The City regulator recently issued its final guidance on how companies should serve their customers. Peter Finch, a partner in Fox Williams’ financial services and fintech teams, offers a primer on what Consumer Duty means for firms.
The Financial Conduct Authority (FCA) has published its Policy Statement on the Consumer Duty (PS22/9) containing the final rules and accompanying finalised guidance (FG22/5). This is designed to ensure a higher and more consistent standard of consumer protection in the retail financial services market.
Whilst the implementation timeline has been extended slightly to 31 July 2023 (31 July 2024 for closed products which are no longer on sale), there are a number of requirements for firms to understand and implement.
Given the continued reiteration of the “seismic cultural shift” the Consumer Duty will impose on those impacted, firms should be pressing ahead with implementation projects to ensure these deadlines are met.
Indeed, the FCA has imposed a deadline of the end of October 2022 for implementation plans to be approved at board level, with firms required to evidence that these plans have been challenged and scrutinised to ensure they are sufficiently robust.
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Importantly, for those going through the application process, firms will need to be able to demonstrate their readiness to comply with the Duty from now on.
As expressed in its first public consultation in December 2021, the FCA believes that financial services companies approach regulatory requirements as a tick-box exercise, which has meant that customers don’t get the benefits or value they should expect from the products and services provided, and that they sometimes miss out on information or help they need.
Greater protection for customers
A new Consumer Principle
As a result, a new Consumer Principle (Principle 12) will require firms to “act to deliver good outcomes for retail customers”.
Three ‘cross-cutting rules’ articulate the standard of conduct expected under the Consumer Principle. These rules require firms to:
- act in good faith;
- avoid causing foreseeable harm to customers; and
- enable and support customers to pursue their financial objectives.
Consumer Duty: Key Outcomes
The rules relate to four outcomes that the FCA wants to see under the Duty. The FCA considers that these represent key elements of the firm-consumer relationship that are instrumental in helping to drive good outcomes for consumers.
1. Products and services are fit for purpose:
Firms need to review their products and services against all aspects of the Consumer Duty. Firms should provide products and services that are designed to meet the customers’ needs and do not pose harm to customers.
2. Products and services represent fair value:
Products and services should be for a fair value that helps customers achieve their financial objectives. Firms should not seek to exploit customers for lack of knowledge or any other characteristics of vulnerability.
3. Customers are equipped to make informed decisions:
Firms should communicate and engage with customers so that they can make effective, timely and properly informed decisions about financial products and services and can take responsibility for their actions and decisions.
4. Customers receive adequate support to meet their needs:
Firms should support their customers in a timely manner, and help customers realise the benefits of the products and services at all stages. Firms should continuously learn from their complaints processes and regularly review the outcomes experienced by customers.
The rules are underpinned by a concept of reasonableness, meaning that the FCA’s guidance and the rules themselves should be interpreted in line with the standard that could be reasonably expected of a prudent firm.
Consumer Duty: What this means for firms
The higher standards being introduced by the new Duty have a very broad scope and the rules impact all firms which distribute or manufacture products and/or services to retail customers.
This makes it applicable to firms who may not have a direct relationship with a customer but are nevertheless classified as manufacturers or suppliers of products and/or services to customers.
Firms will need to reconsider the nature of their relationships with third parties (e.g. manufacturers, distributors and outsourced providers) and any related agreements to ensure these contain appropriate powers to allow them to meet their own obligations under the Duty.
In addition, the four outcomes mapping the firm-consumer relationship means firms will have to assess the quality of information and services provided to a customer at every step of their journey through a product lifecycle: from product design, communications, to distribution and governance. This may mean revisiting and redrafting customer-facing materials.
Internal governance processes will need to be reviewed and amended e.g. what additional resources and systems are needed to track customer outcomes and capture issues that arise during the product lifecycle? How are staff trained?
Firms will need to consider whether their existing product governance arrangements are adequate. Customer service processes may need to be re-thought, and firms should review their complaints processes to ensure issues and trends are identified and reported with product changes effected quickly if necessary.
The need to ensure that products represent fair value means firms will be required to carry out value assessments, for some firms this will be the first time undertaking such an exercise with little or no guidance on how to approach it.
Senior managers will be subject to a new Individual Conduct Rule 6 which requires all staff to act to deliver good outcomes for retail customers where the activities of the firm fall within the scope of the Duty.
The FCA has also amended its guidance to make clear that firms should have a champion at board level who, along with the Chair and the CEO, ensures that the Duty is discussed regularly and raised in all relevant discussions.
What to focus on now?
- Firms should concentrate on robust implementation projects to ensure the various timelines can be met. The board and senior management will need to maintain close oversight of the project to ensure that implementation remains on track and any potential blockers are dealt with.
- Ensure sufficient resources are allocated to allow detailed GAP analysis against the requirements. This is not just a job for Legal and Compliance teams, those involved in product development, marketing and customer-facing roles will need to be heavily involved in identifying gaps in existing products and services and ensuring that effective processes are in place to comply with the Duty.
- Firms should be clearly evidencing the decisions they have made, especially where the Duty allows firms some flexibility around implementation/compliance.
- MI and Data will be key components to ensuring compliance with the Duty, both at the implementation stage and on an ongoing basis. Firms should be prioritising ensuring systems and processes are fit for purpose and give them the information they need under the Duty.