Dr Matthew Connell reports on the latest developments on the road to implementation of the Consumer Duty
The Financial Conduct Authority’s (FCA) launch of the final Consumer Duty rules and guidance in July 2022 was greeted with a huge amount of interest. It was the first major piece of regulation to come out after the pandemic and significantly increased the scope of conduct regulation, especially in the areas of communication and service for consumers.
Although the launch of the Consumer Duty rules feels relatively recent, we are already halfway along the road to implementation for all products and services that are on sale or open for renewal. Firms must be fully compliant for these products and services by July 2023. By July 2024, the Consumer Duty will apply to all closed products and services.
One question firms can ask themselves is whether they are applying the same consumer support standards to deliver good consumer outcomes as they are to generate sales and revenue
So, what should firms have already done in preparation for the Consumer Duty and what should they be doing in the spring to ensure they are meeting the FCA’s expectations?
Where firms should be now
In July 2022, the FCA said it expected firms to have an implementation plan ready by the end of October. Although this plan did not have to be an exhaustive list of actions needed to comply with the Consumer Duty, it should have set out an overall approach to the four key consumer outcomes:
- Products and services.
- Price and value, where “firms should avoid designing products and services to include elements that exploit consumer lack of knowledge and behavioural biases to increase the price paid”.
- Consumer understanding.
- Consumer support – this requires firms to “enable consumers to get what they paid for… without unreasonable barriers”.
As we move into the second half of the implementation period, it is important for firms to have evidence that they have considered what they need to do to meet the new standards, that they have documented who is carrying out specific actions to meet those standards and how far along they are to completing those actions.
Products and services
For products and services, a useful place to start is the product intervention and product governance sourcebook (PROD) rules. The FCA says: “The PROD rules apply to investments [and] insurance... Our proposals aimed to provide a level playing field in all sectors, raising standards in those sectors to which the current rules do not apply… We agree it would be proportionate for firms to comply with the existing rules to satisfy this outcome, as we consider the existing rules meet our expectations.”
As a result, a review of a firm’s existing compliance with PROD rules is an essential part of preparing for the Consumer Duty. The review could be based on this high-level steer from the FCA: “Advisers (as distributors) will need to consider, among other things, the rules around information sharing between distributors and manufacturers. For example, advisers will need to gather information from manufacturers on the products on which they intend to advise; and they should consider how best to feed information back to manufacturers on how the product is meeting the needs of the target market to help with the manufacturer’s regular product reviews. These information flows may be made more effective by contractual provisions between advisers and manufacturers covering the exchange of relevant information.”
Where firms can show that they have considered their responsibilities under the PROD rules in the run-up to the Consumer Duty and they have taken action to ensure that the “information flows” are still working to product good consumer outcomes, they can be confident that they are in a strong position to comply with the products and services element of the Consumer Duty.
Price and value
The price and value element is likely to be a more demanding challenge for firms. Firms should bear in mind that the Consumer Duty does not apply at the level of the individual client, but on the level of client segments. The FCA says: “Our expectations apply based on what is reasonable. We do not expect firms to exhaustively segment their customer base to identify differences in outcomes between all possible groups of customers.”
The key evidence that firms need to be ready to present for the price and value element of the Duty is:
- How they segment their clients.
- Which goods and services are relevant to those clients and which are not.
- What kind of monitoring takes place to ensure that clients are being put into an appropriate segment.
For example, many clients – perhaps the vast majority of clients – need ongoing advice to adapt to their changing circumstances and to a changing economic and fiscal environment. However, the FCA will expect firms to be able to explain why a certain proportion of clients need ongoing advice and, if the proportion is 100%, the FCA will be looking for a very robust explanation.
As the FCA says in a recent Dear CEO letter: “Consumers should receive a value for money service where an ongoing service is offered. The new Consumer Duty requires firms to ensure the service offered is appropriate for the client’s circumstances, is delivered within the terms of the agreement and is at a cost that is fair value. We are concerned firms are not adequately considering the relevance, nature and costs of these services for all their clients.”
Consumer understanding
The consumer understanding principle will also require thought and attention from firms. The FCA has made it clear that this does not mean firms must “verify that all individual consumers have in fact understood the information provided”. However, it does expect firms to “test, monitor and adapt communications to support understanding and good outcomes for customers”.
Firms should be able to show evidence that they have designed a system for testing consumer understanding – especially for consumers who may be in a more vulnerable situation because of health, life events, low levels of financial or emotional resilience, or low levels of financial capability. They should also be able to show that they at least carefully considered the way they communicate in response to this information.
Customer support
Finally, the customer support element is a key element of the Consumer Duty, and arguably expands the scope of FCA regulation further than any other aspect of the principles and rules.
However, it suggests: “One question firms can ask themselves is whether they are applying the same consumer support standards to deliver good consumer outcomes as they are to generate sales and revenue.”
Given the importance of vulnerability in delivering good outcomes on consumer understanding, it is important that firms of any size ensure that they have access to diverse perspectives on consumers’ experience.
As the FCA says in its recent letter to CEOs in the advice sector: “We recognise the sector has taken some steps forward on diversity and inclusion. But there is much more that needs to be done to create truly diverse and inclusive organisations that meet the diverse needs of those they serve.”
For the smallest firms, this may not mean recruiting new members of staff, but it could mean seeking out perspectives on investment and retirement from a wide range of different groups, for example investors who are experiencing issues with their mental health.
The Consumer Duty covers every aspect of firms’ contact with clients and so preparing for compliance can be daunting. However, if firms think carefully about every aspect of the Consumer Duty and take steps to address the issues raised, they will be in a much stronger place to show that they have complied with its principles by July this year.
Dr Matthew Connell is policy and public affairs director of the CII
