Consumer Duty View - May 2022

Consumer Duty: Fewer than 90 days to go. Will you be ready?

"You never want to have that ticking clock and know that you had all this time and didn't use it!"  J.J. Abrams

Welcome to our very first edition of Consumer Duty View.  The Consumer Duty clock is ticking!   But don't panic. Consumer Duty View will keep you up to date with what's happening across the market, industry discussions and what the FCA is saying. By way of reminder, the Consumer Duty will apply to all our clients who are regulated and who either face retail clients or customers directly or manufacture products (e.g. funds) which are bought by end retail investors (including high net worth) - investment and private banks, wealth managers, brokers, asset managers, insurers, fintech and crypto firms.

1. May highlights

The FCA's Policy Statement and final rules are due by the end of July - in fewer than 90 days. The FCA were already talking back in March about making a "...head-start now by making sure you have right mindset, culture and data in place, and looking for gaps between where you are now and where you'll need to be."

Which is very easy to say...

The challenge is trying to turn a rather aspirational Consultation Paper into a practical reality.  But in fact, with our help, many firms have been getting cracking on their Consumer Duty projects in these past months.  And in terms of where to start, carrying out initial mini-pilots of product lifecycles and customer journeys is proving to be a good way of demonstrating early progress and testing priorities.  We have done this a few times now, so please drop us a line if you would like to hear more.

In this month's edition we guide you through a choice selection of some of the implementation questions that have come our way these past weeks, including brain-teasers around territorial scope, the application to payments, what on earth "average retail customer" means and the famous "reasonableness" standard.

We also recap key messages from our client webinar in January when we were delighted to be joined by FCA guest speaker, Ian Searle, Head of Payments, Crypto and Consumer Policy and his team.

If you would like more detail on any of this or just feel like a chat and a cup of tea, then please do contact Caroline Hunter-Yeats, Penny Miller or Alex Ainley.

2. General

Here are those key dates again:

• July 2022: The FCA will provide a Policy Statement and the detailed text of the final rules
•  August 2022: The rules come into force
• April 2023: The deadline for compliance, but the FCA might possibly extend it slightly (although we don't think it will be by very much).  Watch this space.....

On 23 March, Brian Corr (Interim Director of Retail Lending at the FCA) delivered a speech at the Consumer Credit Conference 2022 which had a short and sweet section on the Consumer Duty.  The highlights were:

• firms need to be flexible in light of changing circumstances including the wider economic problems;
• firms can get a head start now by focussing on the right mindset, culture and data in place, and looking for gaps - "We are not waiting for the Duty to come in before we act to improve consumer outcomes...", and
• the FCA will provide more guidance and help as the Duty comes into force.

3. Key takeaways from our January webinar with the FCA

In case you missed it, some key messages came out of this.

• Get your teams to understand the Consumer Duty as a principleand not a set of rules.
• Determine the contents of the report to the management body and work backwards to define the data you will need to show compliance.
• Take a risk-based approach to your implementation plans. Focus on eradicating key harms and known gaps.
• Work out how you will measure and monitor good customer outcomes.
• Work out the 'no regrets' steps that you can take in advance of August 2022.
• Data is key; you can learn a lot from looking at how you collect and analyse your data.

4. Territorial scope: what's in and what's out?

There has been back and forth on this rather vexed question.  In the December 2021 Consultation Paper,  we were introduced to the notion that the Consumer Duty will follow the existing scope of the existing rulebooks.  So if you are dealing with a mortgage customer, look at the FCA rulebook on mortgages to find the retail scope, and so on.  The draft definition of "retail customer" still doesn't quite work though, as a number of responses have pointed out, so we hope some further tweaks will be forthcoming in the final rules. 

This all begs the question: what is the existing scope of the FCA rulebooks, especially when it comes to customers outside the UK?  For example, there could be questions:

• for overseas branches of a UK firm around when and how the Duty applies;
• around the application of the Duty for non-UK clients of a UK firm or branch;
• around the application where UK clients are serviced by a firm globally.

It is a puzzle that needs to be pieced together and it's going to depend on your business model (for example, where is your relationship manager located, what booking centre is being used etc.).  But, in practice, for a number of products an overseas branch of a UK firm could often be out of scope if dealing directly with a UK retail client and without an involvement of UK colleagues.  Unfortunately, when you flip this and look at a UK firm dealing with non-UK customers, it seems that Consumer Duty could well apply for a number of products and the industry is still discussing this. 

5. Payments scope: what's covered in relation to electronic money?

The application of the Duty in the payments and electronic money space is particularly challenging and we are working closely with clients on the impact and practical steps required for day one of implementation.

There are particular questions around how the Duty interacts with the obligations under the existing regulatory framework, particularly potential uplift from the Payment Services Regulations, which are not part of the FCA Rulebook and already covers things like fees, liability, transparency and information requirements. Understandably there are also questions around whether there is an impact on the corporate opt out and the application in areas such as payment aggregation, acquiring and white labelled / BaaS products and services which indirectly affect consumers.

Our Payments View  newsletter provides a succinct and useful roundup of all payments related news. Subscribe here to stay up to date.

6. Average retail customer concept and reasonableness

The Consumer Duty is subject (thankfully!) to a concept of reasonableness. In short: what would a reasonably prudent firm in your position do, making assumptions about the average retail customer's needs and characteristics and knowing what it knows (or what it should know) about the customers in question?

It is not a million miles away from the kind of reasonableness standard that is familiar from tort law.  But it raises the question of who the average retail customer is and what you need to assume about them.  Obviously, the average retail customer will vary from product to product and service to service, and firms will need to take this into account in product design, support, monitoring and follow up (throughout the product life cycle).

What is it really getting at though?  We think the FCA is trying to capture the concept of who the product or service is really designed for. There are a range of questions we are seeing around what this means in practice, including:

• the range of data points firms will collect, and how a firm will take into account these needs, objectives and factors at the product design stage;
• the data that firms will need to use and record to support target market assessments, and
• the additional support requirements and ability to flex products for vulnerable customers with particular needs and characteristics.

7. FCA Strategy 2022-25 and Business Plan

The Consumer Duty is a core item in the FCA's April 2022-25 strategy and 2022 business plan.  A few items were of note for us:

• the FCA focus on testing and requiring firms to test- which may impact testing resourcing in firms;
• FCA references to data collection which aligns with the FCA's data strategy -  firms will be required to provide data to demonstrate the four outcomes, and
• firms will need to factor in the impact of cost of living increases, and the increased reliance of clients on credit as part of the Duty and otherwise.

8. And so...our top 3 picks for this month

Get your data and MI in shape ASAP.  Your Consumer Duty implementation is going to stand or fall on the basis of this. Unless you have managed to avoid reading or hearing anything the FCA has said in the past year, you will know that they are going to be very data-led and the question you will be asked will not be "show us your policies and procedures" but "show us your data and evidence". If you are struggling with your data and the MI required for reporting then let us help. We have an in house team of specialists in governance, data science and data visualisation to support organisations in understanding their data and what it means for themselves and their customers. Get in touch with Caroline Hunter-Yates for more details.

Work out your cost of living strategy. If you have customers for whom things are likely to be a struggle over the coming months, then how are you going to show the necessary degree of support and understanding?

Check your price and value standards.  If asked, what evidence will you be able to show the FCA that your products and services provide fair value?

9. Still struggling on where to even start?

The advice we are providing to multiple and growing clients in this space puts us at the nexus of market best practice from both a documentation and practical application perspective. Building on our experience with the SMCR and D&I toolkits we offer we are currently developing with our product team a set of guidance notes, templates and documentation to assist organisations on the implementation of the Consumer Duty. Topics covered include:

• Defining the delta
• Approach to prioritisation
• Data and Management Information (MI)
• Average retail customer guide

For further information on our current document inventory suite and associated pricing please get in touch.

10.  Are you an asset manager?

Join our webinar on 7 June where we will set out some practical tips on how asset managers can get ready for the new Consumer Duty.

The Consumer Duty will affect asset managers in very different ways and the scale of the job to comply will range from relatively light touch enhancement from some, through to a deeper institutional change in practices for others.

On our webinar we will:

• share lessons already learned from implementation plans running with our banking sector clients;
• discuss how MI and data will drive implementation;
• cover some of the continued challenges for managers, including distributor information loops and price and value;
• suggest the steps managers should be taking now; and
• take questions from the audience.

> Register now

As a final digestif, here are links to other materials:

FCA consumer duty consultation
FCA consumer duty implementation

We hope this is helpful and please do get in touch on anything else relating to the Consumer Duty or your project planning questions.

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