The sentiment behind Consumer Duty is, in my opinion, valid. Who can truly complain about financial services firms providing high-quality products and services that consumers understand and that deliver good value for money? The challenge, of course, is that historically this hasn’t always been the stance of many providers in the sector, which could be argued is why regulation like Consumer Duty was introduced.
But has it gone too far?
Has the regulator overstepped the mark and become a price-capping entity? Has the administrative burden of Consumer Duty become onerous, some might even say unfeasible, leading to uneconomic levels of administration, particularly in relation to identifying and treating vulnerable customers and evidencing good customer outcomes? Moreover, are the requirements too vague and opaque, open to interpretation, which increases costs and ultimately harms the consumer – the only ‘chequebook in the equation?’
Is it becoming prohibitively expensive and risky to operate profitably in certain market sectors? Do the requirements of Consumer Duty, in particular around customer vulnerability and outcomes monitoring, prejudice some business models? And, by doing so, is the public being denied a lower-cost, easier and preferred method of interaction? I’m thinking digital-only, friction-light lenders and suppliers, who (perhaps) reading recent guidance from the FCA are scratching their heads and saying, ‘just how are we supposed to do this?’
I’m also thinking about IFA’s bailing from the market because they have lost the love for the role after drowning in administration. Leading to many consumers choosing to fly solo and, as a result, getting bad outcomes driven by ignorance and a lack of specialist advice.
Mind the gap
Certainly, if questions posed on our monthly webinars are a litmus test, then there is a lot of head scratching. In advance of our August 2024 webinar on vulnerable customers (available to watch here), we asked for questions to be posed for the panel from firms. We received over 200+ questions in advance of the session and it was clear from the sentiment of them that even 12 months on there exists a huge void between what the regulator expects of firms and what many firms believe and / or are actually doing.
With the publication of the FCA’s insurance multi-firm review of outcomes monitoring under the Consumer Duty in June 2024, one begins to see the full administrative burden the Consumer Duty is placing on firms. Over the past year, the FCA has extended its reach into markets such as personal banking, car finance, GAP insurance, and wealth management. Despite declaring the Consumer Duty implementation a success in its ‘Consumer Duty: 1 year on’ webinar, citing tangible improvements in consumer outcomes, firm culture, conduct, and governance, one must ask whether the FCA has lost sight of their role and taken it a step too far.
Is it time for more prescriptive legislation rather than principles-based legislation?
Where firms know precisely what is required of them and can thus operate in a market with clear and consistent rules for all market participants, transparent and known costs in much the same way other regulators do? For example, the solicitor’s regulator, the SRA, who provides templates for firms. Rather this than vague soundbites about frogs and lily ponds and the threat of considerable financial penalty if one’s interpretation falls outside of what is deemed appropriate by the FCA? Where, in reality, every firm in the sector is left to work it out for themselves, wasting millions of pounds and thousands of manhours looking for the perfect solution. A cost that either reduces margins or is passed onto the consumer. Lose/Lose!
One of our guest speakers in our September webinar was Fred Reichheld, the creator of the Net Promoter System℠ (NPS®), and one of the world’s leading experts on customer loyalty and earned growth.
The essence of Fred’s doctrine being that “earned growth” is significantly more effective than “bought growth” – and earned growth comes from extreme customer advocacy. In the webinar, he shared some case study data that is hugely compelling and hard to argue with. Essentially, it is a supplier’s choice to either deliver a product / service proposition to the consumer that “wows” them so much they tell their friends, or to deliver a more basic level of product / service for a likely lower cost. When suppliers deliver a basic level of product / service, the consumer soon realises and bails out / switches. It is the nature of a fair market and in 2024 the consumer has never had so much choice.
‘Put the consumer at the centre of your thinking and make sure they get a good outcome’; this isn’t rocket science – firms like www.apple.com have been doing this for years and growing at rocket-like pace to become the largest and most successful company in the world. Done so, in my opinion, by ensuring customers get a brilliant product and market-leading levels of customer service. Just as an FYI, Apple makes between $500 and $1000 gross profit on an iPhone 15 which retails up to $1500, I wonder if the FCA would accept this as reasonable in a price and value assessment?
When there are other products that, on the face of it, do exactly the same thing that retails for a fraction that the iPhone 15 costs, surely this represents bad value for money? Would the FCA step in and admonish Apple and warn them their profits were excessive? They aren’t doing anything much different to the (much) cheaper suppliers, yet they are charging consumers top dollar for all their products and services. It is perhaps a moot point as we will never know. But the FCA does regulate some products associated with the mobile phone market like phone insurance.
Unlike the insurance companies underwriting your phone insurance, Apple has the luxury (some would say) of operating in a largely unencumbered market. They set their pricing, and they deliver the products and services that go with it, and they live and die by the outcomes. They don’t need a regulator to tell them to put good customer outcomes at the centre of their strategy. They also don’t need to evidence good customer outcomes – this is self-evident and a matter of public record.
Have you ever interacted with Apple? Have you been to an Apple store? Have you called them? Have you had a live webchat with them? I have. The customer experience is just exceptional. Nothing appears too much trouble. For sure you know you aren’t getting any discount – ever – and you know that whatever you are buying you could probably buy something that does the same job for at least half the money, but millions of us around the world willingly pay the money and then rave about Apple. We even stick the little apple stickers to our bags and personal possessions.
What makes that customer experience so great?
In my opinion, it’s the quality of the product and the knowledge and expertise of the people who serve you. Apple train their people. They don’t tick boxes. They aren’t doing the training to evidence or prove anything; they are doing it because they know that the only way they can justify the prices they charge is if the products and customer service they provide is better than anyone else. They train for competence – they do not train for box ticking.
If you go to www.apple.com you will notice you are spoiled for choice as to how you might interact with them. Their phone number is front and centre – almost as if they are encouraging you to give them a call and speak to them. But they could save so much money if they just hid the number and made consumers interact via cheaper channels like chat and email. I’m sure the C-Suite at Apple know this, but they know that by making it really easy for their customers to communicate with them they sell more stuff and make more money!
I wonder what would happen if the FCA prescribed how firms should evidence good outcomes, rather than left it up to them to try and fathom out. Because the FCA says that just pointing to financial results or measuring NPS or complaint volume isn’t a sufficient level of evidencing – but it sure works for Apple. If the outcome monitoring was prescribed by sector, then wouldn’t firms have a level playing field? They would all know what was required of them (in terms of outcome monitoring) and could price accordingly. They wouldn’t be left guessing and creating hundreds of different ways to attempt to achieve the same thing and layering unnecessary cost into products and services.
The money spent doing so might then be better invested in the training and development of their people so that every customer interaction is an excellent one. Where all employees understand the regulations and their responsibilities to customers under the legislation. The prescriptive outcome monitoring would serve to “keep firms honest” and the differentiation would be by price and service. Those firms who, like Apple, want to charge a premium, must back that up with a premium level of service or risk customers defecting.
Then again, perhaps one should look deep into the lily pond and hope that in the shadowy depths one sees inspiration as to what specifically is going to satisfy the FCA in terms of evidencing good customer outcomes for vulnerable and non-vulnerable customers alike!
Ribbit.