Consumer Duty – Q1 2023
IndustriesFinancial servicesRegulatory InsightsFS Regulatory affairs newsletter - Q1 2023
Consumer Duty – Q1 2023
The FCA published a wealth of material in Q1 2023 to support firms’ implementation of the Consumer Duty in the lead-up to the 31 July 2023 deadline. There is a range of different FCA publications to get to grips with from podcasts to Live & Local events across the UK, as well as multi-firm reviews and Dear CEO Letters.
We have highlighted below the key findings from the FCA publications that firms must focus on over the coming months. Implementation plan - multi-firm reviewThe FCA published findings from a multi-firm review of Consumer Duty implementation plans. The findings provided a snapshot into the approach firms are taking towards implementation and examples of best practices to adopt. However, the FCA raised concerns that some firms are behind and there are instances where changes appear superficial or over-reliant on existing policies and processes. Governance and oversight Management should have established a robust governance framework to oversee the progress and delivery of the implementation plan. This should include clear executive accountability for delivery and named workstream leads. This will help management assess the deliverability of the plan, prioritise key workstreams and identify risks to delivery such as resource shortfalls. In addition, the FCA clarified that the board champion role should not be shared across an entire Board or executive due to the risk of diluting the role. Management should also look ahead to proactively identify opportunities with internal audit and compliance functions to plan ongoing assurance and independent reviews post-implementation. Culture and people There needs to be a sufficient level of detail in the plan to set out what tangible action will be taken in terms of training and people development. Role-specific training is essential and will need to be developed and rolled out before the Duty implementation deadline. It is also important for management to consider other methods for raising awareness of the Consumer Duty and how it will impact roles and the business strategy. Firm-wide communication campaigns, including spotlight articles and town halls, can help drive forward the message. Third parties Management must consider the impact of third parties in the distribution chain on the implementation of the Duty. Management should make sure that third-party relationships have been reviewed to understand any implementation dependencies and how third-party arrangements align with the Duty going forward. Management should also agree on an engagement framework for clear and regular communication with third parties, which sets out data and information-sharing expectations. Dear CEO LettersThe FCA published a series of Dear CEO Letters setting out key Consumer Duty messages for a range of financial services sectors. Whilst the letters are tailored to nineteen different sectors, there are common themes and areas of focus for firms to note. Cost of living crisis The FCA highlighted the increasing pressure on consumers’ household finances with rising energy bills, food prices and expenses. The crisis underlines the need for firms to have the right protections in place. This is to ensure that consumers can make informed and effective decisions despite increasingly complex and uncertain economic circumstances. |
What management should consider: Tailored support should be in place, particularly for customers in vulnerable circumstances, who may be especially impacted by the cost-of-living crisis. For example, firms should ensure that consumers fully understand the implications of consolidating debt into a mortgage and the impact of compounded interest. Management should have a keen eye on the results of outcomes monitoring and have sufficient oversight of the outcomes being received by customers and potential consumer behaviour changes. For example, firms will need to think carefully about the design, source, and delivery of the data and dashboards required to maintain oversight. Updated value assessments will also play an important role for management to assess whether retail customers are receiving fair value and can realise the full benefits from the products and services they have bought. The FCA highlighted that firms should not underestimate their high expectations regarding fair value assessments. |
Small and Medium Enterprises (SMEs) The FCA highlighted its interest in the treatment of SMEs. A large proportion of SMEs fall under the Duty. For deposit-taking activities, the Duty includes micro-enterprises, and charities with turnover of less than £1m. Loans or mortgages to any type of SME fall under the Duty if the product is within the scope of the Consumer Credit Sourcebook or Mortgage Conduct of Business Sourcebook respectively. |
What management should consider: Management should ensure that at the start of the product lifecycle, products and services are designed with the target market in mind. This includes considering how the design will impact SME customers. For example, the FCA highlighted that business current accounts can have complex account charging structures and opaque pricing. In conjunction with a low level of consumer engagement and switching, this can lead to poor outcomes for SME customers. Management should be aware of the risk that SMEs may require different support options. It should utilise outcomes monitoring insights to assess whether SMEs experience systemically inferior outcomes than other cohorts of retail customers. |
Unique Selling Points (USP) There is a wide range of terms firms may use in financial promotions to describe their products or services or appeal to different target markets. There is a risk that some firms overstate the produce features in these financial promotions. If this occurs, it will likely breach the cross-cutting rule to act in good faith. |
What management should consider: Firms should review their financial promotions and consider the language used during direct retail customer interactions to understand whether it accurately reflects the way the products are designed and operated in practice. The use of words such as ‘ethical’, ‘socially responsible’ and ‘green’ is important and should not be included where the true performance of the product does not match the claim made. Management could also be aware of the FCA’s proposal to add a general ‘anti-greenwashing’ rule to the ESG sourcebook for all FCA-regulated firms, products and services. Whilst there is a lot of new material to keep track of, it is important to recognise that the FCA expects firms to view their implementation plans as live documents. Further iterations of the plan will be required as we approach the deadline to accurately reflect progress updates and raise any emerging issues regarding the deliverability of the plan. |
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Sarah Ouarbya Partner - Risk and Regulatory Consulting London
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