The Financial Conduct Authority’s (FCA) new Consumer Duty is now in force (as of 31 July 2023), which means that after months of planning, firms must comply with;
- Principle 12: to act to deliver good outcomes for customers
- 4 outcomes relating to: products and services, price and value, consumer understanding and consumer support.
In taking steps to comply, firms must also consider these three cross-cutting rules:
- act in good faith
- avoid foreseeable harm
- support customers to pursue their financial objectives (the 3 cross-cutting rules).
3 key issues we expect to be at the top of the FCA agenda
There has been much commentary on how to embed these requirements in the planning stage. Now firms are asking whether they have done enough and how the FCA will judge their efforts. To address these concerns, we set out 3 key issues we expect to be at the top of the agenda in the coming months.
1. Approach to fair value
Firms need a reasoned and principled approach to providing customers with fair value.The FCA has been laser focused on price and value in the run up to the Consumer Duty going live (see its review of firms’ fair value frameworks and the many publications and speeches on the impact of the cost of living crisis). Some firms are looking for clearer guidance on how they can assess price and value, particularly where this is influenced by other parties in a distribution chain.
The FCA expects firms to foster a culture that centres the needs and individual characteristics of customers, rather than focusing on profit and cutting corners to achieve growth. We have also seen a focus on commission payments and firms ensuring that the level of any commission is commensurate to the service received and does not adversely impact the value to customer.
Even where firms already deal with value under the PROD or COLL rules, they should remember that compliance will now be considered through a Consumer Duty lens and may be held to an even higher standard.
2. Action & evidence
In our view, the most important exercise for firms to commit to is action and evidence.
The FCA expects firms to have reviewed their business as a whole and made improvements in order to achieve compliance with the Consumer Duty, which, in the FCA’s view, imposes a significantly higher standard than the existing rules.
Firms should have full, clear and well-organised records to evidence the steps they have taken, their reasoning for how compliance is being achieved and details of ongoing future planning and monitoring. The FCA has been clear that it has a new Consumer Duty team in its enforcement division that are ready to take action on day one to ensure that compliance is enforced.
If the FCA comes knocking, firms should be able to show:
- what testing has been undertaken in the planning stage
- how the 4 outcomes are being complied with
- board commitment to the Consumer Duty, ideally being discussed regularly with well documented board meeting minutes
- how the Consumer Duty has been embedded internally through policies, training and governance
- what the ongoing monitoring process will look like.
3. Data
The importance of data should not be overlooked.
This is particularly the case for firms that hold significant amounts of data or that carry out sophisticated data manipulation as part of their business. The FCA expects firms to devote the resources and data available to them to their customers, applying the “same standards and capabilities to delivering good consumer outcomes as they are to generating sales and revenue”.
How monitoring data is presented is likely to be something of an evolving process, but firms that fail to get a handle on their data are at risk of being left behind, as effective data management will help firms to achieve compliance (as well as pursue other business critical activities) far more efficiently.
Positioning itself as a “data-led” regulator, the FCA is keen for data and technology to be leveraged to improve customer outcomes and is increasing its use of data to monitor firms’ compliance.
What to expect after 31 July 2023
The 31 July live date is not the end of the matter and there is no expectation that all existing issues or uncertainties will necessarily be fully resolved. Identifying those issues is a large part of what the Consumer Duty is attempting to achieve. The FCA wants to understand the processes that firms are using to find those issues and how firms are working towards making changes that will improve the position of the customer. Equally, the FCA will want to understand the changes that are being made, who in the firm is taking responsibility for embedding those changes and what data is being used to monitor the changes.
Is this a big ask of firms? Yes. But firms should remember that the FCA is seeking to raise the bar to significantly improve standards. Firms that have prepared, identified possible issues, and have a credible and well evidenced plan in place to address these issues, are less likely to be in the firing line.
Watch this space for our upcoming video, where our regulatory team will be sharing their thoughts on how the Consumer Duty is bedding in and key developments to watch out for.
Our lawyers are experts in financial services regulation. If there are any aspects of your Consumer Duty implementation that you are concerned about, or if you want to discuss your preparation, we’d be happy to help. Get in touch with the team if you’d like to find out more.
