake “more in-depth work to assess whether consumers are getting fair and appropriate outcomes, including customers with characteristics of vulnerability”. It said “this will shape our next steps, including targeted action against firms not meeting expectations, and considering whether to make the temporary changes to our rules and guidance permanent”.
The plan seems to indicate that there is no going back to the pre-pandemic way of doing things and that temporary actions that were taken to support customers in the pandemic may well be here to stay. With that, there is an expectation that firms will build on these customer-focused support measures, rather than ‘row back’ on them.
Also underlying the FCA’s priorities for this year is the expectation that consumers should have clear information that helps them make effective choices. The FCA said: “Firms’ information disclosures don’t always have as much impact on consumer decision-making as we would like.”
While shortcomings in disclosure to customers is not a new issue, it is one that has been magnified by the array of complex and risky financial products that have come to the market, such as cryptoassets and other high risk investments, in light of technological developments. For example, we have seen this taking centre stage in the FCA’s recent consultations concerning disclosures for ‘green’ investments.
In a speech made at the launch of the business plan, FCA chief executive Nikhil Rathi highlighted the emergence of a new constituency of customer with whom the FCA is less familiar – they are younger, more receptive to social media and social influencers; and are prepared to take on highly speculative investments. They see investment, in the words of the FCA, as entertainment. The FCA will be closely monitoring the risks this type of high-stakes investing presents. It also plans to undertake media campaigns to heighten risk awareness and strengthen financial promotion rules for high-risk investments and authorised firms that approve financial promotions.
With the proliferation of investing apps on mobile phones and other tech, offering easy-access investing at the push of a button, it is not difficult to see how customers – some potentially quite vulnerable – who may be looking to make some ‘quick money’ could fall into real financial detriment quickly. With the growing risks this presents, it will be incumbent on firms that provide such platforms and services to ensure that they have the right controls in place and that their disclosures are clear, fair and not misleading.
Closely linked to the quality of disclosure are the data analytics that inform the content and prominence of such information presented to customers. The FCA said that it intends “to increase our use of behavioural science, economic analysis and available data capabilities to design targeted, effective disclosures”.
Nikhil Rathi also emphasised the importance of using data to ensure the regulator can make more robust, evidence-led assessments in respect of customer harm and impact; in particular using insights from behavioural science. We have already seen this approach recently in the context of climate-related disclosures where behavioural science has been used to understand the impact of information on customer’s decision-making in respect of ESG type investments.
Given the FCA’s renewed emphasis on data analytics and behavioural research, firms would do well to keep a close eye on these insights as they emerge to help inform their own approaches towards improving customer outcomes. By harnessing these insights, together with any internal data analytics, artificial intelligence and other models, firms should be better placed to deliver better and fairer outcomes for consumers.
The business plan’s messaging on non-compliance is loud and clear: this is a regulator which is prepared to assert itself and test the limit of its powers
One of the FCA’s most significant projects for the coming year draws together the different elements of the regulator’s expectations in relation to firms’ consumer-first approach – the introduction of a new consumer duty, currently under consultation.
Whilst the specific wording of this duty has yet to be finalised, the purpose is clear enough: to set higher standards for firms’ culture and conduct. And so too is the envisaged outcome: for firms to consistently place their customers’ interests at the centre of their business.
In certain respects, these expectations build on existing requirements in the FCA Handbook, the regulator’s wider ‘treating customers fairly’ agenda and its initiatives in diversity and inclusion, for example. However, not only will the new duty bring all of these elements together in one place, it will increase the existing expectations on firms.
Firms need to, in the FCA’s own words, be ‘proactive and forward-looking’ throughout the customer journey – from product design through to complaint-handling. The business plan’s messaging on non-compliance is loud and clear: this is a regulator which is prepared to assert itself and test the limit of its powers. Firms can expect the FCA to be bolder in its supervisory approach to customer outcomes and to use its enforcement toolkit where necessary.
Co-written by Anthony Harrison of Pinsent Masons.
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