26 May 2021

The FCA’s latest consultation is geared towards tackling ‘sludge’ – here’s how you can shape its decision and prepare for the changes

On 14 May, the FCA published a consultation paper. Now those of us that work closely with the regulator knew it was coming – and that many would argue is long overdue.

CP 21/13 details the regulator’s appetite to make changes to the way we interact with and communicate to our customers, and like all new regulation pieces from the FCA it is offering you a voice to share your thoughts and opinions.

The regulator is looking to introduce a new Consumer Duty. It is proposed that this would set higher expectations for the standard of care that regulated firms provide to consumers. It will ask of each firm what outcome consumers should be able to expect from their products, services and their retailers.

The duty would require all firms to assess the effectiveness of all of their actions and interactions, and to enable those positive outcomes, not hinder – even if the firm does not have a direct relationship with the end customer, which inculcates the entire spectrum of our broker buddies, and negates everyone in the chain finger pointing to all directions claiming this to be ‘someone else’s problem’.

Avoid the sludge

So, the regulator has coined a new phrase – sludge practices. In reality they mean behavioural bias, but by definition they are focussed on seeing sludging as: “an excessive friction that hinders consumers from making informed decisions by taking advantage of their behavioural biases.” In the online world sludge can be found inbuilt into websites or apps that are designed to push consumers into choices that may not be in their best interests.

For us in motor retail and finance perhaps this could be illustrated best by citing consumer confusion over fees, different charging layers for prevailing interest rates, ancillary unexpected and undisclosed costs, third party firms becoming involved without explanation such as brokers and non-prime interventions and so on. In fact, as an industry we ourselves have been subject to being sludged, with the enforced application of cooling off periods, product moratoriums, fraud checks and often hugely complex paper processes with high levels of repetition such as IDD, PCE, PCCI, and others.

The output of this consultation paper will result in a package of measures and this new consumer principle will be the first, a set of cross cutting rules to support, and a list of key outcomes which they have rather kindly already shared (communications, products and services, customer service, price and value). This gives us a huge advantage because, just like a decent sat nav, if we know where we are, and we know where we need to be, all we have to do is either decide the route, or decide not to go at all.

For many firms, this change will require a significant shift in culture and behaviour. Outcomes will become the critical acid test when measuring takes place by the regulator. Putting the customer at the heart of every business will be seen as vitally important. Transparency and integrity will be the watchwords of this new regulation.

Thinking points

On 1 April 2013 the Financial Services Authority became the Financial Conduct Authority, and this signalled a core change from simply regulating the sale of financial products, to being responsible for the conduct of each regulated business and its interactions with its clients and consumers. At exactly the same time the FCA was created, they also relieved the Office of Fair Trading, and assumed the burden of Consumer Credit Licensing. This was not a coincidence.

Think about your customers, put them at the heart of all you do, put yourself in their shoes and ask yourself: “Would I be happy to be treated in the way my firm treats its consumers?”

or “Would I be confident and comfortable recommending my firms products or services to my friends and family?”

Think, does your firm provide information which is difficult to read, inaccessible or misleading?

Think, are your products and services fit for purpose, do they deliver the promised benefits?

Think, do your products provide a fair value for the benefits they offer, and is this reasonable?

Think, does poor customer service and communication in your firm hinder your customers progress which could ultimately have a knock-on effect on their financial affairs or potential costs?

And finally, think about other practices, sludge practices that may hinder the consumers ability to react or take actions, create inertia or exploit vulnerabilities.

You can be the progressive type – recognising an evolutionary step and embracing it within your business, or you could see this as another layer of bureaucracy to simply work around. We know our start point and we know our intended destination – the rest is up to you.

YOUR ACTION PLAN

• Be heard. CP 21/13 is an opportunity for your thoughts to be received and understood
• Get in by the cut-off date of 31 July 2021
• Head to www.fca.org.uk/cp21-13-response-form
• Or you can email cp21-13@fca.org.uk

By Andy Tong

Tags: F&I, FCA