Consumer Duty – The Need for A Quantitative Approach

In moving the focus from policy and process to outcomes, the Consumer Duty represents a paradigm shift in regulatory expectations. Our own view is that this shift necessitates a greater focus on quantitative analysis, transforming data into the information that firms need to:

• Identify probable outcomes

• Ensure pricing models are fair

• Establish effective and proportionate mitigations against harm

• Build robust monitoring frameworks to ensure that customer outcomes over time remain as expected.

This kind of approach has long been core to the credit and model risk disciplines, and so the techniques and tools developed over many years in these spheres are highly relevant to addressing the challenges raised by the Duty.

The cornerstone of the Duty is outcomes, so understanding what outcomes customers are experiencing, and why, is key. To do this firms will need to build analytical tools and models that identify expected outcomes across customer segments and product families and at all stages of the customer journey. Monitoring suites can then be built to compare actual performance against these expectations, providing confidence to the business that key elements are within risk appetite or giving early warning of emerging deviations. This will further evidence to the FCA and other stakeholders that the firm has appropriate governance in place to ensure ongoing compliance with the Duty.

Below we set out some examples of how this analytical approach can be applied to key elements of the Duty:

• In the Products & Services outcome, this starts with identifying both good and bad product-relevant customer outcomes, and forecasting their probability across different customer segments, including those who are vulnerable, throughout the customer journey. This allows for the robust identification of foreseeable harms, aiding in the assessment of reasonable and proportionate mitigations and providing solid benchmarks against which actual product performance can be monitored.

• Similarly, for Price & Value, analysis and modelling can ensure fair value, with pricing models designed to prevent inappropriate cross-subsidisation whilst still appropriately pricing for risk. Such models incorporate clear measures to ensure that fair value can be robustly demonstrated across all products and customer segments.

• Vulnerable customers are often more susceptible to poor outcomes and so assessing the outcomes experienced by these customers, and contrasting them with those of others, is vital in identifying areas where problems are occurring.

• Building effective metrics for all elements of the Consumer Duty programme, allowing robust measurement of progress “on the ground” and giving Boards and their external stakeholders confidence that their implementation programmes are delivering quantifiable improvements. These metrics can show that these improvements will meet the standard the FCA expects and crucially, that they will be maintained post-implementation.

In their recent Consumer Duty webinars the FCA made clear the importance they place on data and monitoring, emphasising that:

• The key difference between Treating Customers Fairly and the new Duty is the emphasis placed on measuring and testing outcomes

• Supervision will focus on the effectiveness of firms’ approaches to monitoring outcomes and mitigating harms, with data requests designed to gain a view of customer outcomes across the product lifecycle

• Robust management information is crucial to understanding and demonstrating customer outcomes, and the FCA expects that firms should use the same sophistication and depth of MI for customer outcomes as for example P&L or sales.

Well-designed analysis and monitoring will be key to ensuring that firms, their Boards, and external stakeholders have confidence that measures put in place to achieve good outcomes remain on track and are being reviewed effectively.