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The UK’s Financial Conduct Authority (FCA) has published findings from its review of 23 payments firms’ implementation of the Consumer Duty, highlighting the need for firms to meet higher standards for consumer protection.
A new review by the FCA has looked at how payments and e-money firms are considering the requirements set out in the Consumer Duty and how companies are addressing potential gaps in compliance.
The Consumer Duty came into force for open products and services on July 31, 2023, and a year later for closed products and services.
It has become something of a flagship policy for the FCA and serves as a cornerstone of the FCA’s three-year strategy.
In its report, the FCA describes it as a “fundamental way in which we have set higher standards for firms”.
The regulator reviewed 23 firms and found just over half to be satisfactory, with only minor improvements needed.
Yet, nearly half of the firms had only partially implemented the Duty, requiring significant work to comply, with the FCA saying that these payment firms posed a moderate-to-high risk of delivering poor outcomes to consumers.
“We are concerned about these findings which, if representative of the sector, would indicate that a substantial minority of firms may not be compliant with the Duty,” said the FCA. “We will continue to work with these firms to ensure any harm is mitigated promptly.”
In its review, the FCA noted that firms demonstrating best practices had a clear understanding of their target markets and what constitutes a good consumer outcome, stating that these firms showed a systematic approach to implementing the Duty, with strong governance frameworks and clear monitoring processes.
The most successful firms were also found to have used detailed metrics to track their performance against Consumer Duty standards, employing data-driven approaches to identify areas for improvement and implementing corrective actions promptly.
Meanwhile, for firms that fell short, the FCA identified several common issues, including insufficient oversight of agents, inadequate fair value assessments, and lack of clarity in defining target markets.
Many firms were also revealed to have relied heavily on existing processes without adapting to the Duty's requirements, increasing the risk of poor consumer outcomes.
The FCA also pointed out that some firms did not sufficiently test consumer communications to ensure they were clear and supportive of informed decision-making. Additionally, firms often lacked comprehensive management information (MI) systems to assess their compliance with the Duty’s standards.
For example, some firms were found to have made limited updates to their pre-existing MI systems, denting their ability to detect consumer outcome issues.
The FCA said that these companies often lacked clear links between MI metrics and Consumer Duty outcomes, making it difficult to identify and address shortcomings.
Meanwhile, the FCA said that the best practices identified revealed clear processes in place at board level for MI, helping them identify good consumer outcomes and areas needing improvement.
These firms had used well-defined metrics linked to desired outcomes, employed traffic light indicators (red, amber, green) to highlight issues, and set clear remedial actions with responsible parties and timelines, while also assessing the effectiveness of these actions.
Next steps
In summary, the FCA stresses that firms must carefully consider and fully implement the Duty in a way that suits their business, to ensure good customer outcomes and quickly address any issues before they cause significant harm.
“We designed the Duty and its outcomes-based approach to create an environment [that] supports healthy competition and innovation based on high standards,” the FCA has said.
The FCA stated that firms must implement the regulation across all relevant areas, regardless of the number of retail customers, and cautioned that many firms need to take further action to fully comply and should do so promptly.
Further, the FCA has dictated that firms should review their practices, address any compliance gaps, and raise standards now, rather than wait for FCA intervention later.
“We will continue to monitor how firms are meeting the Duty’s standards and take appropriate supervisory actions where necessary,” the FCA has said, pointing out that it has given firms individual feedback.
“Where we find serious non-compliance, we may take action including restricting firms’ business,” the regulator warned, adding that if significant shortfalls are revealed, it will compel firms to implement mitigation programmes.
