Megan Ho

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Introduction

It is vital for firms to have an in-depth understanding of the Duty in order to enforce effective policies which ensure compliance. This paper will focus on more details about what the FCA is likely looking for in enforcing the Duty. Before proceeding, please read Part 1 of our Consumer Duty Series which explains the essential elements of the Duty.

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Summary of the Duty

The FCA is committed to ensuring that firms prioritise consumer welfare and operate in a manner that prevents harm. The organisation sets high standards for consumer protection in the financial services industry, outlining four key consumer outcomes, along with a focus on vulnerable customers.

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Products and Services:

Rather than pushing products that the consumer does not need, firms should aim to offer those that are genuinely suitable for the individual's needs and circumstances.

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Price and Value:

The FCA mandates that firms provide products and services that offer fair value. This implies that there should be no hidden or unexpected costs. While "fair value" does not necessarily equate to "the best deal," the pricing should be reasonable in relation to the value offered.

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Consumer Understanding:

Clarity and transparency are crucial. Firms should provide clear and timely information so that customers can make sound financial decisions. For instance, vital information should not be hidden in the fine print or within complicated terms and conditions.

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Consumer Support:

Firms are expected to offer customer support that is both helpful and easily accessible. Should issues arise with a product or service, the consumer should find it straightforward to obtain a replacement or cancel the product.

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This regulatory framework is designed to elevate the standard of consumer protection in the financial sector and to minimise the potential for harm to consumers, including those who are vulnerable.

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FCA’s approach to supervision and enforcement

The implementation deadline of the Duty for new and existing products and services that are open for sale or renewal was 31 July 2023.

By now, firms should be able to demonstrate (i.e. provide evidence) to the FCA that they are compliant; ensuring that good consumer outcomes are delivered, and risks of harm to consumers are reduced. Firms are expected to proactively demonstrate compliance by showing that their operations align with the four key consumer outcomes and additional considerations like vulnerable customers. Any weaknesses identified during implementation should result in prompt action to remedy this. In such cases, firms should prioritise work that will potentially have the largest impact on consumer outcomes.

If firms are unable to be compliant and believe that they are in significant breach of the Duty, they must alert the FCA. The FCA will take action if the failure to implement the Duty caused actual or potential harm to consumers. Due to the nature of distributed accountability throughout management, senior managers will be held accountable if they fail to act to implement the Duty to prevent harm to consumers.

The FCA expects firms to continually improve the way data and analytics are used to demonstrate compliance. In the case of breaches, the FCA will take a wide variety of actions such as interventions, investigations or disciplinary sanctions. Such actions will be taken proportionate to harm, or the risk of harm, to consumers. The most serious breaches will result in the most assertive and swift action from the FCA.

Key areas firms should focus on

The FCA has reviewed several Consumer Duty implementation plans from financial services firms that will potentially have a substantial impact on consumers and markets. Based on these plans reviewed, FCA has published their findings, identified three key areas that firms should focus on to ensure full compliance and effective consumer protection.

Effective prioritisation

Issue: The FCA found that some firms' plans were unclear on the criteria used for prioritising certain actions or aspects over others.

Recommendation: Firms should make sure prioritisation is appropriate. Firms should clearly outline their reasoning for prioritisation in their plans. The focus should be on reducing the risk of poor consumer outcomes, especially in areas where they are currently least compliant with the Duty.

Embedding the substantive requirements

Issue: Some firms did not sufficiently evaluate whether their existing policies and processes were adequate for complying with the Duty.

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Recommendation: Firms need to conduct a thorough review of their existing practices against the final rules and guidance issued for the Duty. They should make any necessary adjustments to ensure that the substantive requirements are fully embedded in their operations. The substantive requirements are the consumer outcomes outlined in the Final non-Handbook Guidance for firms on the Duty.

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Working with other firms

Issue: Many plans lacked a focus on collaboration and information-sharing with other firms in the distribution chain, a crucial component for effective implementation of the Duty.

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Recommendation: Firms should establish mechanisms for sharing information and best practices with other entities in the distribution chain. This will help in achieving a more coherent and effective implementation of the Duty across the sector.

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Key questions for firms to reflect upon compliance

Here are 10 key questions that the FCA has asked firms to consider in complying with the Duty:

1.       Are you satisfied your products and services are well designed to meet the needs of consumers in the target market, and perform as expected? What testing has been conducted?

2.       Do your products or services have features that could risk harm for groups of customers with characteristics of vulnerability? If so, what changes to the design of your products and services are you making?  

3.       What action have you taken as a result of your fair value assessments, and how are you ensuring this action is effective in improving consumer outcomes?

4.       What data, MI and other intelligence are you using to monitor the fair value of your products and services on an ongoing basis?

5.       How are you testing the effectiveness of your communications? How are you acting on these results?  

6.       How do you adapt your communications to meet the needs of customers with characteristics of vulnerability, and how do you know these adaptions are effective?  

7.       What assessment have you made about whether your customer support is meeting the needs of customers with characteristics of vulnerability? What data, MI and customer feedback is being used to support this assessment?

8.       How have you satisfied yourself that the quality and availability of any post-sale support you have is as good as your pre-sale support?

9.       Do individuals throughout your firm – including those in control and support functions – understand their role and responsibility in delivering the Duty?

10.   Have you identified the key risks to your ability to deliver good outcomes to customers and put appropriate mitigants in place?

Conclusion

Sheldon Mills, Executive Director of Consumers and Competition at the FCA recently mentioned in a speech that ‘52 million financial services consumers in the UK rely on the sector to deliver good outcomes, and should be even better protected from harm, particularly in these challenging economic times.’ The FCA expects firms to continually improve in delivering good consumer outcomes, and to demonstrate and evidence such outcomes.