Consumer Duty View – February 2023

2023 is the year for all things Consumer Duty! There’s been quite a few updates already this year, including the latest Financial Conduct Authority (FCA) updates (which don’t seem to stop coming!), what’s happening in the Trade Association space, as well as our partnership with the Surviving Economic Abuse (SEA) charity, of which Penny Miller is a trustee, and its interaction with the Duty (in particular vulnerability).

We’ve updated our offering on how we can help you prepare for the all-important implementation milestones in the next 6 months, and onwards. See our latest menu of Consumer Duty solutions and get in touch to discuss options.

We probably do not need to remind you of the first Consumer Duty deadline of April 2023, for manufacturers to have reviewed products and services on the market in line with the Duty and share information with distributors. We’re seeing firms turn to the practicalities of this information exchange and expect further industry updates on this in the coming weeks.

Click below to navigate through this month’s CD View:

• FCA Portfolio Letters
• Industry Engagement
• EU Retail investment strategy – divergence pending…

• Consumer Duty and economic abuse

FCA updates - Other

• Multi firm review - Consumer Duty implementation plans
• FCA Application Forms for Authorisations and Variations of Permissions

• FCA December 2022 Quarterly Consultation Paper

FCA content

• FCA Consumer Duty webpage updates
• FCA Consumer Duty Webinars
• Inside FCA Podcast: “Understanding the Consumer Duty”

1. FCA Portfolio Letters

On 3 February, the FCA published a series of sector-specific letters to portfolio firms, setting out their expectations for implementation and to give more sector-specific feedback on their findings from their review of firms’ implementation plans. This leaves us with the impression that the FCA may use its targeted supervisory interventions once the Duty comes into force, as opposed to enforcement (at least initially).

Our initial take from the portfolio letters is that, whilst they do not introduce any new requirements, they provide some helpful nuggets of information around the implementation of the Duty in the context of specific sectors, so are certainly worth a read. In particular, we think some of the sector-specific examples of good (or less good) practices could be helpful for firms looking to determine what data/MI they need to collect under the Duty. You can find summaries of the relevant letters here.

The FCA have published letters with information on the Duty for:

• asset management, custody & fund services and alternatives
• retail banks and building societies
• claims management companies (CMCs)
• consumer investments
• contract for difference (CFD) providers
• credit reference agencies and providers of credit information services
• general insurance and pure protection firms
• high cost lenders
• life insurance
• mainstream consumer credit lenders
• mortgage lenders and administrators

The FCA has also confirmed that the following sectors will receive letters very shortly:

• credit unions
• debt advice firms
• debt purchasers, debt collectors and debt administrators
• mortgage intermediaries
• motor finance providers
• payments services and e-money
• retail finance providers
• credit brokers

2. Industry Engagement

We continue to keep an eye out for key issues facing our clients, and are currently facilitating discussions regarding the information exchange from Manufacturer -> Distributor and back raise through engagements with the relevant trade associations. We are supporting our clients with critical scoping and implementation issues through involvement with a number of Trade Associations, including AFME, UKSPA, ICMA the IA and AIMA. Some of the thornier issues we have been looking at in such forums include:

• Exchange of information between manufacturers and distributors (ahead of the end-April deadline for Manufacturers). We are supporting the cross-trade association group (comprised of the IA, AIC, PIMFA UKPG, TISA, ABI and UKSPA), on a Consumer Duty disclosure framework to support this information exchange across the distribution chain. Most recently, the cross-trade association group shared its a proposal for EMT changes (Manufacturer->Distributor). Comments are needed by next Wednesday 22nd February by all Associations. We are feeding in and encourage those firms who are members to provide feedback to shape the final output. Focus will then turn to the reverse flow (Distributor -> Manufacturer).
• £50k minimum investment exclusion, including practical and operational issues for derivatives and the impact, of the FCA’s December Quarterly Consultation Paper;
• The application of the Duty for wholesale markets business, including OPS/trustee relationships, hedging activity, and material influence considerations;
• Vulnerable customer requirements, including direct interactions and in distribution chains, and practical considerations in the context of specific products e.g. structured products vs. overseas funds; (we’ve been helping some clients undertake a vulnerability assessment, more detail available here), and

3. EU Retail investment strategy – divergence pending…

We are closely monitoring updates in the EU as part of the Retail Investment Strategy (RIS). The EU Commission is expected to publish its RIS proposals in Q1 2023. Until that time, it is not possible to definitively assess the impact and divergence from the UK rules. Proposed changes may range from no change, to guidance, to targeted legislative change, to substantial legislative overhaul. Watch this space for further developments.

4. Consumer Duty and economic abuse

We are excited to share with you a briefing on the Consumer Duty which we have partnered with Surviving Economic Abuse (SEA) on: available here. The purpose of the briefing is to help firms understand their new responsibilities set out by the Consumer Duty and respond to customers experiencing economic abuse. This should be helpful for those grappling with how they can improve protection for different types of customers in line with FCA expectations around vulnerability (which has been restated last week in the most recent string of Dear CEO letters - more on this below).

SEA has engaged with the FCA and UK Finance in relation to the briefing and a lot of the work builds on the existing FCA Vulnerable Customers paper (where economic abuse and SEA’s work is specifically highlighted). Examples from the briefing on how firms can help victim-survivors of economic abuse include:

• Considering how accessible it is to obtain credit online with no human interaction and setting up extra security questions and safe words when there are known issues of domestic abuse.

• Considering ways to reduce perpetrators’ opportunities to exploit products like credit cards and loans. This might be through reviewing the account terms and conditions, restricting the option to add named card holders to credit cards and/ or applying positive friction when lending.
• Ensuring that there are specialist teams in place who can provide support to victim survivors and help them gain financial independence from the perpetrator.
• Ensuring staff have received the relevant training to identify economic abuse and respond adequately to disclosure – again eliminating any further harm.
• Ensuring that the financial business isn’t gaining financially as a result of economic abuse – for example, considering putting a freeze on interest or writing it off and removing fees and charges.

We’d love to speak to you more broadly about the paper and engage with your teams on the frontline so please do get in touch to discuss economic abuse. We can also help guide you through a vulnerability assessment report.

FCA Updates
When the final rules and guidance were published last July, it was made clear that the FCA intended to monitor firms’ readiness and feedback insights to the market during the implementation period.

In that vein, in addition to the 8 portfolio letters the FCA published last week mentioned above, we have seen a flurry of activity from the FCA in recent weeks, including the result of the FCA’s review into over 60 firms’ implementation plans, a number of new Podcasts, a more detailed dedicated FCA-webpage, incorporation of the Duty into the Authorisation and Variation of Permission process, and last but certainly not least, “clarificatory” points in its standard Quarterly Consultation Paper.

5. Multi firm review - Consumer Duty implementation plans

On 25 January, the FCA published a multi-firm review of firms’ implementation plans. This identifies examples of good practice, and areas where firms may need to improve their implementation approach to deliver the Duty’s standards on good consumer outcomes.

You can read our Consumer Duty View special for a deeper dive into the key findings, available here.

Our key takeaways are as follows:

• The FCA has reiterated that the FCA will be holding firms – including their senior managers and boards – accountable for delivering good outcomes for consumers. It wants to see senior leaders in firms driving the changes needed to meet the Duty standard.
• In the field of data/MI, the FCA has fired an important warning shot that firms should not assume they can “get by” by relying on or supplementing their existing data/MI and urges firms to think “deeply” and “afresh” about what data they will need to monitor and evidence outcomes. We’ve created a data & MI template for board reporting that can help guide you through this process.
• The FCA wants firms to ensure risk, compliance and internal audit are fully involved in implementation planning, including getting their views on timing and planning of assurance work – and note that there are references also to planned assurance work for after the implementation deadline.
• There are several mentions that firms should not be complacent and seek to rely on past improvements, initiatives or frameworks with regards to Duty compliance. This suggests that the FCA expects to see an uplift.
• Timing is, unsurprisingly, identified as a key factor in implementation challenges, in particular engagement with third parties needs to ramp up. This is something we are seeing that is already happening with our work across the industry and involvement in trade associations. The FCA is encouraging firms to take a pragmatic approach to meet the challenge of timely implementation, suggesting any further extension is unlikely. Implementing tactical fixes by the deadline and fuller strategic solutions subsequently is noted as an example of good practice.
• Whilst cultural embedding might be more of a long term change, tangible actions need to be delivered now (eg reviewing reward and incentive structures and performance management frameworks, SMCR uplift and training strategy).
• The most effective plans attempted to define good customer outcomes in the context of their business and considered how to deliver these through improvements to their products and services, communications and the support they provide.
• FCA confirmed that the champion role is to support the Chair and CEO in raising the Duty in all relevant discussions and to challenge the firm’s management on how it is embedding the Duty and focusing on consumer outcomes. It noted that some firms have been slow to appoint their board Champion and will soon commence working with and supporting board champions at some larger firms. If you could benefit from more details on the roles and responsibilities involved in the Champion role, we offer a Consumer Duty Champion (CDC) briefing within our menu of Consumer Duty Services.
• Firms should be engaging with their service providers now to plan timing and exchange information.

6. FCA Application Forms for Authorisations and Variations of Permissions

The FCA are now asking firms applying for permission for the first time, and those applying to vary their permissions, to explain how they have incorporated the Consumer Duty into their business. This will include providing policies, processes and MI showing how the firm meets the outcomes of the Duty. The 'requirements for firms seeking authorisation' section on the FCA’s website provides further details on the specific types of supporting information the FCA will expect firms to provide, including: target market analysis and identification; frameworks relating to product and service governance, fair value assessment and customer understanding assessment and testing; customer support and outcome monitoring policies; and a root cause identification process.

We are working with a number of firms responding to FCA queries on this so please do get in touch if we can help.

7. FCA December 2022 Quarterly Consultation Paper

In case you missed it, the FCA published its Quarterly Consultation for December. While these were presented as “clarificatory” points, these could have a significant impact on how some firms have scoped products and business line in or out of scope for Consumer Duty purposes and therefore should be considered carefully by implementation teams. Some of the key these changes include:

• Application of the Duty to occupational pension schemes: The FCA are proposing to amend part of the definition to make it clear that “retail customers” include any person who is not a client of the firm but who is, or would be, a beneficiary of an occupational pension scheme (rather than a beneficiary in relation to the investments held in the scheme). This has the effect of potentially broadening the scope of schemes caught by removing the specific link to the beneficiaries of the underlying investments, which could have an impact on the scoping analysis for DB schemes in particular. However, helpfully, the FCA does go on to say that, in practice, they do not expect there to be many instances where FCA authorised firms have a material influence on retail customer outcomes in relation to DB occupational pension schemes. It is possible, however: for example, a firm might provide services to DB trustees that have a material influence on consumer understanding or consumer support. The FCA are of the view that the application of the Duty should not be ruled out in this context. They have suggested that the test should be “whether a firm can determine or materially influence retail customer outcomes, rather than a blanket exclusion for DB occupational pension schemes”.

This confirms Simmons view that firms should have clear processes and standards to determine when an activity will or will not “materially influence retail customer outcomes”.

• Application of the Duty to non-retail financial instruments: Proposals were included to amend the exemption so that it cannot be applied in respect of investment funds. This would mean that funds (AIFs or UCITS) that have a minimum £50,000 subscription amount but still have retail investors (e.g. high net worth investors) would not be able to rely on this exemption. This could have significant implications for firms that have already de-scoped such products from their implementation. There is a lot of lobbying on this point both through trade association responses and bilateral conversations with the FCA.
• The ‘closed product’ definition: Proposals were included to clarify the definition of “closed products”. Under the current definition, a product cannot be classed as closed if it is still being distributed. However, the Glossary term defines ‘distribute’ broadly. It could potentially be interpreted to mean that no product or service in which an account is still held, or an ongoing relationship exists, can be classed as closed. The FCA are proposing to remove the use of the defined ‘distribute’ term in the ‘closed product’ definition.
• Firms approving and communicating financial promotions:The FCA included proposals to make clear that certain aspects of the Duty will also apply to firms where their only role is to approve or communicate a financial promotion.
• Firms in the Temporary Marketing Permissions Regime (TMPR): Proposals were included to ensure aspects relating to the approval of financial promotions will also apply to firms in the TMPR.

We have been advising many firms on the potential impact of these proposals, as well as feeding into many industry association responses to the consultation paper. If helpful to discuss further, please do reach out.

In terms of timing and next steps, the Consultation closed on 9 January. However, we understand from the trade association grapevine that some market participants were granted an extension until later in January. With this in mind, despite the expediated consultation process, we aren’t expecting a Policy Statement on this to be seen at least for a few weeks, but watch this space for further details.

FCA Content
We set out below a summary of some of the latest FCA content updates in case you missed any (for which we wouldn’t blame you given the number of different platforms and updated being published!).

8. FCA Consumer Duty webpage updates

The FCA continues to update its webpage on Consumer Duty, however there are no big surprises in recent amends. The topics on the webpage do perhaps indicate the types of questions the FCA is receiving and reaffirm areas of focus. Some points to note:

• Information sharing across the distribution chain: The FCA confirms that they do not expect distributors to share information without being asked, and expect manufacturers to consider what information would be helpful and to take reasonable steps to gather it. This could involve the use of focus groups or sending surveys to distributors. This indicates that the FCA is looking for the information sharing to be tailored to the product and distributors to be reactive rather than proactive.
• Application to non-UK customers: The FCA acknowledges the difficulties which UK product manufacturers may face, especially in relation to obtaining information from non-UK distributors about their distribution of products. In these cases, the FCA’s expectation is for UK firms to consider what is reasonable in the circumstances, for example, by using any information that they do have available to support their work. The FCA helpfully expressly confirms that it does not expect UK firms to obtain information from firms that are not subject to the Duty, for example distributors of non-UK products are not expected to obtain information from non-UK manufacturers.
• Champions: The FCA confirms that the appointment of a Consumer Duty Champion does not affect the Board’s collective responsibility under the Duty or the Board members’ role in complying with the Duty under existing governance procedures.
• NB: The October 2022 version of the clarification statement went on to note that “The Board champion is not an executive role, and they are not responsible for the firm’s implementation of the Consumer Duty but for ensuring it is discussed at the Board”. The FCA has not explained or highlighted the change but this is perhaps an update to reflect that not all firms who are in scope of the Duty have non-executive directors. Reach out to us if you’d find a Consumer Duty Champion briefing useful.

9. FCA Consumer Duty Webinars

The FCA hosted a number of sector based webinars on Consumer Duty which may provide helpful guidance for firms in these sectors. These include considerations on the implementation of the Duty in the insurance sector, the retail lending sector, the consumer investment, pensions and asset management sector and the banking and payments sector.

10. Inside FCA Podcast: “Understanding the Consumer Duty”

The FCA have released three “Inside FCA Podcasts” on the Duty (helpfully with transcripts available for those who prefer a quick skim!), focusing on three of the four outcomes:

1. Price & Value: Ed Smith (Head of Competition Policy at the FCA) confirmed the FCA see this outcome as core to the Duty, given the number of financial products representing poor value for consumers which the FCA sees. Mr Smith confirms there are three elements to the price and value framework:

• Analysing the product itself, specifically as to what the benefits are of the product to the target customer. This requires an assessment and valuation of those product features that are beneficial to the customer as seen through the eyes of the target customer, and to then consider the cost the customer pays for the product.
• Reviewing different customers cohorts: firms need to check whether there are any cohorts or groups of customers who may receive substantially worse outcomes due to, say, differential pricing or due to outlier behaviours or different ways of using the product that might really incur substantial extra fees.
• Looking at what is driving the price both at a firm and at the market level. Here it can be quite useful to see how the price of the product has moved over time, and for the firm to ask itself what is driving that price movement.

Other points of interest include discussion around use of data, charging customers different prices, manufacturers and distributors collaborating and how the FCA will monitor Price and Value.

2. Products & Services: Richard Wilson (Manager of Consumer Policy Outcomes at the FCA) outlined the key expectation on firms: to monitor products and services in practice to ensure they work as expected, are being sold to the right people and are not causing harm to customers. By putting in good governance and oversight of products and services, and taking action if there are any problems identified, Mr Wilson indicates that this will be a “big step” in demonstrating that firms are meeting the overall objective of delivering good consumer outcomes.

3. Consumer Understanding: Richard Wilson talks about the consumer understanding outcome. Key takeaways are below:

• The FCA confirmed that whilst the FCA does not expect every single communication made by firms to be tailored to the needs of the individual consumer, they do expect firms to consider the information needs of recipients, including the purpose of the communication, the context, the timing and frequency, the type of recipient, and what they need to know to make the communication relevant and engaging.
• This thinking applies equally regardless of the medium used, and whether it is an existing or new communication.
• On testing consumer understanding, it was confirmed that although there is no prescribed frequency for testing, firms should monitor communications and test against the factors listed above, including, for example, whether the communication would promote an important decision, whether it would impact lots of consumers or if the content is complex and difficult to understand. Such testing and evaluation of understanding could happen by firms simply asking consumers to explain back what they have read or heard.
• This outcome will be applied in a proportionate way, depending on the size of the firm in question.

We expect the FCA will touch continue with this trend so watch this space for more to come, perhaps on Customer Support and/or cross cutting rules...

Please do not hesitate to contact the Consumer Duty Team (ConsumerDuty@simmons-simmons.com) or any of your usual Simmons contacts to discuss this in more detail.