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Payments and e-money firms in the UK will need to begin complying with the Financial Conduct Authority’s (FCA) new outcomes-focused regulation, with experts suggesting that it will bring new challenges.
Today (July 31), the FCA’s Consumer Duty enters into force for open products, a year after the FCA published its final rules and guidance.
The Duty will require firms to act to deliver good outcomes for consumers.
“The Consumer Duty marks a fundamental step change in regulatory standards and expectations, requiring firms to put customers at the heart of what they do, and deliver good customer outcomes,” said Andrea Wintermantel, financial services partner at PwC.
For example, firms will need to provide helpful and responsive customer service, with the FCA saying that it should be as easy to complain about, switch or cancel products as it is to buy them.
Firms will also need to explain and justify their pricing decisions, including being able to demonstrate that rates offer fair value.
"Determining the application of the rules has been challenging, but regulated payments firms are taking this seriously and engaging with the requirements,” said Max Savoie, partner at Sidley Austin.
Savoie continued that legal and compliance teams have been investing a lot of time and energy into the Consumer Duty and compliance.
“My sense is that this has been a more difficult scoping exercise than many firms realised, and it has impacted some firms in ways that they didn't initially expect."
Despite the Duty now being enforceable, there are concerns that payments firms are not up to speed with the regulation that they now need to comply with.
"The reality is that there are firms who have only taken small steps, but while a year seemed generous to the FCA it was actually a very tight turnaround for what has turned out to be a big project,” said Alison Donnelly, director of fscom.
“There is a lot of regulatory change alongside a packed BAU [business as usual], and very few firms are profitable enough to be able to build in slack,” she explained.
This is perhaps why firms are still seeking support on compliance.
“The fact that we are still receiving enquiries for assistance would suggest that many firms are still not properly prepared for Consumer Duty,” said James Borley, managing director of payment services at Cosegic consultancy.
Borley added that many of the firms he has spoken to have not even created an implementation plan, which should have been in place by October 31 last year.
“The biggest challenge seems to be not that firms provide fair value, or not, to their customers, but that they can evidence how they came to this conclusion, in terms of management information, discussion and decision-making,” he said.
Another challenge for some payments firms is accepting that they are caught by the Consumer Duty, he noted, particularly if they are principally B2B.
“The FCA has been clear that firms that are manufacturers or distributors all need to take account of their role when considering the ultimate consumer user.”
What will change for payments firms?
"There are two aspects as to why payments firms may struggle more than other sectors in implementing this,” explained Donnelly; “a lower maturity baseline and lack of clear examples of detriment in the sector.”
She pointed out that other financial services sectors already had product governance requirements and deeper complaints handling and financial promotion rules in place. “So, they started from a more advanced baseline.”
It can’t be said that the payments industry has been enthusiastic about the incoming rules.
In fact, the Payments Association complained that the Consumer Duty would be unlikely to enhance the customer centricity of those payments firms that are not providing sufficient value, while adding compliance and benchmarking costs to those that are already doing so.
"Payments firms have unique challenges when it comes to implementing the Duty," acknowledged Sara Cody, counsel at Linklaters.
Cody explained that the whole concept of a distribution chain, which is central to the Duty, does not really fit comfortably into the way that these sorts of firms work.
"Working out how and where it applies has been and will continue to be challenging," she said.
Going forward, there are specific challenges around areas like fee structures, Cody pointed out.
"The Payment Systems Regulator has already been critical of opaque and overly complex fee acquirer structures, for example, particularly for SME merchants," she said.
The Consumer Duty will give this more impetus. "White-labelled products, particularly where provided by in-scope firms to card programme managers and others who are out of scope, will need careful management," Cody said.
Speaking to VIXIO, Tony Walker of Armalytix listed areas such as fees for e-money top-ups or redemptions as subject to change as they may adversely affect certain customer groups that frequently make low-value top-ups.
“The cost of redemption should be proportional to the activity's costs, and fees and commissions should be clearly advertised and suitable for the service provided,” the co-founder and head of financial services and gambling said.
“Another concern is the implementation of strong customer authentication (SCA), which needs to be suitable for all customer groups,” he pointed out.
For example, relying solely on mobile-based SCA may not be appropriate for customers with unreliable mobile phone coverage.
“An area expected to see changes is account freezing, particularly in cases of suspected financial crime,” Walker continued. He argued that the aim should be swifter investigations with better support and communication, as too many accounts are currently frozen for too long without adequate explanation.
“The focus on authorised push payment fraud also emphasises that firms should treat customers fairly and avoid undue harshness or lack of support.”
Donnelly added that the other reason payments firms have found implementing the Consumer Duty difficult is that the main examples of detriment — safeguarding of customers’ funds and financial resilience — have long been a focus of FCA scrutiny.
“Some firms have struggled to see where outcomes were poor for consumers in a fast paced, easily understood and transactional business model."
Is enforcement on the horizon?
“Firms will need to continue to focus on improvements beyond the 31 July deadline,” advised Wintermantel. “This deadline is a staging post in an ongoing journey, and firms need to focus on embedding the Duty throughout their organisation and culture.”
Wintermantel continued that this is an opportunity to differentiate their customer offering, enhance customer loyalty and improve their ongoing monitoring of customer outcomes.
“This monitoring should enable firms to quickly spot any poor customer outcomes or risk of harm, and address any issues at an early stage.”
Now that it is enforceable, payments and e-money firms should expect that FCA probes their compliance.
“Getting this right should be critical to organisations’ core purpose and strategy as it centres customers and their outcomes,” said Wintermantel.
“The Duty was ultimately designed to boost competition, inspire customer loyalty, increase trust and reduce the risk of poor outcomes, and only time will tell as to whether it will achieve these aims.”
The FCA’s latest readiness survey, published in June, found retail finance providers and debt advice firms scored consistently lower than others on engagement, understanding and implementation progress.
"I expect the FCA to focus on the sectors where consumer harm is likely to be greatest and that they will seek to make examples of the worst offenders swiftly to underline the value and importance of the regulatory change,” said Donnelly.
She continued that the industry hopes that there will be a willingness to see the spirit where firms have engaged, taken action and are continuing to take action, and that they will be given the benefit of the doubt.
“I imagine that the FCA knows which sectors it wants to target, and will have to be strategic with its resources."
Meanwhile, Savoie explained that because this is the flagship, cross-sectoral policy, it should be expected that the Consumer Duty will be a priority.
“Firms should expect proactive supervision from the FCA and to be asked for documentation sooner rather than later,” he said. “The impression the FCA has given is that this will become part of regular questions asked of firms, as is the case with issues such as safeguarding.”
