Get Consumer Duty Plans Sorted, FCA Warns Firms

January 27, 2023
The UK financial watchdog has listed its recommendations for firms after publishing its findings on the Consumer Duty implementation so far.

The UK financial watchdog has listed its recommendations for firms after publishing its findings on the Consumer Duty implementation so far.

With six months to go before the Consumer Duty comes into force, the Financial Conduct Authority (FCA) has published a review of how firms are planning to implement the duty.

The FCA has reviewed a sample of implementation plans and found that many firms show they understand and embrace the shift that the regulator wants to deliver.

However, it warns that some firms are further behind in their planning, meaning that there is a risk that they may struggle to apply the duty effectively once the rules come into force.

Over the remaining six months of this implementation period, the FCA wants firms to particularly focus on three areas:

  1. Making sure that they are prioritising effectively, with a focus on the areas that will make the biggest impact on outcomes for consumers.
  2. Ensure they make the changes needed so consumers receive communications they can understand; products and services that meet their needs and offer fair value; and they get the customer support they need, when they need it.
  3. Collaborate and share information, working closely with their commercial partners to make sure they are all delivering good customer outcomes.

“The FCA has found that some firms need to accelerate this work to implement the duty on time,” it warned with particular reference to the third point.

‘Getting the message out’

The Consumer Duty is the controversial cornerstone of the FCA’s three-year strategy and will help the regulator set and test higher standards, while attempting to reduce consumer harm.

Parliament granted the FCA a mandate to introduce the Consumer Duty through the Financial Services Act, which it passed in 2021.

The rules come into force on July 31 this year for new and existing products or services that are open to sale or renewal, and a year later for closed products or services (those that are no longer marketed or distributed to retail customers nor open to renewal).

“The FCA is clearly keen to get the message out that the Consumer Duty is a priority,” said Max Savoie, a partner at Sidley Austin.

Savoie added that there was never an expectation that implementation would be easy, yet the feedback does indicate that the FCA expects some firms to up their game.

“One point that comes across loud and clear in the feedback is that the FCA expects firms to have completed a scoping and gap analysis and be pressing ahead with substantive changes now,” he said. “The need for detail is a theme throughout.”

“The Consumer Duty will bring about a step change in the way financial services firms treat their customers and we welcome the work firms are doing to implement it,” said Sheldon Mills, consumer and competition chief at the FCA.

Given the scale of the reform, Mills continued that the regulator recognises that some firms need to make significant changes, and took an optimistic tone here.

“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," he said.

“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.”

Savoie suggested that, in terms of practical guidance, firms would do well to review the detailed feedback published as part of the multi-firm review.

“Boards and compliance officers should be asking themselves whether any of the bullets under the heading ‘Areas for improvement’ in each section could apply to them,” said Savoie. “The FCA will now consider firms to have been put on notice based on this feedback.”

Meanwhile, Savoie cautioned that firms should expect to receive further communications from the FCA on this soon and should take account of any additional guidance.

Third parties

The duty applies to all firms with a key role in delivering retail customer outcomes, including those with no direct customer relationship.

Since its inception, it has sent shivers down the spine for many in the payments world.

The Payments Association, in particular, argued that payments firms should not be in scope.

Nevertheless, now that the timeline confirms a carve out for payments institutions is very unlikely, it will be essential to work together across distribution chains to deliver what the FCA deems good outcomes for the end retail customer.

Working with third parties will likely be one of the most challenging issues for firms in scope, highlighting how wide the regulatory net has been cast.

Some firms appeared to have a good understanding of implementation dependencies with third-party providers and had allocated time in their plan for this work, according to the regulator.

The FCA said it has identified one example where a firm had set a cross-outcome objective to work with partners in a transparent way to ensure cooperation and that duty requirements are met.

Other firms’ work appeared less developed in this area, the regulator acknowledged.

Some recognised that they do work with third parties and that they would need to consider this, but did not specifically identify key third-party relationships or the nature of any dependency.

Meanwhile, the FCA said that in some cases, it was also unclear what, if any, engagement had taken place or was planned with relevant third parties.

Some firms also showed limited consideration in their plan timetable for the need to engage and, where appropriate, exchange information with third parties in a timely way.

Governance, oversight and culture

Among other issues outlined by the FCA’s new report were governance and oversight.

Here, the watchdog has said that it identified plans that gave little detail on who is leading the overall implementation programme and is responsible for it, or who is leading the various work streams within the programme.

In some instances, there was limited evidence that firms’ boards and committees had properly scrutinised and challenged plans.

In one example, there was no evidence of engagement with the firm’s chairperson or other non-executive directors and the board only asked one question before approving the plan.

In another, board minutes showed that the plan was approved without discussion.

And some firms had also not included a summary opinion from risk and compliance or internal audit teams on their implementation plan, and its risks or chances of meeting the deadline.

Evidencing strong governance is a key message, said Savoie. “A regulated firm’s board and senior management should be closely involved in reviewing and scrutinising the implementation programme.”

The report also touches upon culture and people issues regarding the incoming compliance requirement.

The higher standards of the duty and the shift to focusing on consumer outcomes will require a significant change in many firms’ culture, the FCA believes.

It has suggested that firms should ensure that the interests of their customers are central to their culture and purpose, with this being embedded throughout the organisation.

“In that regard, it is important to demonstrate that implementation is not seen as being just a task for legal and compliance teams,” said Savoie.

“In any areas where a firm has concluded no changes are required, it will need to have documented a strong rationale for that.”

The FCA has said that it found some plans were lacking in detail, with limited information about how the duty will be embedded in firms’ culture and people approach.

Delivering on a plan

The FCA has said that most firms have effectively set out key workstreams, with some clearly mapping the milestones they need to meet to have a realistic prospect of meeting the implementation deadline.

In one example, a firm had allocated specific work streams based on the structure of the duty and its requirements. Each of these workstreams included a clear breakdown of deliverables, milestones and target completion dates with a framework for tracking progress.

However, some appeared to have progressed more than others, according to the FCA.

“We identified examples where timelines seemed unclear, or sequencing confused. Some did not give any indication of the number or proportion of products, services, communications and customer journeys covered by their work plan, or of their respective assessment of risks or priorities,” the regulator said.

See also: What the FCA's New Consumer Duty Means for UK Payments Providers

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