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When the FCA talks about the Consumer Duty, it seems that its favourite phrase is "not once and done". By which it means that regulated firms can't sit back and rest, basking in the satisfaction of having implemented the Duty. For some firms, there's still more to be done to ensure full implementation, and for all firms staying compliant is an ongoing exercise that they must build into everything they do that could have an impact on consumers.

The FCA's Consumer Duty came into force on 31 July 2023 for products and services that are open for sale or renewal. Designed to raise the bar for consumer protection in UK retail financial services markets, the Duty represented a significant regulatory shift, placing greater emphasis on firms' responsibility to prioritise consumers and deliver good customer outcomes. Firms have been living with the new rules for over six months now and in that time should have been continuing to embed the Duty requirements by transferring their implementation project workstreams into BAU through day two actions. As well as adapting to the new normal, most firms will be busy preparing for their first annual board report and some may be getting ready for the implementation deadline for closed products (both due by 31 July 2024).

The FCA has not been resting on its laurels either. It has been keeping a watchful eye on Consumer Duty implementation and ongoing compliance through reviews of firms' implementation plans and fair value frameworks. In general, the FCA is pleased that many firms have made good progress and that senior management have largely been giving serious consideration to what the Duty means for their businesses, both operationally and culturally. However, some firms are lagging behind and the FCA has identified areas where certain firms could still afford to make improvements.

To help firms with their ongoing compliance, the FCA has published examples of recent good practice (including in response to its early supervisory work), as well as highlighting areas for improvement. The guidance is split into six key areas, which include the four Consumer Duty outcomes:

Culture, governance and monitoring

Good practice Areas for improvement

Firms have:

  • Altered their company purpose to highlight to staff the importance of focusing on customer outcomes
  • Ensured responsibility for good customer outcomes is understood and owned across the business, not just risk and compliance functions
  • Increased focus on the customer at board level, with senior managers giving serious consideration to the Duty.

Firms should:

  • Ensure that the focus on good customer outcomes is understood at all levels – in strategies, leadership and people policies
  • Be proactive in identifying and addressing issues and risks of harm rather than waiting to see if the FCA will intervene
  • Think seriously about the data and MI they need to understand customer outcomes, rather than repackaging existing data.

Vulnerable customers

Good practice Areas for improvement

FCA has seen firms:

  • Consider customer vulnerability as part of product and service design, eg some firms are supporting the elderly by using 'selfies' for ID verification to confirm they are not being scammed
  • Enhance the support available to vulnerable customers, eg offering literature in alternative formats (braille, audio or with enlarged text) and using different colours and fonts to make the literature more engaging
  • Encourage customer service staff to take more time to provide a bespoke service for vulnerable customers by turning off their productivity targets when dealing with such customers.
  • In the investment market, support for vulnerable customers has not been prioritised, if considered at all. The FCA's recent wealth survey showed that 49% of wealth portfolio managers and 69% of stockbrokers identified no vulnerable customers among their customer base
  • Firms should not automatically assess all consumers over a certain age as vulnerable. They should tailor the support they provide rather than taking a generalised approach
  • Firms should ensure that customers are not repeatedly asked to disclose their additional needs or personal circumstances when being passed between customer service or sales teams.

Products and services outcome

Good practice Areas for improvement

Examples include:

  • Precisely defining the target market and ensuring the products and services are sold appropriately and correctly. Some firms have redesigned sales paths to be clearer about the types of customers and needs the products are suitable for
  • Adapting products and services to deliver additional benefits to customers, e.g. by introducing controls to limit exposure to financial loss
  • Making positive changes to the product development processes. One firm introduced '11 golden rules' for designing new products and services which are linked to the Duty requirements
  • Simplifying their product offering so there are no products with similar or overlapping features where this benefits customers.

Firms must:

  • Share information effectively across supply chains – manufacturers need to inform distributors of the product characteristics, target market and value. Distributors also need to provide relevant information to support manufacturers in their product reviews
  • Ensure that their distribution strategies are driving good customer outcomes
  • Not ignore the Duty just because they do not have a direct relationship with the ultimate retail customer – if firms in a distribution chain have a material influence over retail customer outcomes, they will still be subject to the Duty.

Price and value outcome

Good practice Areas for improvement

Firms have:

  • Improved the value proposition by reducing consumer costs, e.g. reducing the rate of interest paid on certain credit products and/or for certain types of customers
  • Capped fees for long-standing clients and have waived fees entirely where they could not justify the product's cost
  • Monitored or closed products where their value proposition risked causing poor customer outcomes.
  • Firms should not rely solely on an assessment of similar offerings in the market to determine the value of a product. They must also consider the nature of the product or service, the benefits it provides, any limitations and the expected total price customers will pay
  • Firms must be able to explain their remuneration practices and how they are proportionate to the work they do
  • Some firms are providing and charging for ongoing services to customers who no longer need it.

Consumer understanding outcome

Good practice Areas for improvement

Examples include:

  • Working with experts to improve firms' communications and increase customer understanding, e.g. by simplifying the language used. One firm introduced a 'jargon buster' library across its business to help simplify documents
  • Redesigning customer journeys to better support understanding. One insurer now highlights policy exclusions on its website before customers start their application, so it is clear upfront what is not covered
  • Testing customer understanding through surveys, experiments and interviews. A funeral plan provider tested 14 documents with customer focus groups to ensure their customers understand the options to change or cancel their funeral plan.

Firms:

  • Must not undermine consumers' trust by pushing products that are too high risk or complex for them
  • Must be clear with customers about what charges apply, and when
  • Need to ensure they consider the Duty when approving financial promotions.

 

Consumer support outcome

Good practice Areas for improvement

Firms have:

  • Made changes to ensure that new and existing customers receive the same level of support
  • Introduced positive interventions into customer journeys. One consumer credit firm now directs web customers to speak with an agent to receive tailored support where there are indications that the customer may struggle to keep up with repayments
  • Implemented processes to monitor the support they provide and identify areas for improvement, e.g. one firm launched an online portal where customers can provide feedback.

Some firms:

  • Have not trained staff well enough to have complex conversations with customers
  • Use practices akin to 'gamification' on online trading platform applications which can encourage risky short-term trading
  • Do not take the time to understand customer circumstances where they are in financial difficulty. This can lead to stress and unnecessary delays.

What's next?

The FCA's findings show that there is still room for improvement and, as noted above, the ongoing challenge for firms will be transferring the implementation workstreams into a new look and feel BAU. The focus for this next phase will vary from firm to firm but we would expect the vast majority of day two actions to revolve around MI and outcomes testing. Getting these right will be key to adapting to the new normal.

Outcomes testing

What does a good outcome look like? As with all things Consumer Duty, there will not be a one-size-fits-all for this and good outcomes will very much depend on the firm in question, the product or service offered and the target market. Hopefully firms will have identified and captured these outcomes as part of the implementation project.

Testing of these outcomes cannot just be a tick box exercise. The key is to start in the customer's shoes, ie from the outcome itself, and work backwards. Firms should be testing at each stage of the customer journey, visualising each step and identifying any problem points, but should also be testing holistically. Methods of testing will vary firm to firm but may include customer feedback, spot checks on customer communications (assessing whether they are clear and appropriate for the target market) etc. These methods will be easier where the firm has direct contact with customers. Where there is a distribution chain, firms will likely be more reliant on MI from the other relevant third party.

Firms should ensure they have processes in place to capture the results of testing and any follow up actions that are required. The FCA also expects firms to monitor outcomes on an ongoing basis so, even if a good outcome has been identified, it would be sensible to schedule another review for a few months down the line. If a firm identifies a poor customer outcome, it should ensure there is a process in place to ensure that any required remediation is carried out, as the FCA will want to see that firms are making improvements where required.

MI

MI will play a large part in a firm's outcomes testing. Firms are likely to already have product and sales MI, and complaints and claims MI if an insurer, but we expect firms' MI capture and testing will evolve over time, particularly if they are having to employ new technology as part of this workstream.

Firms should be considering whether they are getting the right MI at the right frequency – the FCA has made it very clear that MI capture is about relevance and quality, not quantity. Boards will need to look carefully at the MI they receive and assess whether it provides a sufficient basis on which to determine that customers are receiving the good outcomes that the firm has identified they should be getting. If it is deemed to be insufficient, the relevant individuals within firms should be taking the steps necessary to ensure that they are requesting and receiving MI that is relevant and fit for purpose.

Board report

As well as day two actions and ongoing compliance, firms should also be preparing for their first board report, which is due by 31 July 2024. This "attestation" is not a tick-box exercise – the annual board report is intended to be an essential piece of internal governance. It should be used by firms to evidence the outcomes they are delivering, as well as the gaps identified and the actions they are taking to address these.

The FCA will be reviewing a sample of firms' board reports to assess how effectively the board has scrutinised the firm's performance and what actions the firm plans to address any gaps so the report must be of a standard that firms would be happy to provide to the FCA if requested. Firms should also be prepared to provide to the FCA on request the MI on which their annual attestation report is based.

In terms of the content of the reports, the FCA has not produced set criteria for the assessment. However, it has offered guidance as to the factors firms should think about, such as:

  • Reflecting on the actions that came from their internal implementation plans
  • Commitments firms intend to deliver on
  • Information and actions resulting from MI assessments.

These should together inform where firms are in terms of Consumer Duty compliance and what further work the firm needs to do. From this, firms can develop a clear action plan, setting out how they going to deliver the next set of changes. For very small firms, the FCA has suggested bringing in an independent 'critical friend' of their choice to bring some objectivity and independence into the assessments.

Closed products

The final thing for some firms to consider is the upcoming implementation deadline for closed products. Firms should draw on lessons learned in the run up to the 2023 deadline and ensure that all closed products are compliant with the Consumer Duty by 31 July 2024. Ahead of this date, the FCA has offered guidance on some areas of concern identified by firms:

  • Gaps in monitoring data – some firms have out-of-date or incomplete client records for closed products, for instance lacking information about consumer characteristics, needs, sales records, or historic performance of the product. Where these gaps cannot be filled, firms should take additional steps to mitigate the risk of harm to consumers. For example, there could be enhanced outcomes testing for these customers
  • Fair value – firms must be able to demonstrate that their closed products provide fair value to customers and that they do not exploit consumers' lack of knowledge or behavioural biases. The FCA has advised that firms can take into account the costs and benefits incurred before the Duty came into force and they will not be judged with the benefit of hindsight. It also does not expect firms to re-price products or to repeat underwriting in every case if conditions (such as life expectancy or economic conditions) have changed
  • Customer connection – lack of engagement with customers is a major challenge. Firms are encouraged to communicate more effectively, provide customers with the information they need, at the right time, presented in a way they understand. Communications must be tested, monitored and adapted if they are not driving the right consumer outcomes
  • Vested rights (including annual fees or exit charges) – are also challenging as they may lead to poor consumer outcomes. Firms must take action to mitigate harm, including giving up their 'vested right' and reconsidering fees or charges, communicating more clearly about what deals are available and switching, and offering extra support where there is an intersection of vulnerability of consumer and complexity of product or service.
  • Decommissioning – when considering whether to decommission some closed products, firms must ensure that they have considered the impact this will have on consumer outcomes and that they are not causing foreseeable harm.

Conclusion

Although firms should now be getting used to living with the Consumer Duty, there is still lots to do to ensure that the Duty is and stays fully embedded within their businesses. The challenge for firms will be continuing to transfer the implementation project workstreams into BAU and getting used to the new way of checking and testing themselves. The FCA's examples of recent good practice and highlighted areas for improvement serve as a good reminder for firms of the need for ongoing monitoring and continuous improvement but firms also need to consider how they are going to meet the next major deadline on the horizon. If they have not done so already, firms should now be starting to think about preparing for the first annual board report and considering the data they can use to evidence their progress and compliance to date. And for firms with closed products, as the implementation deadline looms ever closer, the pressure is on to ensure that such products are compliant with the Duty or have been appropriately decommissioned by the end of July.

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