The new Consumer Duty from the Financial Conduct Authority (FCA) is fast approaching. Even if the timescale for full implementation is pushed back - as some have suggested - the scale of change required shouldn't be underestimated.
The proposals set out a framework that will require firms to measure whether they are delivering good outcomes for customers across a number of areas. This includes the quality of their communications, appropriateness of products, the quality of the service offered and whether support is provided to help customers make financial decisions about their future.
The Regulator will expect firms to take all reasonable steps to avoid causing foreseeable harm to customers and to help them pursue their financial objectives, while always acting in good faith.
At its core, this is an evolutionary step change for the financial services industry, raising the bar from ‘treating customers fairly' to ‘treating customers well' - and proving it.
Senior leaders must guide the shift in approach
At a technical level, firms will be focused on implementing the detailed rules across their services, processes and communications. Changes to marketing literature for providers will no doubt be widespread. And all of that matters. But real change will come from culture, attitude and motivation, and those are led from the very top of organisations.
Boards and Executive teams will be expected to understand how their organisation is performing in its duty to customers, what sort of outcomes they are achieving and how the firm is delivering against the core requirements of the new rules.
And this doesn't just apply to life and pensions companies and banking institutions. It applies to all regulated financial services firms, whether they are dealing directly with consumers or even if they are several steps removed, perhaps simply manufacturing products for wholesale distribution.
How we can learn from the mistakes of the past
The financial services industry serves a crucial purpose in society. For example, it allows people access to markets to make returns on their investments, provides security for savings and offers ways to pool risks so people can protect themselves against financial shocks.
If it weren't for motor insurance, it's questionable how many people would ever have the confidence to drive their car. If it weren't for pensions products, few people would have the confidence to invest directly in markets for several decades. Without mortgages, house purchase would be near impossible.
These are essential aspects of how we live our lives with ease, or simply for peace of mind.
But the industry is far from perfect, and it has had more than its fair share of issues over the years, from pensions mis-selling to unfair pricing practices. Much has been done to combat some of the outright scandals that have tarnished the industry's reputation, certainly in terms of tightening controls around corporate governance, accountability and professionalism. But culture remains stubbornly difficult to change through regulation alone.
When you look back at some of the historic examples of poor practice, it's hard to imagine it was driven by individual mal-practice, poor marketing literature or inefficient processes. Usually, it is driven by culture; quite often a culture of putting profit above all else. Certainly above the importance of customer outcomes.
The over-investment in the high risk Collateral Debt Obligations (CDOs) by the banks in the lead up to the financial crisis wasn't driven by the need to fulfil customer outcomes, rather, the pursuit of profit.
Similarly, the many nurses who were offered ‘contracted-out' personal pensions in the 1980s and 1990s - in what became clear was simply a commission-fuelled sales exercise - weren't sold on the basis that it was in their best interests. Payment Protection Insurance (PPI) followed a similar path, and its undoing cost the industry tens of billions of pounds in compensation.
These are extreme examples, but we shouldn't lose sight of them because they emerged from the pursuit of profits at the expense of all else. The irony is that, with hindsight, they all resulted in huge losses.
The Consumer Duty is an opportunity to reset thinking
At a more practical level, we should scrutinise how we prioritise our resources between new customers and the help we offer to those we already have. We must look carefully at how we support them at times of greatest need, and when things don't work out as expected. Any firm can legitimately prioritise how it deploys its resources, and it may well satisfy itself that its model treats customers fairly. But it may be more difficult to say that it's helping those same customers achieve good outcomes; treating them well, in other words.
This isn't to say that the pursuit of profit is a bad thing, but it can become problematic when it's the primary goal, and potentially detrimental for customers when it's the only goal.
Perhaps the Consumer Duty will start to challenge the short-termism of the profit objective in favour of a more sustainable model for companies to pursue longer-term strategies that are centred around the outcomes for customers.
And if the industry embraces the spirit of what is intended, it will improve trust in the industry dramatically, not just by avoiding the headline-making problems of the past, but by making the daily interactions people have much more engaging, more meaningful, and with better outcomes.
And that in itself will probably improve profits.
You can find out what advisers think of the new Consumer Duty, along with what the future might hold, on the Royal London website.
This post is funded by Royal London
