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Considerations for CCA lenders for the implementation of the Consumer Duty

03 August 2022

Have you read our previous articles providing an overview of the required risk analysis and our recommendations of how to assess outcomes when implementing the Consumer Duty in your organisation?

Read our previous articles:

There are, though, other important consideration to bear in mind when implementing the Consumer Duty:

1. Resources

These will never be unlimited, but they will need to be adequate to ensure implementation can be completed within the tight timetable set by the FCA. Those who cannot meet the deadline will need to tell the FCA. Longer term, the FCA have stated clearly that compliance with the Consumer Duty must be treated as being on a par with the generation of sales and revenue.

2. Monitoring

The FCA are not (yet) requiring specific data returns. However, they have stated that firms must have annual board reports, gather such MI as is necessary to demonstrate compliance, and ask themselves specified Key Questions. The FCA have also stated that relevant information/documents must be made available on demand, and that they intend to increasingly rely on data to inform their activities. As such, it is more than likely that copies of board reports, monitoring MI and the Board's answers to the Key Questions will be increasingly demanded by the FCA on an ad hoc basis.

3. Development

Are identified issues being addressed? How will the Board incorporate the Consumer Duty into strategy and all future decision making, in a way that makes it clear that it is treated as being on a par with sales and revenue? Who will be the 'Champion', and how will that role be given real meaning? How will staff at all levels be incentivised to buy in to Consumer Duty compliance? What role will Risk, Internal Audit and similar functions play in ensuring such compliance is a daily reality, rather than an annual chore?

4. Enforcement

The FCA clearly intend to enforce the Consumer Duty as strongly as possible (if only to fend off the criticism they will otherwise face themselves). The weapon of choice will be the SM&CR; in particular, the individual duties of all senior managers. Firms that haven't structured their implementation projects so as to be provide all the necessary information on demand (before, on and after implementation) will be easy targets.

5. Consider your timeline

Careful planning and keeping projects on time will be essential to Consumer Duty implementation. The FCA may have extended the deadline by 3 months, but any lenders operating within an intermediated market will probably still need to have completed the majority of required work by 30th April 2023 if they are going to hit the FCA milestone of providing information to distributors.

Implementation project scoping will always need to be lender specific, if only to demonstrate to the FCA (if so required) that the right thought process has been adopted to produce a tailored result. Perhaps as important, if not more so in commercial terms, the context specific nature of all FCA compliance means that lenders can (at least to a reasonable and reasoned extent) set the targets against which they will be measured, by clearly defining the context within which they operate and justifying the approach adopted in the light of that context. To this end, a successful Consumer Duty implementation project will need to pass through a number of stages.

Get early Senior Manager buy in

How such buy in is achieved may vary between firms, but initial SMF training is a common method being used, both to inform about the Consumer Duty and to reinforce SM&CR responsibilities.

Expand to bring in Team Leaders

Once the SMFs have issued the necessary fiat (let it be done!), those in charge of daily operations (team leaders; certification individuals etc) will need training so they can in turn understand the FCA requirements and start the process of:

  • identifying and segmenting target markets, and routes to market; 
  • analysing products and identifying criteria to underpin an assessment of fair value for each product/market/segment
  • developing concepts for good and bad outcomes at all stages of the customer journey;
  • analysing any changes to policy and/or process which may be required to avoid any potential bad outcomes identified;
  • analysing communications and documentation at every stage of the customer journey, so that they not only provide customers with information in a comprehensible manner, but also ensure that their expectations are properly managed
  • developing staff roles and training to ensure they have both the knowledge and authority to provide adequate Consumer Support

Firms operating in the intermediated market will also need to be:

  • identifying product information which should be communicated to distributors;
  • analysing ways in which distributors can influence good or bad outcomes for customers;
  • identifying the extent to which the firm can take steps to prevent distributors creating bad outcomes;
  • developing a range of appropriate intermediary oversight mechanisms, such as the capture of relevant MI, audit arrangements and customer feedback

The importance of feedback

The stages outlined in the last section will require detailed analysis by individual teams at 'coal face' level. However, regular central feedback and review will be essential, both to ensure correct direction of travel and overall consistency of approach/decision making. In particular, lenders will need to think at all times about a consistent application of the cross cutting rules. Is this or that approach really 'in good faith', taking into account factors such as customer expectations and the need to justify any differential benefit to the lender and borrower of a given activity; is it causing foreseeable harm; is it supporting customer objectives?

Monitoring needs to be considered at every stage. The first Board report will need to evidence that implementation has been successfully achieved; subsequent reports will need to evidence ongoing compliance. What is reasonable in year one may not be so by year five; how will the development of issues and responses be captured? What MI will be needed to validate ongoing compliance and answer the Key Questions? What testing should be done to ensure that the right MI is being correctly identified and captured?

Put simply, how will the business demonstrate to the Board (before, on and after implementation) that compliance with the Consumer Duty has been, and will continue to be, fully achieved, so that the Board can demonstrate as much to the FCA if needs be, and thereby avoid any difficult conversations and/or enforcement activity?

Finally, if there is one word that has to be a part of each and every discussion about the Consumer Duty, it is 'proactive'

As stated previously, the Consumer Duty is the latest in a long line of attempts by regulators to get lenders to 'do the right thing' by their regulated customers. To a great extent, previous attempts (including Treating Customer Fairly) have been designed around a reactive approach; plenty of forethought from those lenders who were naturally so minded, but at its most basic level still an approach to compliance with a focus on dealing with issues arising.

Making things right for borrowers if they go wrong will always be an important part of FCA compliance, but the Consumer Duty requires lenders to be pro-active at every stage of the lending process; actively assessing all 'borrower risks' and taking reasonable steps in advance to minimise the potential for those risks to cause detriment. Only by being pro-active will lenders be able to deliver 'good outcomes' and demonstrate full compliance with the Consumer Duty.

How can we help?

We are uniquely well placed with our combination of lawyers and regulatory consultants and can help with any or all of your Consumer Duty needs. For example, in relation to the Products and Services Outcome, credit firms would likely benefit from talking to our investment and insurance market specialists who have been dealing with product governance rules since the introduction of MiFID II and IDD respectively.

Whether you want ad hoc support in respect of specific issues, an independent third party review of plans and progress, or for us to work closely with your internal teams to manage and implement the Consumer Duty, DWF's team is able to help.

If you would like to discuss Consumer Duty and the impact it may have on your firm, please contact: Richard Humphreys, Head of Consumer Credit, Regulatory, Andrew Jacobs Head of Regulatory Consulting or Robbie Constance Head of Financial Services Regulatory.

Further Reading