Consumer Duty View - September 2024

Welcome to the September edition of Consumer Duty View! We hope you had a chance to relax and enjoy the sun over the summer, especially after the push to finalise board reports at the end of July.

As mentioned in our Flash View, the FCA announced a new Call for Input on 29 July 2024 in order to identify Handbook rules which could be removed or simplified if they overlap with the Consumer Duty. We are aware that there is a lot of industry discussion ongoing within different sectors, with many firms seeing this as an opportunity to provide feedback on their pain points. We have set out more details on this Call for Input further below, but please reach out to us if you would like to discuss further.

This edition covers the various developments in this space over the summer, which we hope will be useful as you start to plan for the year ahead.

1. FCA reflects on one year of the Consumer Duty

On 31 July 2024, the FCA hosted a webinar to mark the one year milestone of the Consumer Duty coming into force for new and existing products. The FCA covered the impact the Duty has had in the first year, examples of good practice and areas for improvement and its priorities for the year ahead. Speakers on the panel included key representatives from the FCA (including from Competition, Enforcement & Market Oversight and Authorisations), and also the Financial Ombudsman Service (‘FOS’).

The FCA made clear that the Consumer Duty cannot eliminate all risk for consumers, and must be balanced against the aim to increase competition and innovation for the UK globally. The FCA emphasised that their intention was to empower consumers to ensure they have the right information to make the best decisions for their risk appetite.

Our key takeaways from the session are set out below:

• Creating a customer centric culture at firms: The FCA emphasised the importance of aligning firm culture with customer interests, at every level of the business. This includes when designing products and providing customer service in relation to those products. The Duty is an ongoing consideration that needs to be culturally embedded within firms, rather than a single implementation exercise.
• Leveraging board reports: The boards of firms should use the recent board reports to challenge the business and work towards the change envisaged by the Duty. The FCA referred to their recent publication on good and poor outcomes monitoring for the insurance sector – see item 4 below for our summary of this.
• Knowing your target markets: It is essential that firms understand their target markets, including segments within this market, as well as their individual characteristics and needs. In particular, firms should be able to articulate how the characteristics of the firm’s products (e.g. duration of the product and exit fees) are compatible with their target market – this was drawn out in relation to applications for authorisations in particular.
• Proactive, flexible customer service and complaints resolution: The FOS highlighted the need to be flexible about complaints processes and produce solutions or adjustments, rather than rigidly sticking to procedure. Whilst complaints resolution has become faster post-implementation of the Duty, there is still room for improvement here and in relation to customer service. Firms should analyse complaints data to proactively target and resolve flaws in their service provision.
• A collaborative approach from the FCA: The FCA reassured attendees that they intend to take a proportionate approach to supervision of the Duty at this stage. Where firms are identified by the FCA to be clear outliers in their approach, an explanation may be required for this or the FCA can otherwise request changes to their practices. Failure by the firm to respond positively and constructively may lead to FCA intervention.

We can expect to see the FCA’s grid of Consumer Duty work later this year, which will outline their future programme of work. In particular, the FCA set out the following areas of future focus:

• Price and value: Whilst the FCA does not set prices, it is keen to ensure that firms are properly assessing whether they provide fair value to consumers and taking actions where they are not to address and reduce customer harm.
• Post-implementation review: The FCA has indicated that they are planning to conduct a post-implementation review of the Consumer Duty within the next two years to assess “what has worked and what hasn’t". Note that this is separate to their recent Call for Input, which instead focuses on streamlining existing retail conduct rules which overlap with the Duty.
• Thematic work: The FCA expects to continue thematic, sector-specific work by providing targeted requests for information.

2. FCA requests Consumer Duty Board Reports and supporting information from a sample of firms

The FCA has requested information from a sample of firms about how they monitor and ensure good outcomes for customers. This request for information (‘RFI’) is in line with the FCA’s previous indication that they will review a sample of Board Reports and aim to share insights on good practices and areas for improvement in relation to monitoring customer outcomes under the Duty.

The RFI that went out to firms requested:

• A copy of the firm’s Consumer Duty Board Report;
• Supporting information used by the Board during their assessment of their firms’ implementation of the Duty;
• Evidence of the Board’s approval of the Report, such as board minutes and discussions of the Report’s content, findings and recommendations;
• The action plan agreed by the Board to improve on any poor outcomes or risks identified during the Board’s review; and
• Whether the relevant firm has needed to change its business strategy as a result of the Board’s review.

Firms which received this RFI were requested to provide this information by 2 September, meaning we may expect to see the results of their assessment sometime later this year.

3. EU Retail Investment Strategy – trilogues to commence

You may have seen the EU Retail Investment Strategy (‘RIS’) moving up everyone’s agenda. Some RIS proposals mirror the principles of the UK Consumer Duty, presenting a significant challenge for firms operating in both the UK and EU to adapt to the evolving retail investment environment. Given the overlap, we think it is important for firms to start engaging with this at this stage.

What is it? - The RIS comes as part of the EU Commission's long-rumbling 2020 Capital Markets Union Action Plan ('CMU Plan'), the stated aims of which are to improve access for retail investors to financial markets, at the same time as ensuring investor protection. The RIS is the first major proposal to come out of this edition of the CMU Plan and it has not been without controversy, especially on the topics of inducements and product governance. The changes propose to amend MiFID, IDD, AIFMD, UCITS, Solvency 2 and PRIIPs.

To date, we have seen the Commission (in May 2023), EU Parliament (in April 2024) and EU Council (in June 2024) publish three divergent RIS proposals, covering a number of key areas including:

• Inducements
• Value-for-money/Benchmarks
• Regulatory powers
• Suitability/Appropriateness
• Professional client categorisation
• Timing for implementation of the final RIS provisions

When? - With all three EU bodies’ positions now in place, the stage is set for trilogues to commence in October 2024. This will involve the Parliament and Council (and to a lesser extent, the Commission) bringing their respective positions to the table, debating and ultimately agreeing on a final RIS “compromise” text to be adopted as the main RIS level 1 legislation. We expect that this will take place in H1 2025 at the earliest. Further underlying legislation/guidance will then follow.

It’s also worth mentioning that the broader political environment could impact on the direction of travel of trilogues. As you may be aware, the EU Parliament elections in June yielded a strong result for far-right parties, and Hungary (a politically (far) right government) currently holds the EU Council Presidency until 31 December 2024. Could this political shift towards the right see trilogue outcomes favouring Member State sovereignty (possibly more national gold-plating provisions) over EU-prescriptive rules? We don’t know for sure as yet, but we continue to monitor all of this very closely.

We continue to monitor developments closely and will keep you updated. You can find lots of information about the RIS proposals, our views and podcasts by visiting our RIS Hub Page.

4. Thematic review of good and poor outcomes monitoring under the Consumer Duty in the insurance sector

Whilst this review relates to the insurance sectors, firms across the market will benefit from considering these insights in relation to their outcomes monitoring / board reporting processes.

On 26 June 2024, the FCA published their thematic review of good and poor outcomes monitoring by insurers under the Consumer Duty. The review was based on a sample of Board and Committee reports and focussed on how insurance firms adapted and used monitoring to detect and improve outcomes.

The publication is comprehensive and covers the following areas for consideration:

• Design of monitoring approaches: Firms should have a comprehensive suite of metrics and a clearly articulated approach to identifying foreseeable harm. Firms should avoid reliance on monitoring process completion metrics (e.g. number of value assessments completed) and focus on consumer outcomes.
• Data types: Firms should use a variety of different outcomes driven data types, including those covering trends, RAG, qualitative and quantitative data. Firms should develop frameworks to test customer outcomes. Firms should consider if the data they have is sufficient for customer outcome monitoring, as the FCA found that some firms’ data strategies were largely based on repackaging existing data.
• Interpretation and scrutiny: Firms should integrate second line scrutiny of outcomes monitoring through the risk control and internal audit functions, in order to provide challenge to the first-line owners of customer outcomes. The FCA also commented positively on firms which established tolerances for each metric, ensured firm governance on the level of these tolerances and implemented annual scrutiny. The publication also provides examples of poor practice where data used was unlikely to facilitate scrutiny or challenge.
• Different customer groups monitored: Firms should measure outcomes with differentiated data across different subsets of customers, including those with characteristics of vulnerability.
• Actions taken to improve poor outcomes: Firms should use a broad range of datapoints in order to identify outliers, conduct deeper analysis of these and therefore improve outcomes. One example cited included the use of complaints analysis, customer journey time MI and survey feedback.
• Four outcomes: The publication also sets out the FCA’s findings specifically in relation to monitoring products and services, price and value, consumer understanding and consumer support, including the metrics / data monitored under these outcomes.

Next steps

• All insurers, insurance intermediaries and outsourced service providers operating within the insurance sector should consider these findings, including the good and poor practice observations. Firms that identify gaps in their compliance with the FCA rules should act immediately, putting robust plans in place to address any shortcomings.
• The FCA also states that retail financial services firms in other sectors may find these observations useful. We think such firms should consider this publication where looking to identify gaps or make improvements to their outcomes monitoring processes in the year ahead.

5. Thematic review of product oversight and governance in the insurance sector

On 21 August 2024, the FCA published a further thematic review relating to the insurance sector, this time in respect of product oversight and governance. The FCA was disappointed to observe that many insurance firms were failing to meet their product governance obligations under PROD 4, with the associated consumer harm this potentially entails. Specifically, manufacturers are failing to assess and evidence their provision of fair value and good outcomes, whilst distributors are failing to obtain sufficient information on distribution strategies from manufacturers, nor consider the effect of their own remuneration on product value.

PROD 4 relates to insurance products and is not applicable to other types of financial products. However, the FCA notes that it is closely aligned with two Consumer Duty outcomes: (1) price and value, and (2) products and services, so other financial services firms may find the report interesting.

Key findings made by the FCA during their review include:

Manufacturers

• Product oversight and governance arrangements: Many product governance frameworks did not provide the appropriate level of challenge and oversight required under PROD. This meant firms could not adequately evidence robust challenge, clear judgments supported by evidence in their product reviews and the FVAs, appropriate MI and analysis and proactive identification of products with value problems and action to address them.
• Fair value assessments, regular product reviews and ongoing monitoring: There were shortcomings in quality of the FVAs undertaken by many firms. This included firms not adequately considering the total price paid, including the impact of remuneration on the overall value of the product. Furthermore, firms did not have sufficient MI to monitor distributors’ remuneration and ensure that it was consistent with providing fair value to customers, and to identify fair value problems (including where these were apparent). We are considering the impact on other manufacturers (e.g. structured notes and asset managers) and the potential read across from this paper.
• Target markets: Firms need to be more granular regarding the risk tolerance and appetite of their customers as this was sometimes not detailed enough to ensure the distributor was considering the customers’ objectives, interests and characteristics.
• Co-manufacturing: Some manufacturers are either not meeting their co-manufacturing obligations or do not have co-manufacturing agreements that are PROD compliant. An intermediary should only be considered a co-manufacturer where the intermediary is itself responsible for determining essential features and the main elements of the product. Each party should understand and meet their own obligations - the insurer cannot allocate full responsibility for PROD compliance to an intermediary.
• Distribution arrangements: These arrangements, alongside choice of distributors, should be considered in the context of the product and its target market and firms should be able to demonstrate how these are consistent. Many firms were also not providing appropriate and timely information to distributors.

Distributors

• Product distribution arrangements: Firms need clearer governance structures and processes to make responsibility clear and provide rationale and evidence for key decisions, including any actions taken where issues related to value are identified. Many firms had product distribution arrangements without enough detail and a lack of effective processes to get appropriate information from the manufacturer to allow them to understand the target market, distribution strategy and the product’s intended value.
• Target market: Target markets of distributors were sometimes mismatched with the manufacturer’s target market, meaning the products were possibly being sold to customers outside of the target market with a resulting risk of harm.
• Distribution strategy: Many distributors failed to comply with their PROD obligations in this case - many shortcomings were partly due to manufacturers failing to provide adequate information to distributors to help them ensure the distribution strategy was aligned to their own and to the identified target market.

6. Call for input from the FCA on streamlining of retail conduct rules

As mentioned in our recent Flash View, the FCA announced a new Call for Input on 29 July 2024. This Call for Input aims to identify retail conduct rules which could be streamlined or removed in light of the Consumer Duty. In doing so, the FCA aims to reduce compliance costs, facilitate the move to outcomes-based regulation and simplify the rules. The FCA argues that reliance on high-level standards tends to support better flexibility and innovation, and greater futureproofing.

The Call for Input has requested views on:

• Detailed rules/guidance which could be replaced with high-level rules;
• How simplification might affect the FCA’s statutory objectives;
• The balance between detailed and high-level rules;
• Possible benefits and costs of rule simplification; and
• Potential consumer impacts.

The scope of the Call for Input is broad – the FCA also asks for feedback on areas of the Handbook or Non-Handbook guidance beyond those where there is overlap with the Duty. For example, due to the changes in the way business is now transacted, the FCA appears to recognise that certain existing rules may be redundant.

Firms should now assess any rules affecting their retail business lines which they think may benefit from simplification. Overlapping rules cited by the FCA include, for example, the provisions in DISP which relate to firms taking action in response to identified consumer harms (similar to the PRIN Consumer Duty requirements). More detailed rules will continue to be relevant in certain areas (the FCA gives PROD as an example), for example to ensure regulatory certainty, standardisation and to maintain consistency on an international level.

Responses are due on 31 October 2024, with industry engagement expected in Autumn 2024 ahead of a follow-up publication – potentially a Consultation Paper – in early 2025. Please do let us know if you would like to discuss your response and approach to the Call for Input.

7. FCA continues restrictions on wealth management firm owing to its failure to deliver good client outcomes

On 31 July 2024, the FCA issued a Second Supervisory Notice to wealth management firm London Stone Securities Limited – this was following serious concerns about the firm not delivering good client outcomes. The restrictions, which were initially imposed in April, prevent the firm from undertaking any regulated activity, charging further fees to existing clients and taking on new clients. The firm was also required to withdraw all financial promotions and keep assets in the business.

The firm’s non-compliance is in respect of its obligations relating to its financial promotions and marketing and communications with clients and fees charged to clients – the FCA cites the rules in COBS, GEN, Principle 6 (Customers' Interests) and Principle 12 (Consumer Duty) in its findings.

In particular, the FCA highlighted the following concerns:

• Poor disclosure of charges and service terms: The firm did not ensure that clients received charge disclosures, or agreed to these in advance. Onboarding was found lacking: a review of related documents showed that the service and fees disclosures were unclear and at times no agreement as to a client’s service level could be found.
• A failure to provide fair value: The firm’s charges were excessive and unjustified, without a reasonable relationship to the benefits received by clients. The FCA highlighted in particular the charge of inactivity fees, commission and annual management fees and that firms should not impose charges which make customers less likely to leave unsuitable products/services. Firms should also not take advantage of a customer’s lack of knowledge in order to impose unfair charges.
• Non-compliant financial promotions: The firm had issued non-compliant financial promotions which targeted elderly, disabled and vulnerable clients. For example, these promotions potentially misled customers by emphasising the firm’s regulated status in relation to their products/services. Information provided on fees was also misleading due to inconsistencies across their website. The FCA consequently required the firm to remove all of their financial promotions.
• Communication with the FCA: The FCA was concerned that the firm had not been open or honest in its communication with the regulator. The firm had provided the FCA with inconsistent information as part of a wealth-management sector survey. For example, they had named 5% of portfolio value as the maximum charge it imposed – whilst the FCA found some fees of over 65% of portfolio value had been charged.
• Vulnerable customers: Some clients were vulnerable, disabled or elderly, meaning that the non-compliant financial promotions and poor explanation of service terms were even more potentially harmful. Most of the firm’s clients were rated either low or medium risk and were generally aged 60 years or over. The information provided to the FCA sector survey (on composition of the firm’s client base and the number of vulnerable customers) was also inconsistent with other firm data.

8. Final Policy Statement on access to cash

On 24 July 2024, the FCA published their final Policy Statement PS24/8 on access to cash, with the new rules set to come into force on 18 September 2024. The new rules require those in scope to (i) assess gaps in their provision of cash; (ii) evaluate local needs; and (iii) promptly make cash access services available where this analysis indicates there are significant gaps in cash access provision. Firms subject to these rules are those designated by the Treasury (the list can be found here), which includes a number of large retail banks and building societies.

The new rules aim to ensure reasonable provision of cash and are set against the wider background of increasing bank and building society branch closures across the UK. The FCA is particularly concerned about ensuring the needs of local communities are met and that customers with vulnerable characteristics are not left without means of payment. The Policy Statement therefore aims to keep methods of payment reliable and inclusive, especially where payments are increasingly becoming digitised.