The Consumer Duty 'what do I need to know and what do I need to do?'

The introduction of a new Consumer Duty promises to be one of the biggest shake-ups to retail financial services regulation in over 15 years. Not so much a change of direction for the Financial Conduct Authority (FCA), but a change in what is required of firms.

The regulator's stated aim is to 'ensure a higher and more consistent standard of consumer protection for users of financial services', and to prevent harm before it happens. 

The consultation is open until 15 February 2022. While the policy and legal debate has been well covered, what are the practical implications for firms?

What practical actions need to be undertaken as firms prepare for April 2023?

The burden of proof is shifting; with providers now expected to provide the evidence that their products consistently deliver good outcomes for customers. Over the last decade the FCA has developed a new toolkit which has been embedded within their policy and supervisory teams:

  • Behavioural economics to analyse how and why customers make decisions in response to the choice architecture presented by firms. Customer behaviour, whether rational or irrational, is now predictable.
  • Data science to quantify the distribution of customer outcomes and locate the clusters of customers that are not enjoying good outcomes. Customer outcomes are now measurable.

The FCA is now expecting firms to deploy the very same toolkit; to prevent harm from occurring in the first place.

Aside from the theoretical legal debate, avoiding foreseeable harm has a very practical application. For example, firms must now demonstrate evidence that they proactively predict how customers will behave in response to digital channels. Firms will be expected to analyse the data on customer decisions are influenced by different designs of choice architecture.

If the choice architecture promotes good decisions, then it can be called a 'nudge'. If not, it can be called a 'sludge' (which discourages good decisions) or 'dark pattern' (which encourages bad decisions). Evidencing this will require A|B testing and 'sludge audits'.

The FCA's intention is that the Consumer Duty prompts firms to gather the evidence on the big questions around customer behaviour and outcomes. The real question for firms is now 'what evidence should we collect, and how?'

Come along to our Preparing for the Consumer Duty workshop with UK Finance and Oxera on 12 May to find out more.

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