Consumer Duty View - July 2023

We started Consumer Duty View in Q2 2022, with one year to go to implementation... and here we are, a year later, with less than one week to go before the Consumer Duty deadline. How time flies!

As well as the usual FCA and industry updates, in this Consumer Duty View we've also included a go live check list with some final actions points for consideration to assist with what will hopefully be a smooth run up to the implementation deadline and beyond.

1.      5 KEY STEPS TO TAKE PRIOR TO GO-LIVE

1. Readiness Assurance: To mark the end of the implementation period the FCA Policy Statement requires boards (or equivalent management bodies) to "assure themselves that their firm is complying with their obligations under the Duty, and ensure the firm has identified any potential gaps or weaknesses in their compliance and any action needed to remedy this". Boards (or equivalent management bodies) should:

• Prepare a set of documentation to evidence compliance with the Duty, and outline the ongoing work post-July to close identified gaps;
• Record all check and challenge, and scrutiny from Senior Managers, the Board and the Consumer Duty Champion as part of the assurance;
• Ensure the assurance materials are supported with data and Management Information ("MI") to demonstrate how they have assured themselves around compliance for Day 1 (this will continue to be refined into 2024 in time for the annual Board reports which are due by 31 July 2024);
• Have regard to the 41 "Key Questions for Firms" which are of the type of questions firms can expect to be asked in their interactions with the FCA, and in particular the 10 key questions for firms to consider, a sub-set of the 41 questions, which the FCA called out in their recent publication - see FCA publication: One month to go for the Consumer Dutybelow; and
• Be prepared to share readiness assurance packs and supporting data/MI with the FCA (on request).

2. Ongoing monitoring: Whilst the FCA has confirmed that it does not expect "brilliance from Day 1" (see FCA Podcast on Consumer Duty Outcomes Monitoring below), it does expect firms to use some types of data to monitor and assure themselves that customers are getting good outcomes or identify where they're not getting those good outcomes. Once identified, firms are expected to have a strategy for developing data and systems over the long term to be able to monitor the outcomes (i.e. as a priority Day 2 action).  We are seeing firms review their Consumer Duty implementation (through the lens of the Four Outcomes, as well as other key themes including Cross-Cutting Rules and vulnerable customers) by taking products through their new processes and reviewing data and MI as well as records (e.g. minutes of the relevant meetings where products are approved, and new policies and procedures), as well as developing a strategy to improve data and monitoring capabilities in upcoming months and on an ongoing basis.

3. Record keeping: Everyone has been very busy, but do take time to ensure that your hard work and thinking can be found at a later date, if required. We are also working with some clients to ensure there is traceability of the implementation of the Duty, both in relation to the Four Outcomes and the Cross-Cutting Rules in to key policies, procedures and tools. Firms are also carefully considering the evidence around their Consumer Duty project and decisions taken by relevant Working Groups / SteerCos as the projects move into business as usual. There are lessons to be learned from recent enforcement actions, which highlight that the FCA doesn't always focus solely on the post implementation period. For example, in FCA Final Notice against Citigroup Global Markets in relation to the implementation of Market Abuse Regulations, Citi was criticised for:

• Failing to consider all of the relevant legislation - the equivalent under the Duty would be failing to consider the Finalised Guidance (FG22/5);
• Failing to complete a gap analysis at an early enough stage;
• Failing to complete a risk assessment early enough and when completing it failing to consider the links to the identified gaps; and
• Its Working Group failing to have sufficient oversight and there being no designated owner to oversee completion of projects, a failure by compliance to monitor and evaluate implementation work; and a failure by senior leaders in compliance to communicate with each other.

4. Information sharing: Ensuring that firms are aware of their responsibilities under the Duty so that there is adequate information sharing in the distribution chain, and reviewing and utilising the industry templates available to assist (for example, EMT v4.1 for manufacturer-to-distributor information flows). A data framework has been agreed for the distributor-to-manufacturer feedback loop between, identifying six core data items. Given the nature of the information requested, this has involved some lengthy and challenging discussions across the manufacture and distributor networks and so may be something firms continue to iron out in upcoming weeks. Further details on the framework are expected to be published in the coming days.  

5. Post-implementation: Firms should be focused on:

• Addressing Day 2 actions, closing any identified gaps, and identifying key risks and mitigants, (the FCA have made it clear that compliance with the Duty is not a one-off exercise. Firms should therefore continually assess their products and services to ensure delivery of good customer outcomes);
• How it will further embed the Duty in its affected businesses day-to-day on an ongoing basis and what MI is being collected and assessed to assist the firm in determining whether good customer outcomes are being met;
• Planning and resourcing needed to meet the 31 July 2024 implementation deadline for closed products;
• The new EU Retail Investment Strategy, focused on any overlap, potential divergence or efficiencies from an implementation perspective from the Consumer Duty (we are preparing a comparison of the Duty and EU RIS - please do get in touch if this if interest).

As always, please do reach out both pre and post the implementation deadline - we can provide the following menu of Consumer Duty solutions.

2.      KEY FCA UPDATES:

FCA publication: One month to go for the Consumer Duty

In light of the July implementation deadline, the FCA has published a list of the 10 key questions from the FCA Final Guidance on the Consumer Duty which firms should be asking themselves in order to reflect on their implementation and identify gaps or areas of improvement. These are not new questions and are rather a sub-set of the '41 Key Questions for firms' found in the Non-Handbook Guidance (FG22/5). This is helpful in the sense that firms can focus on the key questions firms can expect to be asked in their interactions with the FCA. Note that the FCA also expects the Duty Champion and the Chair to use these types of questions to guide discussions by the firm's Board or equivalent governing body.

The FCA reiterates that it expects Boards or equivalent management bodies to have clear oversight of the implementation of the Duty, and expects the Board to have identified any potential gaps or weaknesses in compliance and to have developed a plan to remedy this.

FCA Consumer Duty Firm Survey - Spring 2023

The FCA published the results of an anonymous survey of 1,230 firms from 6 different sectors which ran between March and May 2023, aimed at understanding how prepared firms were in meeting the implementation deadline. The survey results show that there are high levels of engagement and understanding of the Duty across the sectors, and most firms believed they were on course to meet the deadline:

• 64% of those surveyed indicated that they would be fully compliant by the deadline;
• 23% indicated that most requirements would be met; and
• 7% indicated that they would still have significant work to do after the deadline or had not started work on the Duty.

The FCA has indicated that it will use these results to tailor further communications on the Duty.

FCA Podcast on Consumer Duty Outcomes Monitoring

The FCA has published a podcast with Ed Smith, the FCA's Head of Competition Policy, on outcomes monitoring under the Consumer Duty.

Mr Smith focusses on the importance of firms using data and technology to monitor compliance with the Outcomes and tackle any breaches. The FCA expects firms to have a strategy to identify the appropriate data sources which should be proportionate to the size of the firm, the client base, and the products and services offered, noting that the majority of the data may already be readily available to the firm (e.g. customer retention records, complaints data). When collecting this data, Mr Smith reiterated the FCA's focus on vulnerability, but also on cohorts of customers who may be receiving worse outcomes than others, such as long standing customers or those from different socio-economic backgrounds.

Once the evidence has been obtained, the FCA expects firms to tackle harm by "drilling down to the root causes", and develop a strategy to address these with clear and compelling reasoning. Firms should be able to evidence that changes are having an impact on customer outcomes and that the Duty is embedded in all decision making which can impact customers.

The FCA reiterates that they do not expect brilliance from Day 1, but they do expect firms to be able to use some data to assure themselves that customers are getting good outcomes, and develop a strategy going forward to be able to improve their data and monitoring capabilities and use better types of data.

FCA Guidance consultation on financial promotions on social media

The FCA has published a Guidance Consultation on the new hot topic of financial promotions on social media. The FCA makes it clear that they expect firms to consider this guidance alongside their obligations under the Duty to ensure good outcomes are being delivered to retail customers. The FCA reminds firms that Principle 12 and the Cross-Cutting Rules will apply to communications and financial promotions on social media, whether the firm has a direct relationship with the customer or not, and includes where a firm is approving the financial promotion. The FCA expects firms to consider how they tailor communications for the likely audience on social media and the features of different platforms, especially in terms of the likely audience and complexity of the product and service.  Some of the key risks the FCA sees are consumers being repeatedly bombarded by financial promotions on social media, vulnerable customers being more susceptible on social media due to excessive targeting and social media being an inappropriate channel for advertising.

Financial Ombudsman Service ("FOS") Speech on what Consumer Duty means for resolving complaints

The FOS has published a speech on what the Consumer Duty means for resolving complaints. The FOS confirmed that, as the standards of fairness and reasonableness are already used by the FOS, it does not expect to significantly change the way it considers complaints, and does not expect to receive complaints involving the Duty until later in 2023. As a result of the Duty, the FOS indicates that they may see a change in the areas in which complaints are received, moving from the sale and cancellation of products and services to a focus on the use and price and value of products and services. The FOS is currently creating sector-specific directorates which will be "homes for specialist knowledge" to enable firms in these sectors to have quick and easy access to answers and insights on the types of complaints being seen in that sector. The FOS will also aim to share case studies, including key themes, content, decisions and lessons learned.

Nikhil Rathi speaks to the Treasury Committee on the Duty

On 19 July 2023, Nikhil Rathi, the FCA's Chief Executive, spoke to the Treasury Committee confirming that the aim of the Duty is to ensure firms are placing customers at the heart of their business, which should include more proactivity in communicating with consumers, providing products which are fit for purpose for the target market, ensuring the value provided is reasonable, customer service is matching its promises and there are proper redress mechanisms in place. Mr Rathi stated that every firm should have gone through its practices and ensured they have resolved any residual problems. In terms of metrics, the FCA is hoping to see consumer trust increase, complaints decrease and consumer harm decrease, and expects these to be the overall metrics the FCA will monitor.

3.      SECTOR SPECIFIC GUIDANCE:

Banks & Building Societies: FCA statement on expectations for fair and competitive saving rates

As a result of a meeting with the UK's largest banks and building societies, the FCA published a statement setting out its expectations on fair and competitive saving rates. The FCA indicated that it has started to see positive action being taken by banks and building societies to improve their rates and ensure customers are receiving better value for the products, but note that it wants to see this progress accelerate, with banks helping consumers access the best rates. The FCA has indicated that it has previously committed to reporting at the end of July as to how the savings market is supporting customers, and aims to set out in this report whether further steps are needed.

Following this, the FCA's response to the Treasury Committee's request for information about bank's savings rates and the Duty was published. As well as reiterating the above, the FCA also includes examples of metrics it will use to assess whether a product is offering fair value to the target market, and expects firms to have a strategy to ensure information about the available rates across different products is available to consumers, together with making customers aware of how they may benefit from switching.

The FCA has also confirmed with the Information Commissioner's Office regarding data protection issues in the context of the Duty and the requirements to tell customers about better deals. The FCA confirms that the right to object to direct marketing does not prohibit firms from providing communications to their customers when requested or required by the FCA, such as under the Duty.

Retail Banks: Parliamentary Questions - Consumer Duty

The Duty has also featured a talking point in recent Parliamentary Questions, with the Prime Minister indicating that the Consumer Duty "will protect people with mortgages for by, for example, moving them onto interest only mortgages or lengthening their term". This builds on the Prime Minister's comments that the Consumer Duty is the "solution to soaring interest rates". It is interesting to see the Duty being featured in these discussions, and perhaps something for firms to consider if customers are struggling to keep up with payments.

Asset Managers: Dear CEO letter and findings from liquidity management multi-firm review

The FCA has published a webpage and have sent a Dear CEO letter to asset managers which summarises its findings from its multi-firm review of liquidity management frameworks. The FCA notes that whilst this review was carried out before the implementation of the Duty, many of the good practices outlined contribute to improved consumer outcomes and are consistent with the Duty, and firms should review their frameworks with this in mind. Whilst the review focussed on AFMs, the FCA indicates that the findings are also relevant to all asset managers and AIFMs, with the findings and good practices grouped into governance, liquidity stress testing, redemption process, liquidity management tools and valuation.

You can also watch our flash webinar on demand to hear views from our regulatory experts from across our European network. We were delighted to be joined by European Fund and Asset Management Association ('EFAMA') who shared their immediate views and suggested next steps for industry participants. Watch on demand here.

For further details on how we can assist with your Consumer Duty implementation please view our ready to go menu of templates, services and training programmes or speak to a member of the team.