February 8, 2023 | Amanda Khatri
Estimated reading time: 6 minutes
How to comply with the Consumer Duty?
With just 6 months to go before the Consumer Duty comes into force, it’s time for firms to gear up to reach the regulatory finish line.
The Financial Conduct Authority (FCA) designed the Consumer Duty to motivate companies to put consumers’ needs first and promote transparency of financial services so that customers can make well-informed decisions. This is especially important during this era of rising prices and interest rates hiking up costs of living.
The Consumer Duty is centered around effectively communicating information about a product or service to customers so that they are thoroughly informed of potential risks before making a decision. Essentially, it is there to help support the consumer decision-making process as well as encourage innovation in the industry.
Ahead of the 31 July 2023 deadline, the FCA reviewed a sample of Consumer Duty implementation plans from around 60 of the largest firms in retail financial services.
Summary of key FCA findings
Upon investigation, the FCA found that many firms understood what was expected of them and had developed comprehensive plans to meet the Consumer Duty requirements. However, some firms lagged behind in their plans and may face challenges when the rule comes into force.
- Firms were embracing the financial transition to focusing on consumer outcomes which will benefit both the firm and its customers.
- The FCA will be distributing a survey to 600 small to medium-sized businesses to get an idea of their progress in complying with the Duty.
- The FCA will provide support to firms of all sizes through this time of transition.
Sheldon Mills, Executive Director of Consumers and Competition at the FCA, said that the Duty “will bring about a step change in the way financial services firms treat their customers.” He goes on, “given the scale of the reform, we recognize that some firms need to make significant changes. For firms which are further behind in making the necessary changes, there is time to put that right and for them to show they are acting in the spirit of the new Duty. Firms will also see the benefits of the Duty, with increased trust in the sector, more flexibility to innovate and in time fewer rule changes.”
For new and existing products, the rules will come into force on 31 July 2023 and 31 July 2024 for closed products and services.
What should firms focus on?
1. Effective prioritization
Firms should prioritize actions that will minimize the risk of negative consumer outcomes and what areas are most likely to align with the Duty’s requirements. Firms should focus on areas that will have the greatest impact on positive consumer outcomes.
2. Carefully consider the requirements of the Duty
The FCA has seen plans that suggest firms are not sufficiently scrutinizing their existing policies and depicting them as already meeting the needs of the Consumer Duty. Firms should make the changes needed so that customers receive clear and honest communications about their products and services that are easily understandable.
3. Liaise with other firms
By sharing information with other firms, companies can ensure they are adequately implementing the right policies for good customer outcomes. This could even help firms to understand what is expected of them sooner and reach the Duty finish line faster.
How to comply with the Consumer Duty?
Being vulnerable is the hardest part of the Duty. It asks firms to be completely transparent about their product or service which many may have avoided in the past to engage more customers. But, it isn’t just firms that are vulnerable, consumers are always vulnerable as they have to choose to trust a business and its communications.
Look at the whole picture
Take a step back to consider the Duty plans in a more holistic manner and then ask themselves what they need to comply with and how they can help customers understand their products or services better to make informed decisions.
Ensure good Governance
The FCA will be holding senior managers and boards responsible for delivering good outcomes for consumers and expect the C-Suite to lead a firm through changes to meet the Duty’s obligations. Develop robust governance frameworks and clear board oversight, especially for risk, compliance and internal audit functions. Firms’ boards should scrutinize and challenge plans, set up discussions and instil an approval process.
Have a clear plan
Identify who is leading the Duty implementation and who is in charge of different actions. Give timelines and deadlines to provide effective progress updates as well as clearly mapped milestones. The Duty will need to be embedded into a firm’s culture. Ensure staff training, strategies, leadership and people policies are a part of this plan and update internal cultural and training materials as per your firm’s implementation.
Build customer trust through support and fair value
Ensure the correct support systems are in place so that consumers receive the support they need when making financial choices. Ensure that the quality of the product or service is honestly reflected in the price and develop communication standards that provide consumers with the information they need, presented in an understandable way.
Deliver good outcomes
Prioritize providing favorable outcomes for consumers and ensure all employees are aware of their obligations under the Duty. Get opinions from the risk and compliance team to ensure the outcome projected is good enough.
Be prepared for further changes
Regulations are constantly being updated. Ensure your firm has a robust compliance framework in place or a regulatory change management solution that can identify and alert your compliance teams to any amendments. CUBE’s Automated Regulatory Intelligence (ARI) can help your firm stay ahead of any regulatory changes, putting your mind at ease and overcoming compliance hurdles.
To view the FCA’s Consumer Duty advice, please click here.
The Consumer Duty provides consumers with the protection they require and upholds their right to the fairness of service. The saying ‘put the customer first’ has been around for some time now, but it is only more recently that regulators are stepping in and putting a stop to firms that exploit vulnerable customers by holding them accountable.
Speaking in a recent podcast, Emily Sheppard, COO of the FCA, said that the Duty is “more of a guidance than anything else.” It is more of a guide because the FCA would like “people to get the spirit of it and embed it within the organization. We need it to be flexible as larger firms will embed it differently than smaller firms.” The Consumer Duty aims to be a lot more than just a “tick box exercise.”
We agree. Consumer Duty should be far more than a box-ticking exercise. By having these Duty obligations in place, firms are required to prioritize the welfare of customers and improve the ethical standards of products and services. Consumers can have total confidence in their purchases and build trust with businesses. The Duty aims to maintain a healthy balance between the interests of firms and consumers, creating fairness, transparency, and accountability in the industry.
Keep ahead of emerging regulations such as the Consumer Duty to ensure compliance across your business with CUBE.