Hailed as the biggest shakeup to the regulation of retail financial services, the FCA Consumer Duty comes into force in a fortnight’s time on Monday 31st July 2023.
In this article, we take a look at what the new Consumer Duty is, who it applies to, the expectations of firms affected by the Duty, and how to implement the Duty into operations.
What is the FCA Consumer Duty?
Defined by the FCA as the ‘standard of care that firms should give to customers in retail financial markets’, the Consumer Duty outlines new expectations on firms to deliver better protection to consumers, provide good outcomes for retail customers, and offers guidance around the regulator’s expectations to support innovation, competition and new ways to serve customers.
“Our new Duty sets higher and clearer standards of consumer protection across financial services, and requires firms to put their customers’ needs first.”FCA
Who does the Consumer Duty apply to?
The Duty applies to all firms authorised under the the Financial Services and Markets Act 2000 (FSMA), the Payment Services Regulations 2017 (PSRs) and E-money Regulations 2011 (EMRs), in respect of financial products and services offered to retail customers.
What is expected of firms under the Duty?
The FCA has outlined ten expectations of firms under the Duty:
- Firms should put consumers at the heart of their businesses and operations, with a key focus on delivering good outcomes
- Design products and services that meet customers’ needs, provide fair value and help customers to achieve their own financial goals
- Allow customers to make well-informed decisions about financial products and services through effective communication and engagement
- Do not seek to exploit customers’ behavioural biases, knowledge or vulnerabilities
- Act in customers’ best interests and support them in realising the benefits of products and services purchased
- Ensure consistent consideration of customer needs, and how they behave at every stage of the product life cycle
- Learn and evolve process through increased focus and awareness of real customer outcomes
- Embed the interests of customers into company culture and purpose
- Monitor and review the outcomes customers are experiencing, and remedy any risks to continued good outcomes being delivered
- The Board or equivalent takes full responsibility for embedding the Duty within the business, and senior management are accountable for customer outcomes
What are the implications for firms?
The implementation of the Consumer Duty is anticipated to have broad implications for regulated firms. One of the core takeaways from the guidance issued is the expectation that firms take a proactive, companywide approach to implementing the Duty’s requirements. It applies across all of a firm’s activities, ‘from high-level strategic planning to individual customer interactions’ (FG22/5 Final non-Handbook Guidance for firms on the Consumer Duty). Firms will be required to incorporate the principles of the Duty into their processes and organisational structure at every stage, prioritising customers’ interests and outcomes.
Firms are expected to adopt a “get it right from the start” approach, particularly during the design of products and services. The FCA also emphasises empowering customers to make decisions that align with their needs and financial goals.
Importantly, senior managers are expected to bear the responsibility of ensuring compliance with the Consumer Duty throughout all business areas, and may be held liable for failing to meet the required standards.
The availability of appropriate information will play a crucial role in demonstrating the effective assessment and monitoring of customer outcomes. The information used in this process must be fit for purpose, supporting senior management in proving that they have taken reasonable steps to fulfil the Consumer Duty requirements.
Throughout the implementation and ongoing execution of the Duty, continuous monitoring, testing, and adaptation of practices and processes will be necessary for firms to ensure they meet the expected outcomes. The FCA will require firms to provide information and data that demonstrate compliance with these outcomes, and regular training on the Consumer Duty must be provided to employees.
Implementing the requirements of the Consumer Duty
Helpfully, the FCA has developed 10 key questions for firms to ask of themselves, their current processes and procedures, to measure their readiness for the introduction of the Duty in two weeks’ time. These questions should guide firms in their implementation of the Duty’s requirements, as well as helping to identify any gaps in current processes.
These questions are:
- Are you confident that 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 to ensure this?
- Do your products or services contain any features that could potentially pose a risk to vulnerable customer groups? If so, what changes are you implementing to address these concerns?
- What actions have you taken based on your fair value assessments, and how are you ensuring their effectiveness in improving consumer outcomes?
- What data, market intelligence (MI), and other sources of information do you use to continuously monitor the fair value of your products and services?
- How do you test the effectiveness of your communications, and how do you act upon the results obtained?
- How do you modify your communications to meet the needs of customers with characteristics of vulnerability, and how do you determine the effectiveness of these adaptations?
- What assessments have you conducted to evaluate whether your customer support adequately caters to the needs of customers with characteristics of vulnerability? What data, MI, and customer feedback are utilised to support these assessments?
- How have you ensured that the quality and availability of your post-sale support matches that of your pre-sale support?
- Do all individuals within your organisation, including those in control and support functions, understand their roles and responsibilities in delivering the Duty?
- Have you identified the primary risks that could hinder your ability to provide favourable outcomes to customers, and have you implemented appropriate measures to mitigate these risks?