Investing in the age of AI

The subject of regulation is unlikely to be something high up the list for anyone looking to create a literary masterpiece, however if ‘a short history of nearly everything regulatory’ was to be written, then the summer of 2023 would be worthy of at least a chapter, more likely a whole volume. Nobody reading this should need to be reminded... we hope... that this was when the Consumer Duty came into effect.

In the run up, this much discussed piece of regulation polarised opinion. Was it just TCF reinvented, or did it in fact represent a fundamental reset and refocus, putting the consumer back to the centre of everyone’s attention? Now that we are two years in, we can begin to look back and reflect. Where have firms focused their attention? Is Consumer Duty now a regular feature in all conversations around regulation?

In our observations of the market, we have seen firms taking Consumer Duty on board in the spirit the Financial Conduct Authority intended. Of course, many firms start the conversation with an assertion along the lines of ‘We have been delivering good outcomes to our customers for years’, and this is likely to be true in most cases, but the new outcomes focused requirement means more recording and monitoring than had previously been the case - a ‘show me’ rather than ‘tell me’ approach.

Many firms we support have, as a result, made a tangible commitment to embedding Consumer Duty into their DNA, which is really positive. In particular, firms recognise the need and benefit of enhancements to the Management Information (MI) they collect, seeing how it can help them to identify regulatory risk earlier and provide assurance around the delivery of good outcomes to their customers. We have noticed that firms are now seeing themselves in, perhaps, a more objective light. This represents something of a cultural shift.

A good metric to show how Consumer Duty has become embedded in the mindset of firms is to look at a handful of the questions we received from members on a recent Compliance Clinic event, the subject which was completing the annual Consumer Duty Board Report.

“We have spent time working on our support framework and the MI we collect for customers with vulnerable characteristics. Is this something we can record in our Annual Report?”

This is a great example of progress that has been made in recent years. We know that looking after clients with characteristics of vulnerability is central to complying with the Consumer Duty. In the recent information requests sent to wealth managers and investment advice firms, it came as no surprise to see the regulator ask how many clients are vulnerable and whether there have been related adaptations made to advisers’ services. An increase in the data held around these interactions and support offered can only help firms - and the industry in general - to develop better working practices. Consumer Duty has re-energised efforts in the sector to support customers with characteristics of vulnerability.

“We are going to introduce a requirement for employees to give us the time and date of the best phone call and the worst they had with a) a customer and b) with a provider in order to see what is actually going on with customer contact. Is this a good idea\ bad idea as regards Consumer Duty?”

An excellent idea that illustrates feedback can be both external and internal. Both customer and staff feedback should be considered a key piece of management information for firms. Where negative feedback leads to making changes/improvements to the service, this should be recorded as part of ongoing monitoring. Similarly, evidence of good feedback can act as a powerful source of evidence for fair value assessments.

We have seen many firms introduce customer feedback mechanisms, and some have used these remarkably effectively, allowing for insight into trends and common themes. This provides firms with something tangible with which to work, and makes process improvements easier to define, and clearer to evidence.

It is also worthwhile gathering feedback on interactions with providers. The FCA is keen for those in the distribution chain to share information and, where the actions of a provider affect whether a consumer is receiving good outcomes, this should be highlighted to them.

“We have reviewed and updated the technology we use to support client outcomes? Is this something we should include in our Annual Report?”

It is widely recognised that technology has a significant role to play in the ongoing evolution of financial services and, in many cases, it will benefit both firm and consumer to adopt these solutions and keep them under review. Whether that is client portals, research tools, cashflow modelling software, CPD learning portals, feedback tools, or to support with identifying vulnerabilities – any improvements to a firm’s service which can benefit consumers should be recorded along with any monitoring of outcomes because of using/adopting the technology.

“Are we able to adjust the annual date of the monitoring assessment to fit in with other business-related reporting?”

This type of question illustrates that some firms are taking time to think about how they collect and assess management information and data. Many firms will be working to an annual July deadline each year to sign off good outcomes, but you can adjust the date of your internal reporting and sign-off to suit you as a business, as long as a 12-month period is not exceeded.

“We’ve increased the number of file checks we do, as surely good advice equals good outcomes?”

Good advice and good outcomes are kindred spirits. It is a regulatory requirement that firms that give advice have systems and controls in place to monitor quality, and this should be clearly set out in the firm’s Training and Competence Plan. The level of expectations is likely to differ depending upon the situation, e.g. experience, the outcome of past reviews, nature of activities etc, and the selection of cases should broadly represent a spread of business and take account of different levels of risk. However, no regulator or compliance consultant will ever counsel against increasing the number of files being checked. Even where this may highlight an occasional a shortcoming, it only serves to show evidence of a robust process and oversight.

In conclusion, the questions being raised above reassured us that firms are striving for continuous improvement under Consumer Duty. Whilst this regulation must always be framed around proportionality, and more regulatory guidance is required to support firms on what this means, it remains a requirement for all firms large and small to deliver good outcomes - and be able to show it too. Our observation at the two-year mark, is that there has been a shift in mindset. Firms recognise that Consumer Duty is firmly embedded in the regulatory landscape and requires a more objective assessment of business activities. This is welcome, as Consumer Duty is here to stay and not something to be consigned to the history books any time soon.

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