Here, I share some views on how I’d be structuring the work in the hope that it might reduce some of the complexity and ease the initial assessment and implementation of Consumer Duty.
Consumer Duty was finalised in July 2022 and comes with a short implementation timetable considering the size of the change. The first of those deadlines is 31 October when firms should have initial implementation plans completed. I say ‘initial’ as this will likely be an ever-evolving piece of work that will require frequent refresh and iteration – as opposed to a more traditional approach to project delivery.
Irrespective of the size of the organisation, the first place I’d start is with my data and a simple question about how I measure outcomes and what I’d consider to be potential harms.
As an example: A customer unintentionally dropping onto the standard variable rate (SVR) at the end of a product period. Do I consider that a potential harm, what do I currently do to avoid it, what data have I got to evidence that?
In order to put more meat on those bones and reduce the complexity I’d suggest dividing Consumer Duty into five steps:
1. Identify target market
2. Define good outcomes
3. Identify harms
4. Decide how to evidence that 2 is being achieved and 3 avoided
5. Create the plan – document any gaps between the activity and the evidence
Step one: Target market
This is fairly straightforward. Sales data will define what borrowing needs the firm deals with and what proportion of the overall business each need comprises. Add to that the general characteristics of affordability and you’ve got the basis of a target market. The only nuance might then be if the firm deals with more than one product type (equity release/retirement interest-only), offers advice and non-advised channels and whether the advice covers just mortgages, or a broader protection set as well.
Example:
“Our target market consists of customers who are looking for advice on remortgaging, purchasing a new home, or buying their first home. Our customers can demonstrate good mortgage affordability, have a clear credit file, be aged over 18 and be looking to repay their mortgage, in full, at the end of the term and within their lifetime” – note, example definition excludes retirement interest-only (RIO) and equity release by stating ‘repay in full within their lifetime’
Step two: Define good outcomes
Again, should be fairly straightforward. The only consideration – in my view – is if the outcome is set against the product or the mortgage term, or maybe both? I’d also encourage firms to turn the outcomes into customer/adviser statements – it helps ensure they’re specific/measurable and therefore there’s a better chance of evidencing supporting actions and data.
Examples:
“My customer will always be on the most suitable product for their needs”
“None of my customers will unintentionally be on an SVR rate”
“I will make sure all of my customers fully understand their mortgage options and will always document the reasons behind any recommendations”
Or,
“As a customer I want to know that my adviser will always recommend the best product for me”
“As a customer I want to repay my mortgage as soon as possible”
Step Three: Identify harms
Putting this simply, harms are the opposite of the good outcomes. Therefore, if we use the above, we could say that harms were:
• Borrowers not understanding their product
• Borrowers extending themselves beyond what is reasonable affordable
• Borrowers being repossessed
• Borrowers sitting unintentionally on SVR
• Adviser unable to confirm if product continues to meet the needs of the borrower
• Adviser recommending an incorrect product
The above isn’t an exhaustive list but hopefully that provides a bit of a guide.
Step Four: Evidencing good outcomes and avoidance of harm
Collecting evidence. This is probably the area where most of the work will be required. It’s likely most firms are completing the majority of the activities required to deliver good outcomes and avoid harms but might not have documented them or have the data to evidence the activity.
Example:
If we want the outcome to be that “my customer will always be on the most suitable product for their needs”, our evidence will partly be contained within the fact find and suitability reports but will also involve making sure we are aware of any change in circumstance that might mean the original product/advice is no longer suitable.
We could therefore state that all customer files will contain a copy of both the fact find and the suitability report and that customers will receive at least one annual review call to check if their circumstances have changed.
If circumstances have changed, these will be documented, recorded in the customers file and the customer will be invited to discuss alternate options. During these discussions a full fact find will be completed and any subsequent recommendations documented.
We then need to make sure we can evidence that, that is happening. So, we could look at data in the following areas to support the outcome:
• Advice pass rate – evidence suitability at outset
• File check pass rate – we’ll check to make sure the content of the customer file is as above
• Percentage of customers with annual reviews completed – capturing change of circumstance
• Product mix – two, five, 10-year fixed/discounts/number on SVR – product bias, risk of unintentional SVR
• Spread of borrower need – remortgage/purchase/switch and so on
• Customer feedback
Step Five: Create the plan
The output from the work above is the identification of any gaps between the activities undertaken to deliver good outcomes and avoid harms and the evidence/data to prove that they have taken place. If there is no gap and all of the activity required to deliver good outcomes and avoid harms is in place, then it’s simply a case of ensuring the reporting and intelligence is sufficiently robust to spot any negative trends.
It’s likely there will be gaps, however, most likely these will be around the data required to evidence the activity. In that scenario the implementation plan is about evidencing what actions will be taken to close those gaps down. That might mean firms need different data feeds from lenders and they are likely to need to add more detail into process documents, policies and procedure guides.
Ultimately the more time spent on steps 1, 2 and 3 then the easier steps 4 and 5 will be…
This is the first in a series targeted to help advisers implement consumer duty at a firm level.
Tony Crane is a consultant, speaker and expert on the strategy, proposition and delivery of Consumer Duty with a specialist focus on later life lending. His CV includes three years as customer experience director at Bank of Ireland and head of group business development at Just Group.
