Consumer dutyDec 5 2022

FCA's consumer duty goes beyond simple compliance checks

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FCA's consumer duty goes beyond simple compliance checks

The consumer duty represents a paradigm shift in the regulator’s expectations of retail financial services in the UK and will raise the bar when it comes to setting higher and clearer standards of consumer protection.

Mandated due to failing public confidence in retail financial services, the data the Financial Conduct Authority collects from firms will provide a view of the whole product life cycle and enable the FCA to stamp out poor practice before it becomes systemic.

The duty therefore represents a fundamental shift in the industry’s mindset, aiming to improve the culture of firms to ensure they focus on real-world consumer outcomes.

From these aims and objectives alone, it should be clear to firms with retail clients that the scope of proposals is significant. Preparing for implementation now, beyond the October 31 deadline, will require careful planning from the top-down.

Complying is as much a matter of data management as it is a cultural exercise.

Firms that follow and understand the FCA’s objective of becoming a more assertive and data-led regulator can get ahead.

Complying is as much a matter of data management as it is a cultural exercise, and those that recognise it as an opportunity to measure for themselves how they can deliver good consumer outcomes will turn management information requirements set out by the duty into a competitive advantage.

For example, the customer journey mapping exercise can be used to drive centralisation of the services provided and act as an opportunity to streamline the business.

Expectations for the April 2023 deadline 

As of the end of October, boards or equivalent management bodies should have agreed their implementation plans with evidence that they have scrutinised and challenged them to ensure plans are deliverable and robust to meet the new standards. 

However, the real legwork starts now. By April 30 2023, manufacturers, or in other words investment firms that create, develop, issue and/or design financial instruments, must complete all the reviews necessary to meet the four outcome rules for their existing products and services, which are:

  • Consumer understanding: Consumers are equipped to make good decisions. Information is made available at the right time and is understandable.
  • Price and value: Products and services should be sold at a price that reflects their value. There should be no excessively high fees.
  • Product and services: The firm’s products and services should be fit for purpose. The terms match the target consumer needs and products and services work as expected.
  • Consumer support: Customer service should be responsive and helpful. It should be as easy to complain about or switch and cancel products or services as it was to buy them.

A matter that goes beyond compliance 

The duty’s renewed focus on customer interests and outcomes will need firms to consider compliance at every level of the organisational structure. So, with just over four months to go until the next deadline, firms – if not done already – must act swiftly to set up project teams across each business line tasked with benchmarking compliance against the new requirements and effecting a programme of change to address identified gaps. 

To instil the sense of responsibility required to be successful in this process, C-suite buy-in and senior management accountability will be critical, with specific roles, including those overseeing adherence, documented in the senior managers’ statement of responsibilities.

On top of this, firms must develop and deliver regular training to staff on the consumer duty, which will be overseen, again, by senior management, cementing the crucial need for wholehearted involvement from these individuals in the process – it is not up to the compliance function alone. 

Challenges facing firms at this stage

The aforementioned scope of duty will be one of the most significant challenges facing firms, applying to each element of the value chain for products and services sold to retail customers. Extensive oversight will be needed to ensure the regulations are considered across all relevant products, business lines and legal entities.

However, it is important for firms to consider how the duty is applied appropriately and proportionately to each function, depending on its influence on the design, operation and distribution of relevant products and services.

A one-size-fits all approach will not be effective, but equally, the process should not become siloed, with individual functions taking their own approach. 

Here lies the value of the consumer duty board champion. To ensure that good outcomes for consumers are central to a firm’s culture, strategy and business objectives, the FCA expects firms to have a champion at board (or equivalent governing body) level.

 

With an established individual in place, the duty should not only be discussed in a meaningful way, but also implemented in a co-ordinated fashion with direction from an individual, or group of individuals, that have oversight of the process across all relevant products, business lines and legal entities.  

Beyond scope, firms must be cognisant of the fact that consumer duty does not represent a single piece of regulatory change and that in itself will be a challenge.

Compliance will not be a box-ticking process and the impact of the duty must be considered in the broader context of business strategy, operating models and the extent to which existing frameworks, technology and data can be routinely improved. 

The bottom line is that the FCA is looking for firms to build a customer-centric culture through a process of continuous improvement to ensure that the interests of the end-consumer are always put first, and this must remain at the forefront of senior management’s minds as they hit the ground running with consumer duty. 

Benefits stemming from cultural change 

It has already been established that the new duty will drive a change in culture at firms, with the FCA expecting businesses to step up and put consumers front and centre or have senior managers held accountable. 

Collecting meaningful data forms a critical part of consumer duty.

Accounting for a customer’s circumstances has always been the regulator’s expectation of firms, so those that have already been placing importance on duty of care for the end consumer should see the process of compliance as an opportunity to bolster good practices and culture instead of creating it from scratch.

Deriving value from meaningful data 

Collecting meaningful data forms a critical part of consumer duty, with the FCA evaluating the success of its proposals by using data from a variety of sources, including firm management information.

However, before firms start drawing intel from products, business lines and legal entities, it will be important to take stock of the data that will appropriately evidence positive outcomes and can be subsequently used to drive even better results both operationally and externally, with improved products and services. 

Detailed documentation of all decisions made (to become consumer duty compliant) together with recommended actions will leave a firm with a bank of data or, in other words management information, that will help evidence compliance to the FCA and help improve internal efficiencies.

The FCA expects the duty to create an environment for healthy competition between firms, fostering innovation in the development of products and services.

However how the firm uses this data, for internal purposes, will determine its ability to derive value from the meaningful data collected. 

In this regard it is important to remember that the FCA expects the duty to create an environment for healthy competition between firms, fostering innovation in the development of products and services that meet consumers' needs.

Businesses that look to get ahead and utilise the management data to better understand clients’ wants and needs have the opportunity to create a competitive edge by developing a suite of products and services that are not only fit for purpose but enhance the customer journey and the governance process siting behind it.    

The direction and intention of UK regulators 

With the introduction of consumer duty, the FCA made clear its aim to become a more assertive and data-led regulator.

The statement in itself was a marked changed in tone from the FCA and has helped establish its new approach to regulatory change, which will involve front-loading firms with pre-determined guidance to ensure that, come implementation day, there is no margin for error. 

Firms should take note of the FCA’s approach to the consumer duty and its focus on consumer-led outcomes as a whole, particularly as the UK battles with a cost of living crisis.

Globally other regulators are beginning to follow suit and take a similar focus.

This particular piece of regulatory change will likely set the tone, with greater scrutiny over data and general value for money in regards to products and services almost certainly coming down the tracks. 

As established, the FCA is driving the industry to demonstrate its focus on good outcomes for customers, but globally other regulators are beginning to follow suit and take a similar focus.

The Central Bank for Ireland recently published a discussion paper, for instance, to review its consumer protection frameworks.

No doubt others too will begin to look at how to ensure retail financial services are made up of sustainable, resilient, well-run, consumer-focused firms, opening up a chasm of challenges and opportunities for multi-jurisdiction firms. 

Linda Gibson is director and head of regulatory change EMEA at BNY Mellon’s Pershing