Consumer Duty View - February 2024

As we inch ever closer to Spring, we've seen a flurry of activity from the FCA on all things Consumer Duty. This is apt timing as distributors may be preparing to share information with manufacturers and focus turns to Annual Board Report and closed product implementation both due at the end of July. We therefore bring you another bumper edition of Consumer Duty View, including examples of good practice and areas of improvement identified by the FCA in relation to their early supervisory work in relation to implementation, identified via a new webpage and through the FCA's Autumn survey and a summary of the Asset Manager Portfolio letter which includes Consumer Duty points for managers to consider.  

There are also some interesting nuggets from FCA speeches, including challenges firms are seeing in relation to closed products and the FCA's expectations in this area ahead of the implementation deadline of 31^st^ July this year. We've also included some FCA industry-specific updates, given that the findings and expectations included are useful for the wider industry.

1. FCA's new webpage including good practice and areas for improvement in relation to Consumer Duty implementation: ACTION FOR ALL FIRMS REQUIRED

This webpage is critical for all firms to review and action. The examples cite particular markets or products, but firms of all sizes across the market will benefit from considering them.

The FCA has published a new webpage highlighting good practice and areas for improvement for firms in relation to the implementation of the Consumer Duty. The findings are grouped into six categories based on the four outcomes as well as culture, governance and monitoring and consumers in vulnerable circumstances. This is certainly a helpful source for firms who are currently focused on embedding the Duty post go-live in July 2023 for open products, implementing closed products and preparing their annual report by due 31 July 2024.  The good practice examples and areas of improvement cover a wide variety of areas and raise some interesting points. In particular, around Board level involvement, expectations around MI, sharing information effectively across the distribution chain, ensuring products align with investor's risk profile and level of complexity, systems and controls and staff training.

You can find a detailed overview of the key highlights in our publication here

Next Steps

• Benchmark and Reflect: Evaluate your firm's practices against the good practice examples. Celebrate wins and identify gaps (with a clear plans to address them or justify why no action is required).

• Continue to make improvements: the Duty isn't a mere compliance checkbox. It expects a fundamental shift in mindset and practices to be customer-outcome focused. The FCA's findings sheds light on both positive progress but also critical gaps in the implementation landscape so far. This should allow firms to continue to make improvements in line with good practice and continuously address issues that risk causing consumer harm.

• Stay Ahead: The 31 July 2024 deadline for closed products and services looms. Use the FCA's findings to fine-tune your approach to closed product implementation.

2. FCA Speech - The art of the possible in a year

A small pat on the back to firms from the FCA, indicating in a speech given by Sheldon Mills, FCA Executive Director, Consumers and Competition that firms have made "solid progress" in many areas of the Consumer Duty. The FCA indicates that it is seeing evidence of good practice, whether this is through firms offering the right products and services to the right customers, improving the language used in communications or offering customers less bespoke and cheaper options where this is a better fit, as well as evidence of Board members considering how the Duty is being embedded into the culture and operation of the firm. It's not all gold stars though, with the FCA confirming that work is still needed, focussing in particular on data and fair value assessments and ensuring firms are relying on solid data and other credible evidence to demonstrate that the consumer is deriving real value from the product compared to the price paid, as opposed to simply benchmarking against the market.

The FCA's attention is also on the implementation deadline for closed products, with the FCA pointing to the main challenges firms are facing in anticipation of the upcoming deadline and the FCA's expectations, focussing on five main challenges:

• Gaps in customer data: Many firms are finding that they have out of date or incomplete client information, which makes it harder to assess whether good outcomes are being delivered, especially in relation to vulnerable customers. The FCA states that where a firm cannot fill an information gap, it should take additional steps to mitigate the risk of harm being posed to customers, such as implementing enhanced outcomes testing.

• Determining fair value: Firms must be able to demonstrate that a closed product is providing fair value, although the FCA notes that firms can take into account costs and benefits incurred before the implementation of the Duty when carrying out this assessment. Whilst the FCA confirmed that it will not judge a firm with the benefit of hindsight, it will consider whether a firm complied with the rules that were in place at the time, especially if the firm could have known that any assumptions made in relation to aspects such as life expectancy or economic conditions were significantly wrong at the time the product was sold.

• Less engaged customers: This raises issues such as customers paying for products they no longer want, or that they are no longer eligible for, or customers being unaware of changes made to a product. Whilst the FCA notes this is not a new problem, it expects firms to go further to ensure customers are receiving good outcomes, including communicating more effectively, and testing their approach to communications to ensure this is driving the right outcomes.

• Vested rights: Where a firm imposes annual fees or exit charges, firms will be required to assess whether this leads to poor outcomes for consumers, such as the fee being significant and undermining the benefit of the product, and take action to mitigate the harm. This action may involve giving up the vested right, reconsidering the fees or providing clearer communications around other available products and how to switch.

• Withdrawing closed products: The FCA is aware of firms who intend to withdraw closed products and migrate customers to alternative open products. The FCA indicates that firms should ensure they are considering any impacts this could have on consumer outcomes and any foreseeable harms this could cause.

Please do reach out to us with any questions you may have in relation to the implementation of the Duty for closed products.

3. FCA's Autumn survey on the implementation of the Consumer Duty

The FCA has published the results of a survey carried out in November 2023 of 634 firms which looked at how prepared firms were for the implementation deadline for open products, with a particular focus on smaller firms (i.e. those with 1 - 49 employees). This forms the second of three reviews, taking place 6 months after the first in Spring 2023. The aim of the survey is to understand the progress made since Spring 2023 in complying with the Consumer Duty, which aspects of the Duty firms are finding difficult and what changes firms are making in response to the Duty.

Some of the key findings of the survey were:

• The number of firms reporting that they have completed the required steps to implement the Duty has increased significantly, with 43% of firms surveyed reported that they were not having difficulty with implementing any aspect of the Duty.

• Sectors which were behind in their preparedness when reviewed in Spring 2023, such as Retail Finance Providers and Debt Advice Firms were closer in their implementation actions to other sectors, which the FCA indicates shows the benefits of targeted engagement.

• 74% of firms reported that they had conducted a fair value assessment of every product and service, 69% had assessed the needs of consumers with characteristics of vulnerability and 75% of firms had reviewed their communications to ensure they support the consumer understanding outcome, with 19% of firms amending or withdrawing communications as a result.

• Outcomes monitoring was identified as the most difficult aspect of the Consumer Duty to implement.

• 38% of firms improved significant consumer contracts and 30% of firms identified or made significant improvements to their marketing strategy.

The FCA indicates that it will continue to work to check firms are fully embedding the Duty, including via thematic work considering issues and harms arising in specific sectors, multi-firm work within sectors based on common themes and risks and interventions in relation to specific firms where there are concerns around their approach.

4. FCA Speech - How consumer-facing technology can help keep consumer markets honest

Bringing together perhaps the two main focus areas of the regulators, AI and Consumer Duty, the FCA has published a speech given by Nikhil Rathi, Chief Executive of the FCA,  around how technology can be best adopted to benefit consumer markets. In the speech, the FCA outlines two scenarios: the first being a "hyper-digitalised, super-personalised" full technology integration option, and the second based on incremental progress but with little extra innovation. In relation to the first option, the FCA sees a number of benefits from a retail customer perspective, including:

• The ability to tailor products and services which could provide real improvements for consumers;

• Lower costs, which enables services and products to be more easily provided to financially excluded customers;

• Increased competition, which lowers barriers to entry and allows challengers to enter the market. This would enable easier switching, and encourage firms to tailor products and prices to individual customers characteristics due to increased competition between firms; and

• A greater variety of firms offering financial services, as opposed to incumbents.

The FCA points to a number of risks with the second option, such as Big Tech avoiding the regulatory sphere, meaning their data is not captured by financial firms, and incumbent firms becoming reluctant to incorporate tech into their businesses, resulting in limited personalisation which hinders good customer outcomes. The FCA is of the view that technology can be used to the benefit of the Consumer Duty outcomes, by helping firms gain a better understanding of consumer needs, assisting with data accessibility, and ultimately promoting financial inclusion, innovation and security.

The FCA believes it can allow innovation in AI without excessive regulatory intrusion, given the outcomes outlined in the Consumer Duty and accountability mechanisms under the Senior Manager Conduct Regime, with the expectation that firms will have the governance in place to fix any issues as and when they arise.

5. FCA stops thousands of misleading advertisements and promotions

The FCA has been busy... 10,008 financial adverts and other promotions were withdrawn or changed in 2023 following FCA intervention over whether they were clear, fair and accurate to enable retail customers to make informed financial decisions. This is an increase of 16.6% compared to 2022. This action is underpinned by the requirement under the Consumer Duty for firms to demonstrate that they are providing consumers with information which helps them make effective and informed decision about products and services. The FCA also published 2, 285 alerts to help consumers from losing their money to scams, compared to 1,800 in 2022.

Industry specific updates

1. Financial Advisors: FCA requests information from financial adviser firms about delivery of ongoing advice services

Back in December 2022, the FCA sent a letter to financial adviser firms setting out its concerns that they were not adequately considering the relevance, nature and costs of ongoing services for all of their clients. Following the implementation of the Consumer Duty, and the expectations set out in the portfolio letter sent to the sector in January 2023, the FCA has now written to around 20 of the largest financial advice firms asking them to provide information about their delivery of ongoing services.

The survey asks if firms have assessed their ongoing services in line with the Consumer Duty, and whether any changes have been made as a result. Building off its concerns that customers may be paying for a service, such as an annual review, but not receiving it, the FCA asks for details on the number of clients due a review on the ongoing suitability of the advice as part of the service, how many received that review, and how many paid for ongoing advice but whose fee was refunded as the suitability review did not happen. The FCA indicates that it may carry out further work in this area subject to firms' responses.

2. Mortgage lenders: FCA launches working group on interest-only mortgages.

In August 2023, the FCA confirmed that it was carrying out a review of its finalised guidance published in August 2013 on dealing fairly with interest-only mortgage customers (FG 13/7) to ensure the guidance is in line with the higher standards set by the Consumer Duty. As part of this review, the FCA has established a working group composed of 12 mortgage lenders and administrators with the purpose of supporting and informing the review of the guidance, to ensure firms are providing appropriate support for interest-only borrowers who may otherwise be at risk of not being able to repay.

The working group will review the current FCA guidance in light of the FCA's research findings, firms' experiences and the implementation of the Consumer Duty, as well as reviewing current follow-on mortgage products and solutions to consider whether further innovations could be beneficial. The FCA confirmed that it will collect views of consumers separately.

3. Insurers: FCA requests insurance firms pause sales of Guaranteed Asset Protection Insurance

Following a warning in September last year asking them to take immediate action to prove customers are receiving fair value, the FCA announced that it has come to an agreement with insurance firms to pause the sales of Guaranteed Asset Protection insurance, (which typically covers the difference between (a) a vehicle's purchase price or outstanding finance; and (b) its current market value in the event of a total loss under the customer's motor insurance), on the grounds that the product is not providing fair value to customers. This follows the FCA's findings that only 6% of the amount customers pay in premium for GAP insurance is paid out in claims and that commission levels to downstream distributors can be as high as 70% of the gross premium paid by the policyholder.

This demonstrates the FCA's focus on ensuring customers are receiving fair value for the product or service, and as a result the insurers have committed to make changes to their GAP products to provide better value to customers. The FCA confirmed that it intends to carry out a second engagement with the GAP market with the aim of improving fair value of the product across all firms.

4. Claims Management Companies ("CMCs"): FCA's key findings from multi-firm review

Following the FCA's portfolio letter to CMCs in January 2023, and its concern that consumers were wrongly assuming that all claims management company activities were regulated, the FCA carried out a multi-firm review to assess whether they were using their FCA authorisations to legitimise unregulated activities. The FCA has now published its findings, which found that firms had:

• Inadequate systems and controls to distinguish between regulated and unregulated activities. The FCA expects firms to be clear with consumers about which services are regulated and which are not.

• Charged significantly higher fees for unregulated claims activities. The FCA urges firms to consider the Consumer Duty, including whether the services they are providing represent fair value for the consumer when considered against the benefit they receive. 

• Issued non-compliant financial promotions. The FCA expects CMCs to make it clear in communications that the services that a consumer is agreeing to use are not regulated, and ensuring the terms and conditions of their unregulated services are clear and fair.