Posted July 27, 2022
Waiting for the 7am launch of the FCA's Consumer Duty this morning, and still recovering from the recent UK heatwave, my mind drifted into calculating how large a carbon footprint the resulting wave of social media posts might directly cause.
While finding out that one tweet causes 0.2g of CO2 omissions, and each of us causes 135kg of emissions from sending emails every year (the same as driving 200 miles in a car), 7am loomed into view. So, with at least 350 notifications from my network telling me the Consumer Duty had been launched, I went 'On Duty'. However, as I began to read on, harm - albeit consumer rather than environmental - quickly emerged as a key motif.
Where's the harm?
One reason for this, is that when reading the new Consumer Duty, the word 'harm' looms large, often, and ominously.
Used 163 times throughout the finalised Duty, the FCA do not directly define 'harm'. Instead, they offer multiple examples across all 11 sections to illustrate it (spanning product design, to understanding, to consumer outcomes).
Most notable, however, is the FCA's repeated reference to firms' responsibility to prevent foreseeable customer harm. Used 56 times, the FCA state firms "must take proactive and reactive steps to avoid causing harm to customers through their conduct, products, or services…[including] their design, terms and conditions, marketing, [sales] and support".
Critically, the FCA recognise that the Duty is underpinned by the concept of 'reasonableness'. This means that firms are responsible only for what was reasonably foreseeable. Here what a firm knew at the time about its customers, or what a firm should be reasonably expected to have known, is the key factor.
And this emphasis on ‘reasonable and foreseeable’ harm is key for four reasons.
- Data: profiling harm
Data has always been central to Knowing Your Customer, and more recently Knowing Your Vulnerable Customer. And the Consumer Duty does not deviate from this.
The Consumer Duty states that we "expect all firms to collect enough information to be able to act to avoid causing foreseeable harm". While this depends on the type of information a firm collects as part of its business, and also on its scale and size, the FCA are again underlining the importance of data in avoiding customer harm.
Here - as we outline in our own guidance on data - firms need to walk the regulatory tight-rope between the FCA and ICO's expectations, and strive to collect the absolute minimum of the most relevant information for meaningful action, while also actively using this information to prevent customer harm.
2. Design: preventing harm
The Consumer Duty identifies design as a means of preventing foreseeable harm.
This statement should not come as a surprise to any firm, as design was identified by the Financial Services Authority way back in 2006 as one of six outcomes in its Treating Customer’s Fairly work. Meanwhile in in the FCA's guidance on vulnerability (FG21), ‘inclusively designing out’ the harms that vulnerable consumers might face has repeatedly been emphasised (with a specific emphasis on using customer base and target market profile data to inform this).
Here the FCA make reference to foreseeable harm arising where firms' "products and services…have not been appropriately tested" or these have not been "designed to meet the needs of customers within their target market".
Importantly, the FCA acknowledge the legal duty of all firms to anticipate the needs of disabled customers and proactively provide reasonable adjustments for these customers to enable them to use and access products and services. Here design plays a central part in achieving this from the outset, and firms may find our guidance on inclusive design helpful here.
3. Understanding, support, and harm: two considerations
Appreciating the range of harms customers can experience is only possible through engagement and understanding.
The FCA recognise this in their requirement for firms to adopt an "approach that takes account of the needs of customers with characteristics of vulnerability" and responding to any harm that occurs "as a result of firm inaction".
When working with customers, firms therefore need to be able to answer and evidence two fundamental questions.
First, "what harms - if any - might a customer be vulnerable to?". Without establishing this, at an individual customer level, firms will be unable to identify what support they might reasonably provide themselves to a customer, or what signposting or partnership arrangement they might need with an external specialist service.
Furthermore, in terms of operations and aggregate data, knowing what harm our customer base and target market might foreseeably experience is vital. This is because operationally mobilising resources to meet and ameliorate the most common and severe harm requires such insight. Meanwhile, being able to have a 'birds-eye' view of the trends, successes, and challenges in providing relevant and commercially realistic support should be a key part of the senior leadership data dashboard.
Second, in addition to establishing 'vulnerable to what?', firms must consider the other part of consumer understanding: do our current methods of communication help or harm consumer understanding and decision-making? As with design considerations, firms need to consider whether the way they communicate is facilitating customers to make informed decisions (fully aware of any key risks or consequences). And also, whether a firm is meeting the information needs of a customer throughout the life cycle of the product that follows?
Taking these steps will prevent customers, for example, incurring foreseeable harm about high product charges (as they were not made aware of these in a clear enough manner), or being unable to use a product as it was intended simply because they were not provided with information in a format that was accessible to them.
Firms wishing to improve their understanding of customer needs will find guidance in the Trust's own resources, while there is excellent guidance in the Behavioural Insights Team's work on designing better communications here.
4. Outcomes: what counts when it comes to harm?
Lastly, but definitely not least, are outcome measures.
These are vital in establishing the level of harm that customers might be experiencing in key areas of the Consumer Duty, and also in ensuring that the outcomes of vulnerable customers are as good as those of non-vulnerable customers.
While establishing which foreseeable harms were prevented from occurring is not the right question for firms to pursue (being difficult to evidence), it is feasible to measure reductions in poor outcome areas over time, as well as collect indicator data on actions taken by staff to provide support that minimised or avoided harm happening.
Such is the importance of this area, that the Trust is launching a new programme on outcome development, measurement, and interpretation with public courses running in the autumn.
Overall…what's the damage?
In placing 'harm' and 'foreseeable' harm at the centre of the Consumer Duty, the FCA has confirmed something that most firms have known for a long time: that they are now expected to meet many of the conduct standards for all customers that were trailed and trialled in the previous FCA guidance on vulnerability.
In requiring firms to plan ahead, to proactively and actively consider customer harm, and to evidence their impact, the FCA have given financial service firms a framework of expectations which will significantly challenge them.
And with the Duty first coming into force in July 2023, before full implementation in July 2024, the clock is now ticking.
To help meet this challenge, the Trust has revisited and realigned much of its activity, and we will announce our new and revised support options for firms in the coming period. Critically, a huge amount has been learnt during all our work on vulnerability, and this is both transferable to the wider Duty itself, as well as its ongoing requirement to prevent foreseeable harm to vulnerable customers.
However, in the meantime, the Duty is likely to prompt much online discussion about its implementation and delivery.
Inevitably, this will impact on your social media timeline. But in an attempt to avoid foreseeable harm, I can promise you our posts on the Duty will - like all our work - always aim to be short on the obvious (and long on the practical).
Find out more about the Money Advice Trust’s training and consultancy at www.moneyadvicetrust.org/vulnerability
Chris Fitch is the Money Advice Trust’s Vulnerability Lead Consultant and Research Fellow at the University of Bristol’s Personal Finance Research Centre. View all posts from Chris Fitch.