Consumer Duty View – January 2024

What better way to begin the year and clear any January blues than with a Consumer Duty View, providing you with a number of useful Consumer Duty-related nuggets since our last update in November 2023. There's been quite a few, and whilst a lot of the FCA's publications are targeted at specific industries, we think a lot of the good practice and learnings are relevant across the industry.

As a reminder, the implementation date for closed products is moving ever closer, and we are working with a number of firms on closed product scoping and what implementation uplift is needed for various closed products in practice to be ready for the 31 July 2024 deadline.  Also, the deadline for the first annual report to the Board is coming round on the same date. We are working with a number of firms on their report, and also have our own template.  Please do reach out if you would like to discuss further.

True to FCA's word that their supervision under the Duty is "shifting to become more assertive, intrusive, proactive and data driven", we have seen recent scrutiny from the FCA in a number of areas, including increased focus on Consumer Duty Champions, requests for information and surveys targeted at certain sectors (e.g. wealth managers), and making general enquiries at firms regarding implementation and ongoing compliance the Duty. We have supported several firms on their responses. Do let us know if helpful to discuss further.

Due to popular demand, we are planning to host a Consumer Duty event in 2024 for Non-Executive Directors/Champions. The purpose of the event is to get a targeted group together to discuss how NEDs/Champions are finding their oversight role, challenges and best practice, learnings from implementation, progress with ongoing compliance and phase 2, with a particular focus on Data and Management Information. Please let us know if your Champion/NEDs would be interested and we'll be in touch with a number of you in any event.

Please do take a look at our full list if Consumer Duty Day 2 menu of services or speak to a member of the team for more information on how we can help or for any questions you may have.

Finally, for those also interested in the latest state of play regarding the EU Retail Investment Strategy, see our latest EU RIS View

1. FCA Speech - Consumer Duty: Not once and done

For those of you who thought all things Consumer Duty could be left in 2023, think again, with the FCA reiterating in this speech that the Duty is not a once and done exercise, and firms need to ensure they are continuously learning and improving, and evidencing this in their annual Board reports.

The FCA indicates that it has already seen good practices developing post-implementation of the Duty (such as simplified language in letters, the introduction of more accessible formats, firms being more upfront on their websites about exclusions and firms reviewing their fees with fair value in mind), and hopes that this trend will continue. However, the FCA does flag some areas of focus when reviewing firms' implementation of the Duty, including checking that all proposed changes stated in implementation plans have been made, reviewing data and MI (with the expectation that this is challenged to ensure MI is continuously improving) and the annual board report (flagging that the assessment will form part of any compliance review the FCA undertakes). The FCA also note that it will continue to work across all sectors to test firms' implementation and integration of the Duty, and will also work to produce good and poor practice reports.  

We are supporting several firms on deep-dives into their data / MI framework to ensure meaningful data is being collected and considering how it aligns with other business MI presented to management. Please do reach out if you have any questions.

2. FCA Dear CEO Letter to Wealth Management and Stockbroking firms

Publishing what is becoming one of many Dear CEO Letters following the implementation of the Duty, the FCA published a Dear CEO letter following its review of the wealth management and stockbroking industry which sets out strong messages around Consumer Duty outcomes. The FCA indicates that this is one of the higher risk sectors of the financial services industry, given the scale of consumers in the sector and levels of assets under management, and what the FCA see as a trend to push products which are too high risk or complex for retail consumers. Many of the expectations set out in the letter, however, are likely to be relevant for the wider industry. You can read our full summary here.

From a Product and Services and a Consumer Understanding angle, the FCA expects firms to have a clear focus on the target market, ensure products are aligned to consumer's needs, risk profile and circumstances, reassess the vulnerability status of consumers and ensure consumers fully understand all aspects of their investment products. This is as well as only uprating retail consumers to professional if this is supported by robust systems and controls.

From a Price and Value perspective, the FCA indicates that it continues to see firms charging for services which are not delivered and failing to consistently provide clear disclosures around their fees or charging structure, resulting in consumers being unaware of high fees. The FCA also found that firms are not considering all revenue streams, pointing in particular to firms which are not passing on fair interest on client money balances (see Section 5 below for more of the FCA's concerns in this space).

The FCA expects CEOs and leadership teams of these firms to fully understand the exposure their firms have to the risks and harms set out in the letter and invest significant time and energy to manage these. This includes identifying and resolving any root causes of the harms identified, which the FCA indicates  are normally as a result of ineffective systems and controls combined with ineffective leadership and governance. The FCA indicates that it will consider whether appropriate action has been taken in future engagements, and will take action if any issues have not been addressed.

3. FCA and HMT DP 23/5 on the Advice Guidance Boundary Review and proposals for closing the advice gap

As part of the Edinburgh Reforms, it was announced that the FCA and Government will commence a review of the regulatory boundary between financial advice and other forms of support. Just under a year later, we now have the Advice Guidance Boundary Review in Discussion Paper 23/5, which sets out proposals to help consumers make informed investment and pension decisions and seeks to create a system which ensures consumers get the help they want, at a time they need it and at a cost that is affordable. This Review is intended to leverage the FCA's Consumer Duty to set clear expectations for the support that firms provide to their customers.

The Discussion Paper sets out three proposals to close the advice gap:

• Clarifying the advice boundary to enable FCA-authorised firms to give more support to consumers without providing personal recommendations, whether this is via further guidance or introducing rules mandating specific actions.

• Introducing a new regulatory framework enabling firms to broaden the support they can provide to consumers, such as support without explicit charges and based on limited information to enable firms to give advice based on a target market of a consumer, rather than fully individualised support.

• Creating a simplified form of advice which enables firms to support consumers with simpler needs and smaller sums to invest in a commercially viable way.

The Discussion Paper closes on the 28 February 2024.

4. FCA Dear CEO Letter to investment platforms and SIPP operators

The FCA has published another Dear CEO letter, this time to investment platforms and SIPP operators. This covers the retention of interest earned on customers' cash balances, noting that the FCA has serious concerns around firms who are both retaining interest and taking an account charge or fee on customers' cash (i.e. "double dipping") which may not be in line with the Consumer Duty and may result in firms causing foreseeable harm to consumers:

• The high percentages of interest retained are not in line with customers reasonable expectations and are therefore unlikely to amount to firms acting in good faith.

• Retention of interest by firms is not providing fair value to consumers (for example, if it significantly exceeds operational costs).

• The retention is not disclosed in a way that facilitates Consumer Understanding and may not meet the information needs of consumers. As a result, consumers are not equipped with the information to make decisions that are effective, timely and properly informed.

• Given the potential confusion caused by double dipping practices, the FCA does not consider that this demonstrates that a firm is acting in good faith, or that it is honest, fair and open, or that it is dealing and acting consistently with the reasonable expectations of customers.

The FCA expects firms to review their approaches to the retention of interest in light of these findings, ensure it represents fair value to customers and take action to address the FCA's concerns, as well as ceasing the practice of double-dipping. The FCA envisages reviews and uplifts being required, such as ensuring products are designed to meet the needs, characteristics and objectives of retail customers, ensuring customers can easily locate the information they need about cash balances in firms' communications and potentially updating terms and conditions to ensure the approach is accurately reflected. Additional communications may also be needed to discourage customers from holding large cash balances on platforms in the long-term.

The FCA expects firms to provide confirmation to the FCA by the 29th February 2024:

• Confirmation that they have ceased any double-dipping practices;

• Confirm any changes made to the rate of retention;

• Confirm that the firm has revisited its Fair Value Assessment,

• Evidence of any improvements made to disclosures; and

• A copy of the firm's terms and conditions outlining the treatment of interest on customer cash balances.  

Whilst the FCA's focus here is on investment platforms and SIPP operators, this may well have read across to wider firm types offering custody services with the FCA showing a "laser focus" on double dipping practices, expecting firms to be able to evidence how this represents fair value.

Many of you would have considered this as part of your fair value assessments for your custody services, but to the extent you haven't, this letter serves as an early warning that the FCA will look to intervene where fair value cannot be shown.

5. FCA Retail banking Consumer Duty multi-firm work - banks, building societies, and mortgage providers

The FCA published its findings from its retail banking Consumer Duty multi-firm work in which it reviewed 70 product journeys across 47 different firms, focussing on the approach firms followed to develop frameworks, apply methodologies and address the results and outputs of gap analyses. Whilst this is specifically focussed on banks, building societies and mortgage providers, the FCA states that the findings are relevant to firms in other sectors, indicating that there is real scope for learning across different industry areas. Some of the key areas the FCA flagged include:

• An example of good practice being the development of frameworks with clear expectations and / or user guides, some of which are mapped to the Consumer Duty Final Guidance, and outlined the end-to-end customer journey, as well as where reviewers were required to answer key questions linked to requirements within each outcome and provide evidence in the form of commentary or data points to justify their answer. Better frameworks were those that clearly identified the target market, including who the product was and was not suitable for.

• Firms which set baseline standards of good customer outcomes (for example, customer communications playbooks, pre-work gap analysis workshops or customer support criteria), which fed into these frameworks helped these firms to implement a consistent approach and supported the identification of gaps in processes and procedure.

• The FCA found that the range of data used varied between firms, with firms that used a range of data points (as opposed to a single source) were more able to consider different types of customers and outcomes. 

• Firms which have adopted a test and learn approach to their review of Consumer Understanding were seen to have adopted a good practice. This included firms identifying the area of the business responsible for the communication, which communications the consumer had used in their decision-making process and using a range of testing (such as controlled trials, experiments, surveys, interviews and focus groups) in order to review Consumer Understanding.

• The FCA saw evidence of some firms considering quantitative and qualitative factors to assess how products were performing throughout their lifecycle, taking into account changing market conditions and changing customer needs.

• Another example of good practice was firms that had clear plans in place to prioritise and address identified harms with timelines, ownership, a dedicated budget and mitigation plans.

• Interestingly considering the focus on this area, the FCA found that consideration of vulnerable customers was lacking in some firms' documentation

The FCA stated that the findings from this review will feed into its cross-sector work on how firms are meeting its expectations under the Consumer Duty, and reminds firms that it will continue to monitor how firms are meeting the higher standards expected by the Duty.

6. Dear Authorised Fund Managers ("AFMs") Letter on the FCA's Thematic Review of its Guiding Principles for ESG and sustainable investment funds

Following the publication of its Dear AFM letter on its Guiding Principles on the design, delivery and disclosure of ESG-related information in communications back in 2021, the FCA has published feedback of its multi-firm review of the implementation of these Principles into the fund disclosures of asset managers. The feedback has a big Consumer Duty focus, indicating that AFMs should have regard to the expectations that investors are likely to form of their ESG and sustainability products based on the way they are designed, delivered and the information disclosed about them, and whether these expectations are in line with the Consumer Duty. The FCA indicates that the Consumer Understanding outcome is particularly relevant for AFMs providing ESG or sustainability products, especially in relation to communications and the disclosures contained therein, focussing on whether fund and firm-level disclosures are reconcilable, the quality and accuracy of cross references and the oversight and control frameworks to identify, monitor and manage poor outcomes from unclear ESG and sustainability disclosures.

7. FCA Statement on communications in relation to PRIIPS and UCITS - Investment Companies

The FCA has published a statement setting out temporary measures to give investment companies greater ability to explain their costs and charges to help consumers make better informed investment decisions, in response to concerns that the current disclosure obligations are producing unhelpful cost information for consumers. The FCA indicates that these temporary measures are to support its objectives under the Consumer Duty to ensure customers receive the information they need, at the right time and presented in a way that they understand. The FCA has essentially allowed funds to provide a factual breakdown of the component parts of their costs to enable funds to provide additional context where they are concerned that the aggregate figure (as currently required under PRIIPS and UCITS) does not accurately reflect the ongoing costs. The FCA indicates that investment companies should consider how this is reflected in disclosures, and ensure that when doing so they consider their obligations under the Consumer Duty.

8. Dear Remuneration Committee ("RemCo") Chair Letter setting out the FCA's approach to remuneration for 2023/2024 - banks, building societies and PRA designated firms

The FCA has published a letter to the Chair of the RemCo for banks, building societies and PRA designated firms setting out its approach to remuneration for 2023/2024. This letter reiterates previous messages from the FCA, particularly relating to the FCA's expectation that remuneration links to positive consumer-focussed outcomes. One of the key focuses of the letter is the implementation of the Consumer Duty, and indicates while banks continue to transform their business in line with changing technology and customer behaviour, they should consider the impact changes to the services they offer will have on consumers, including vulnerable consumers. Interestingly, the FCA indicates that the RemCo Chair should consider how they can use risk metrics and performance criteria to inform individual and firm-wide remuneration decisions, including making remuneration adjustments if progress for embedding the Consumer Duty falls short.

9. FCA's update on cash savings - banks and building societies

In July 2023, the FCA published a review of the cash savings market, as well as an action plan to ensure banks and building societies pass rate rises to savers appropriately, communicate with customers more effectively and offer better saving rate deals to customers. The FCA has now published an update setting out how the market has developed, as well as where firms need to continue to make progress towards the expected consumer outcomes. The main focus of this update is how firms are demonstrating that their products are providing fair value to customers. The FCA requested 9 firms to provide it with their fair value assessments ("FVAs") for their lowest paying easy access savings accounts, with these assessments raising important questions about how firms assess value. As well as ensuring the FVAs are fit for purpose, the FCA also flags the ease and speed of customers being able to switch between products, the speed of reaction to base rate changes for some of the lowest paying products available on the market and proactive communications to customers in low paying savings accounts to consider alternatives. The FCA expects to see continued improvements from firms and confirms it will continue to work closely with firms over the next few months to ensure their assessments are fit for purpose.

10. FCA webpage setting out Consumer Duty expectations for firms offering fractional shares to retail investors

The FCA has set out its expectations under the Consumer Duty of firms offering fractional shares to retail investors. This is a significant and growing part of the consumer investment market in the UK, given that it enables consumers to invest in listed shares at a price point that fits their needs, where the price of a full share may be unaffordable. The FCA has reiterated that firms offering fractional shares must consider whether these products are delivering good outcomes for consumers, and sets out considerations firms should be taking into account under each of the four outcomes. This will include the consideration of the characteristics of fractional share models, such as any limits on transferability, when fractional shares will be executed, what fees and charges will be incurred by consumers and whether consumers understand if they will have voting rights or other shareholder rights, dividend income and ownership rights based on their fractional share holdings.

The FCA confirms that it expects firms to review their practices in relation to these products in line with this publication to ensure they comply with their obligations under the Consumer Duty.