We are three months post-implementation of the Consumer Duty (and Summer is a distant memory). In this edition of Consumer Duty View, we wanted to highlight some key "Day 2" items. These are relevant to firms' ongoing considerations, as we move toward year end - and indeed, into the New Year.
For some firms, work remains on closed book products and services (a reminder about this appears in point four below). Moreover, one cannot fail to notice the Duty routinely making headline financial news - notably in the wealth management space - with various articles citing the FCA's alleged interactions with a prominent UK wealth manager. Taking everything in the round, there is a dawning realisation that the Duty's principles/outcomes based construct is far from being a box-ticking compliance exercise - rather, the unfolding post-implementation picture is one of the Duty fast becoming a pervasive, go-to supervisory tool for the FCA.
1. How can we help?
We are helping a spectrum of firms across a number of key areas:
Management information (MI). What would the FCA think about the quality of your MI and are you appropriately tracking risks? We are assisting firms with benchmarking their MI processes against both regulatory expectations and as among peer firms. We think what firms are reporting to themselves internally, including what data they are using to assess/satisfy the new requirements, is a key review piece going forwards. We can help through the delivery of MI-focussed workshops, or reviewing your committee decks, for example.
Annual report template. Firms are expected to complete their first Consumer Duty annual report on the Duty by 31 July 2024. How will your MI "aggregate upwards" and feed into your first annual report? Our annual report template will help firms navigate this key requirement with a top-down approach to the key questions and data-points that firms will want to have tracked. Along with the MI review piece, we strongly encourage firms to think about these deliverables sooner rather than later.
Legal design. How are your client communications standing up against the new requirements? We can assist firms with reviewing key materials - this could include distribution agreements, marketing materials and/or other terms of business documentation. Our legal design team can also support with creation of retail focused wrappers to aid with comprehension of key documents and terms.
Please view our Consumer Duty Day 2 menu of services or speak to a member of the team for more information on how we can help.
2. Supervisory focus
At the FCA's annual public meeting (on 4 October 2023), points were raised about the FCA's supervision of the Consumer Duty now it is in force (the full transcript is available here). The regulator notes that it has seen improvements in the way that firms are focusing on consumer outcomes, both from the top at board level and throughout firms. Some specific improvements that the regulator would like to see more of are:
firms looking at charges (that is, the additional charges that consumers might be unaware of);
a focus on complaints, with firms ensuring that they are responding to complaints and that complaints handling processes are in place;
firms' understanding of their target markets and customer bases. In particular, looking at customers with vulnerable characteristics and getting the right forms of data, and having technological systems to identify and support vulnerable customers.
Interestingly, the FCA references an area that all firms need to improve on is their use of data to demonstrate the outcomes expected from supplied products and services, and the processes for the consumer journey. With regards to its future supervision, the FCA highlighted the following:
it will continue to look at markets, such as equity release and savings, and set out its expectations;
it will look at data: practically speaking, this means the FCA will be asking for more data and it will increasingly use data to identify harms against the outcomes it expects under the Duty; and
in relation to larger firms, and some mid-size firms, there will be more proactive one-to-one supervision by the FCA's fixed firm supervisors.
You may recall that in Q1 2023 the FCA published a series of portfolio letters across the financial services industry - these generally set out the regulator's expectations as regards how different types of firm are expected to embed the Duty. Taking specifically the portfolio letters for retail banks and building societies, and mortgage lenders and administrators, the FCA sets out further specific information about next steps in Q4 this year and into Q1 next. This includes engaging a sample of firms on:
specific instances of changes they have made due to their baselining and gap analyses, including their design and implementation of appropriate corrections and remedies of the gaps and shortfalls they have identified;
specific instances where they concluded that change was not needed because their baselining and gap analysis showed that the Duty was already being met; and
the enhanced data, indicators and dashboards that firms should by then be starting to use to monitor customer outcomes against the consumer duty.
From January 2024, this also includes engaging a sample of firms on what their enhanced outcome-focused data and dashboards are now indicating about customer outcomes, and whether those outcomes are consistently meeting the consumer duty.
Implementing the Consumer Duty in the Retail Banks and Building Societies sector (fca.org.uk)
Implementing the Consumer Duty in the mortgage lenders and administrators sector (fca.org.uk)
3. What other practical things should we be thinking about?
Firms should ensure their governance arrangements continue to effectively embed and test the Consumer Duty, post-implementation. The broad essential question is this: have you created something that is working? For example:
Legal assurance. How can a firm enhance compliance with the Duty within its organisation? If you are a senior manager, are your steps "reasonable"?
Boards/committees. How well are these working in practice - are you receiving the right level of MI, how are the data dashboards working/looking, what is the quality of analysis and challenge?
Consumer Duty Champions. Any post-implementation issues encountered / are resolutions being swiftly, and effectively, achieved?
4. Applying the Consumer Duty to closed book products and services
By way of reminder, this is a key open item for some firms. The FCA has allowed firms an additional 12 months to review their closed‑book products (with the attendant rules applicable from 31 July 2024).
Similar to open products and services, the FCA expects firms to focus on those products or services most likely to have a risk of harm. It does not expect firms to review products and services for each individual customer, but to consider the product or service as a whole.
In Chapter 3 of FG22/5, the FCA provides guidance on how the products and services outcome applies to closed products and services. For example, as there will be no further sales, there are no requirements for firms to have a target market or distribution strategy for the product or service.
Firms' review of closed products and services under the Duty should include reviewing the product or service during the implementation period, and on an ongoing basis, under the cross-cutting rules, as well as ensuring products continue to offer fair value under the price value outcome rules.
When reviewing closed books, firms could consider:
Carrying out an initial review first. For example, firms might want to consider what aspects led to the decision to close the product or service, to see if that has a bearing on customer outcomes. If a product was closed because it offered poor value compared to newer products, this is clearly a factor to consider.
Prioritising review of products or services with higher risk of consumer harm. For example, if a firm has received complaints about a product, such as in relation to price and value, it could focus on that product.
Incorporating a review of the elements of the Duty into existing and ongoing review cycles.
Grouping similar products and services together for review. For example, firms may be able to analyse cohorts of products or services together. By similar products and services, the FCA means those products and services that are intended to meet similar customer needs and where the customer base is similar. Firms should consider if it is appropriate to group the products or services in question, or if that may lead to (for example) insufficient focus on nuances in the pricing. Firms should consider if the customer base, complexity and risk of consumer harm are sufficiently similar. Firms should not group products or services where they are aware of any issue that could impair their ability to assess that product or service adequately.
FG22/5: Final non-Handbook Guidance for firms on the Consumer Duty (fca.org.uk)
5. The Consumer Duty "hook" - interest rates and fair value
Over the last few months, we have seen the FCA citing the Consumer Duty as a sort of "lynch-pin" in a number of areas, applicable across a number of different types of firm and industry. In this sense, it is clear that the FCA has the Duty front and centre of mind, particularly when it remarks on areas of perceived concern across the financial services market.
Interest rates
Take the FCA's feedback on interest rates, for example. The regulator set out a 14-point action plan to ensure banks and building societies are passing on interest rate rises to savers appropriately, and that they are communicating with customers effectively and offering them better savings rate deals. As part of its action plan, the FCA required firms offering the lowest rates to provide their fair value assessments under the Duty by 31 August 2023, and vowed to take robust action by the end of 2023 against those firms who cannot demonstrate fair value in line with the new requirements.
FCA sets out 14-point action plan on cash savings | FCA
Value assessments - asset managers, lenders and insurers
There have been a series of FCA communications (statements and press releases) targeting a cross-section of firms. These are "early signals" (as the FCA puts it) of the Consumer Duty work program being undertaken post-implementation:
- Asset managers. Following a review of authorised fund managers' value assessments, the FCA has found that while many firms have better practices in place, some still require improvement. The regulator warns firms to ensure they are not solely focused on a fund's profitability over value for money for investors - and that it will use the Duty to further support regulatory expectations in this area.
FCA finds fund managers' value assessments significantly improved, but still work to do | FCA
- Lenders. Since the 14-point plan was published, the FCA notes that it has seen greater availability of higher interest rates in both term limited and easy access accounts, as well as moves by some savings providers to align the rates available on accounts currently on sale and those now closed.
FCA analysing lenders' fair value assessments | FCA
- Insurers. In letters sent to all insurance firms, the FCA reminded them of its expectations to make sure they are checking their products are providing fair value to their customers. The letters referred particularly to Guaranteed Asset Protection (GAP) products, with the FCA telling firms manufacturing these products that they must take action to prove customers are getting a fair deal, or it will intervene - giving firms a three-month ultimatum.
FCA calls on insurers to take action as it publishes latest fair value data | FCA
6. EU Retail Investment Strategy parallels with the Duty
We wanted to end with a final note about the EU's Retail Investment Strategy (known as the EU RIS). This is a package of EU regulatory reforms seeking to improve retail investor market access by amending the various EU sectoral financial services legislation (MiFID, PRIIPs, IDD, AIFMD, UCITS and Solvency 2). More information about the RIS is set out in our Simmons' EU RIS View, available here and more broadly on our EU RIS feature page here.
As the EU RIS develops at a European level, firms with businesses subject to both the Consumer Duty and the EU RIS may rightly be thinking about areas of likely alignment and/or divergence between the two regimes. Whilst the overall policy aims of the RIS and Consumer Duty are broadly aligned, there are differences in approach when it comes to implementation, based on current EU proposals. We set out below as a starter for ten, the key areas of likely convergency and divergence:
Type of rules. The Duty is a principles/outcomes focussed regulation - whereas (true to European form) the EU RIS is a prescriptive, rules-focussed amendment to existing legislation.
In-scope activities/in-scope clients. The Duty applies principally to UK retail customers whereas some of the EU RIS provisions may (perhaps inadvertently) end applying to professional, retail and eligible counterparty clients.
Vulnerable customers. The EU RIS contains no provisions relating specifically to customer vulnerability.
Value assessment vs. pricing process. One of the fundamental features of the Duty is the value assessment (and the somewhat holistic assessment of overall value that this entails). The EU RIS does not contain such provision - but does contain new rules around a "pricing process" - that is, the quantification and justification of costs and charges in relation to in-scope financial instruments.
Areas of alignment. Clearly, there are areas of alignment between the Duty and the EU RIS - both fundamentally share the same broad mission which is the protection of retail investors.
Whilst not completely aligned (as the above shows), firms' work already carried out under the Duty workstreams will likely serve as a useful starting point, and in some cases very helpful, for EU RIS implementation (when the time comes).
