May 3, 2023
Estimated reading time: 10 minutes
Consumer Duty: A step-by-step guide to compliance
Former Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) Senior Supervisor and Regulatory Consultant, Mete Feridun, draws insights from his supervisory and consulting experience.
The Consumer Duty is a new initiative by the Financial Conduct Authority (FCA) that aims to increase consumer protection and promote fair practices in the financial services market. It represents a mindset and culture shift with far-reaching implications for the retail sector and goes beyond just policies and procedures but to the heart of a firm’s culture, strategy, and business.
The Duty comprises a Consumer Principle, cross-cutting rules, and four outcomes representing critical elements of the firm-consumer relationship. It prompts firms to consider the impact of their decisions on customer outcomes and address issues such as misleading information, products and services that are not fit for purpose or do not represent fair value, poor customer support, and practices that exploit consumer vulnerabilities. The initiative will also change the FCA’s approach to regulation, making it more proactive, innovative and data-led. With the deadline fast approaching, full and timely compliance is critical for firms as those that fail to prepare for the Consumer Duty risk damaging their reputation, losing customer trust, and facing regulatory sanctions.
By embracing this regulatory change and committing to delivering good customer outcomes, firms can differentiate themselves from their competitors, build brand loyalty, and ultimately drive sustainable business growth. So, how can firms start preparing for the Duty implementation deadline to demonstrate their commitment to putting customers first?
What are the specific objectives of the Consumer Duty
The FCA has introduced cross-cutting rules that require firms to act in good faith towards retail customers, avoid foreseeable harm, and enable and support customers to pursue their financial objectives. The four outcomes of the Consumer Duty (products and services, price and value, consumer understanding, and consumer support) establish the suite of rules and guidance setting the FCA’s expectations of firms.
Accordingly, firms are expected to review their current approaches, ensure they can evidence outcomes, and review and monitor results continuously. The FCA expects firms to embed the Duty in the same way as they have with financial performance or risk. Compliance with all elements of the Consumer Duty should permeate throughout senior management. The FCA wants to see a focus on delivering good consumer outcomes running through every action, fully embedded into every department, and supported by robust evidence.
Firms are expected to design products and services that meet customers’ needs, provide fair value, help them achieve their financial objectives, and not cause harm. A few ways to do this are:
- Communicate and engage with customers to enable them to make informed decisions and avoid exploiting their biases or vulnerabilities.
- Support customers to realise the benefits of their purchases without unreasonable barriers.
- Monitor and review customer outcomes.
- Ensure that their board takes full responsibility for embedding the Duty within the firm.
- Ensure senior managers are accountable for customer outcomes in line with the Senior Managers and Certification Regime (SMCR).
Which firms are affected by the Duty?
The Duty applies to the regulated activities and ancillary activities of all firms authorised under the Financial Services and Markets Act 2000 (FSMA), the Payment Services Regulations 2017 (PSRs), and E-money Regulations 2011 (EMRs) in respect of products and services for prospective and actual retail customers.
The Consumer Duty applies to UK-authorised firms that provide products and services to retail customers. The scope of the duty varies depending on the financial services category, such as investment services, consumer credit business, deposit-taking, payment service and e-money providers, and insurance business. The Duty does not extend to professional clients or eligible counterparties in investment services, corporates, and SMEs in the consumer credit business, or individuals acting for purposes within their trade, business, or profession in the insurance business.
Firms not licensed in the UK but provide services to customers in the UK are not directly in scope. Still, some may need to implement the Duty, and firms that are part of a distribution chain can expect to be indirectly affected by the Duty. Additionally, firms seeking to acquire a UK-regulated financial services entity should review the target firm’s implementation plan as part of their due diligence exercises.
Firms should also note that those with greater responsibility in determining a product’s pricing and terms and conditions would have more significant obligations. When a firm’s actions or inaction pose a direct risk of harm to consumers, the Duty will apply to a more significant portion of their actions. For instance, if a firm collaborates with a fund manager to create a fund and has decision-making power over aspects like the target market and investment strategy, it would be considered a co-manufacturer under the products and services outcome and the price and value outcome.
What are the specific regulatory requirements?
The FCA expects firms to develop and design products that meet customer needs in the identified target market, charge prices that reflect the product benefits and provide information that enables customers to make informed decisions and ensure that their products can be used as reasonably envisaged.
To prepare for challenges in meeting the Four Outcomes of Products and Services Outcome, Price and Value Outcome, Consumer Understanding Outcome, and Consumer Support Outcome, firms should do the following:
1. Focus on understanding their customers’ needs, preferences, and behaviour patterns
This will enable them to design products that meet the specific needs of their target market and charge prices that reflect the benefits received by the customer.
2. Adequate marketing and communications
Firms should also ensure that their marketing and communication strategies provide clear and transparent information about their products and services.
3. Implement regular reviews of their product and services
By doing so, firms can identify any issues and remediate them promptly. This will ensure that their products remain fit for purpose and meet the evolving needs of their customers.
4. Execute robust complaints and disputes resolution procedures
This will ensure customers can access the support they need when encountering issues with their products or services.
5. Monitor and analyse customer outcomes
This will help to identify potential risks and take proactive measures to mitigate them, enabling firms to address issues before they escalate. As a result, this also demonstrates a firm’s commitment to providing high-quality products and services. By doing so, firms can build customer trust, improve customer satisfaction, and reduce the risk of regulatory sanctions.
What should firms expect to change in the FCA’s supervisory approach?
- The FCA’s supervisory approach is likely to become more intrusive and focused on ensuring that firms are delivering good outcomes for consumers, with a greater emphasis on prevention rather than simply addressing issues after they arise.
- The regulator will likely be more proactive in identifying and addressing issues that cause consumer harm. It will expect firms to take greater responsibility for ensuring that their products and services suit their intended customers and represent fair value.
- Firms should expect the FCA to take a more data-led approach to regulation, using technology and data analytics to identify potential issues and monitor compliance.
- Finally, the FCA will likely emphasise firms’ governance and accountability arrangements, ensuring that senior management ensures that the Consumer Duty is embedded throughout the organisation and that good consumer outcomes are prioritised.
Going forward, firms should expect a more outcomes-based approach to regulation from the FCA, of which the Consumer Duty is a part. This approach will focus on a firm’s purpose, with a greater emphasis on culture, diversity, inclusion, and vulnerable customers.
The regulatory body is not looking to develop detailed rules but instead expects firms to make judgments on the outcomes being generated for customers. The SMCR is an important driver to increase personal accountability, and embedding the Consumer Duty alongside SMCR requirements will consumer harm and strengthen market integrity by making individuals more accountable for the outcomes generated for customers.
What are the critical challenges for firms?
The FCA is expected to take an assertive approach to firms’ implementation of the new rules, and firms should take a risk-based approach and focus on the most complex and risky products. Boards must take full responsibility for delivering the Consumer Duty, and it should form part of the strategic planning for any financial services business.
Firms may face several critical challenges in meeting the requirements of the Duty. These include defining and monitoring good customer outcomes, making subjective judgments, using appropriate data and KPIs to evidence outcomes, ensuring accountability and staff training, and supporting and empowering consumers.
- Firms should create a framework for monitoring customer outcomes
- Embed the right governance
- Define subjective FCA concepts
- Use data to evidence outcomes
- Deliver tailored staff training
- Evaluate how they support and empower consumers
- In addition, the FCA requires firms to ensure that their strategies, governance, leadership, and people policies lead to good customer outcomes.
- Firms must also ensure that their staff incentives, performance management frameworks, and remuneration structures are designed in a way that is consistent with ensuring good outcomes for customers.
Assessing your firm’s performance
As such, the FCA recommends that a board or equivalent governing body review and approve an assessment of whether the firm is delivering good outcomes for its customers, which are consistent with the Duty, at least annually. The assessment should include the firm’s monitoring to assess whether products and services are delivering expected outcomes, evaluating the impact and root cause of any poor outcomes, and taking action to address any risks or issues. The assessment will be part of the evidence used to assess a firm’s compliance with the Duty.
Firms are also expected to monitor and review the outcomes their customers are receiving, identify poor outcomes, and take appropriate action to rectify the causes of the poor outcomes. They should continuously learn from their focus and awareness of the outcomes that their customers experience in practice as well as be able to demonstrate how their business models, actions, and culture are focused on good customer outcomes.
How should firms prepare?
The Duty’s outcomes-based approach will require firms to review their product suite, communications, and end-to-end customer journey and make changes to areas such as governance and accountability, MI and reporting, product design, pricing, distribution, servicing, and staff training.
Review current operations
To prepare for full compliance, firms must undertake a comprehensive review of their operations, identifying areas where they may need to meet the requirements of the Consumer Duty. This review must include a detailed analysis of their product suite, including assessing whether the products and services they offer are fit for purpose and represent fair value. Firms must also consider product design and pricing changes to align with the new regulatory requirements.
Assess communications and customer journeys
In addition, firms must review their communications and end-to-end customer journey to ensure they are transparent, fair, and not misleading. This will require a thorough assessment of all customer-facing materials, including websites, brochures, and marketing materials, as well as the customer journey from initial contact to post-sales servicing.
Governance and accountability
Governance and accountability will also be key focus areas for firms, requiring changes to how they manage their business and their relationships with customers. The FCA will expect firms to have robust governance frameworks with clear lines of responsibility and accountability. This will involve changes to existing policies and procedures and the development of new processes and systems to support the new regulatory requirements.
Management Information and reporting
Management Information (MI) and reporting will also be critical for firms to demonstrate compliance with the Consumer Duty. Firms will need to develop new metrics to measure the effectiveness of their operations in delivering good outcomes for customers and report on their performance to the FCA. This will require developing new data analysis tools and integrating new data sources to support more accurate reporting.
Review product distribution and servicing
Firms are required to ensure fair and transparent access to their products and services. This will require changes to existing distribution channels and the development of new channels to reach underserved markets. In addition, servicing will also need to be improved to ensure that customers receive the support they need to make informed decisions and manage their financial affairs.
Finally, staff training will also be critical in preparing for full compliance with the Duty. Firms must ensure that their staff are fully aware of the new regulatory requirements and have the knowledge to deliver good customer outcomes. This will require the development of new training programmes and ongoing support and development for staff.
To be fully compliant, firms will need to make significant changes to their current operations. This will require a significant investment in time, resources, and expertise, but the benefits of full compliance will be significant, both for firms and their customers.
Get in touch with CUBE to stay ahead of Consumer Duty obligations.