
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:
| Firms should:
|
Vulnerable customers
Good practice | Areas for improvement |
FCA has seen firms:
|
|
Products and services outcome
Good practice | Areas for improvement |
Examples include:
| Firms must:
|
Price and value outcome
Good practice | Areas for improvement |
Firms have:
|
|
Consumer understanding outcome
Good practice | Areas for improvement |
Examples include:
| Firms:
|
Consumer support outcome
Good practice | Areas for improvement |
Firms have:
| Some firms:
|
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.
This article is for general information only and reflects the position at the date of publication. It does not constitute legal advice.