How to test for the four consumer duty outcomes

Being able to measure if good outcomes are being achieved is a critical feature of The Consumer Duty. The new rules require firms to help customers achieve good outcomes, and to report on this annually. To do this a robust testing framework will provide the evidence needed. With only a few months until implementation, many of our clients are now starting to develop their outcome testing programmes. We are helping to review existing frameworks; that they will stand up to regulatory rigour, as well as resource managed programmes to help clients to increase their outcome testing capacity.

This is our fifth article in The BDO Consumer Duty Series, helping clients to develop their approach to the new regulation. Here we look at how to test for the four Consumer Duty outcomes.

 

 

Previously, 'Principle 6' introduced an outcomes-based approach to regulation, where firms were expected to ensure that customers are treated fairly. Many firms responded positively to this and now use measures of customer outcomes to drive their business in some way. The Consumer Duty redefines the outcomes expected from firms and raises the bar on what ‘good’ looks like. So, even for firms who routinely test outcomes and use the outputs to make improvements, there is still work to align this to the new rules. And for those who do not, this will need to be established to demonstrate they are achieving good customer outcomes.

What do firms need to do?

The Consumer Duty cross cutting rules will define the standards of outcomes a reasonably prudent firm is expected to deliver by; acting in good faith, avoiding foreseeable harm, and helping consumers achieve their financial objectives. The four consumer outcomes give further detail on expectations for the core elements of a consumer/firm lifecycle. Firms will need to demonstrate they are able to achieve good outcomes across these stages and to the standards set out in the cross-cutting rules. The needs of vulnerable customers also need to be met so that they can achieve the same outcomes.

• Consumer understanding - consumers are equipped to make good decisions. Information is made available at the right time and is understandable.
• Price and value – products and services should be sold at a price that reflects their value. There should be no excessively high fees.
• Product and services – the firm’s products and services should be fit for purpose. The terms match the target consumer needs and products and services work as expected.
• Consumer support – customer service should be responsive and helpful. It should be as easy to complain about or switch and cancel products or services as it was to buy them.

These standards raise the bar by holding firms to an objective standard of a ‘reasonably prudent firm’ and because the cross-cutting rules give a more specific and forward-looking view of good outcomes. Boards will take responsibility for assessing that the firm is achieving these outcomes and report on this at least once per year.

The first stage for firms is to apply the four outcomes to their customers, products, and services. This involves knowing exactly where and how the firm has an influence on consumers. As we explored in a previous article, by analysing customer journeys firms can identify where and how they impact outcomes.

Firms need to include in their analysis of customer journeys how decision-making bias, information asymmetry and consumer inertia can influence outcomes. For example, sludge practices that may impede customers achieving good outcomes. Our previous article explores the behavioural science that underpins The Consumer Duty.

Once the firm has ‘mapped’ their business in this way they are then able to objectively test against the four requirements.

What is outcome testing?

Outcome testing is a methodical approach of objectively assessing whether a system or process results in a defined outcome. It is typically used to provide evidence of desirable outcomes being achieved, or to indicate areas for improvement. Where impediments are found, outcome testing should also help to reveal causality, which can be rooted in culture, operational practice, processes, and policies. It goes beyond traditional quality control which tends to test only if processes have been followed.

Outcome testing applied

Firms can use outcome testing to gain objectivity, to explore areas of concern, and to embed an outcome driven culture.

By engaging a suitably experienced consultancy to review existing outcome testing arrangements, firms can build confidence in their approach. Our clients have engaged us to benchmark against best practice, drawing on our regulatory knowledge and industry insight. We have also carried out managed programmes to help clients investigate areas of concern and provide independent assurance of customer outcomes. Our expertise and resources mean that we can review business and provide the insight needed to make improvements.

Another way to apply outcome testing is to integrate it within customer operations. By working alongside ‘first line’ and providing timely and direct feedback, sources of detriment are detected and addressed much earlier. This also establishes outcomes-based thinking within the culture of the firm. In this way, we helped a client to transform their complaint handling function through the design, deployment, and delivery of a fully managed outcome testing solution.

In the case of The Consumer Duty outcome testing can be used initially, to calibrate the firm against a new set of outcomes, and on an on-going basis to monitor that these outcomes are being achieved. As such firms should develop an outcome testing approach as an integrated part of their MI framework.

How to implement outcome testing

While the principles of conducting a single outcome test appear straightforward, firms need to ensure a robust approach that provides meaningful and actionable insight across all areas. An effective framework will be built with the following components:

• Define a good outcome against the expectations set out in the Consumer Duty
• A complete map of in-scope touchpoints: all products, all services, and all customer types
• For each touchpoint all associated policies, systems, and processes
• For each touchpoint all sources of data identified and made accessible, including online, social media, consumer groups, charities and mystery shopping
• For each touchpoint an objective test (or set of tests) of the desired outcomes
• A method for measuring and recording the result of the test in a way that can be used to assess performance and to inform actions for improvement
• An appropriate methodology for root cause analysis, applied consistently
• Tools for capturing results in a way that can be aggregated and accessed for analysis
• Routine reporting to review performance and indicate areas of concern

To find out more about how to implement outcome testing you can download our methodology here. We have helped many firms realise the benefits of outcome testing, from the design and set-up of a new framework through to a fully managed service.