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The effect of the Consumer Duty and the next steps

12 December 2023

The Consumer Duty has created more trust in markets and is steadily supporting economic growth. However, firms must remain proactive and regularly review and monitor outcomes.

Key messages from the FCA's Consumer Duty 'next steps' webinar

The FCA's Supervision and Enforcement Approach:

The FCA have confirmed that they will intervene as necessary where they have concern about the outcomes a firm is delivering or how they are complying with an aspect of the duty, and will consider the following approaches:

  • Supervisory conversations: these will occur when firms make the necessary changes promptly without the FCA having to use their formal powers to require change. 
  • Formal tools: this will occur when poor conduct is causing significant harm or where firms are slow and ineffective at addressing problems on a voluntary basis.
  • Substantive enforcement action: this will be taken where the FCA see sustained non-compliance leading directly to consumer harm. 

Where there are problems occurring across a sector, the FCA may undertake multi-firm work and thematic reviews to understand what is going wrong and to mitigate risks. 

Sector-specific areas of focus: 

Firms in the investment sector have been overhauling their fee structures, including cutting charges and giving refunds for services that not have provided good value. Firms are also moving clients away from expensive portfolios to simpler ones that are more relevant to the consumer's needs, and actively removing the emotive aspects of promotions which were playing to the biases of consumers. 

However, more could be done in terms of firms investing in training for staff, especially when products are complex. Staff need to understand financial objectives and the consumer's needs in sufficient detail. Many firms are also charging clients for a service they are not benefitting from on an ongoing basis. The customer is paying for an annual review which they are not actually receiving. 

In the insurance sector, Gap and Building insurance firms are failing to provide fair value. Further guidance is expected in the coming months.

Vulnerable Customers:

The duty makes an explicit reference to paying attention to customers with characteristics of vulnerability. 

Examples of good practice are:

  • Firms undertaking a wholesale review of their approach, their operations, their systems and processes and reviewing them in a concentrated way. This has led to improved outcomes as they are introducing services that are more accessible for impaired customers.
  • Firms are also undertaking wholesale reviews of communications and whether the information is suitable for certain cohorts of consumers, for example where they are illiterate or English is not their first language.

However, in a report recently published by the FCA it was found that 49% of portfolio managers and 69% of stock brokers did not identify any vulnerable customers. This shows how firms are taking a narrow approach and struggling to identify customers who have characteristics of vulnerability. There needs to be a nuanced approach to these customers.  

Action to be taken by firms: 

Firms should ensure they are on track to meet the 31 July 2024 deadline for the Annual Board Report and the Closed Products Review. 

  • Annual Board Report:  Firms' governing bodies must review and approve the Firms assessment of whether the Firm is delivering good outcomes that are consistent with the Duty for its customers. This is not a 'tick box' exercise – Boards or their equivalent alongside their Executives should ensure that the MI and data collected is effectively scrutinised and supports any findings. The FCA have confirmed that they will be conducting a review of Board Reports with a view to assessing whether Boards are working effectively to examine and challenge outcomes to date, are taking a data led approach and that Firms have in place credible and proactive actions plans to address any gaps identified. 
  • Closed Products:  Firms should prioritise work based on the greatest risk of potential harm. Factors to consider include consideration of reasons for closure such as that the product did not offer fair value or that there were other indications of poor consumer outcomes and or foreseeable harm caused. Importantly, Firms will need to ensure that customers with closed products continue to receive the support that they need. 
  • Fair Value Assessments: Firms should continue to  consider the relationship between the price and benefits with reference to the needs and objectives of particular customer cohorts and or segments, they need to develop their frameworks, assess who is the target market and execute the assessment for each product and service. 

As next steps, you should:

  • Consider how the FCA's findings could be applicable to your firm and take appropriate steps to ensure you are achieving good outcomes for consumers;
  • See the FCA's Consumer Duty webpages, which include the latest updates and details on how to comply with the requirements; and
  • Be prepared for upcoming deadlines in 2024, including ensuring your Annual Board Report has a sufficient level of detail – ensure you are capturing and reviewing the right data.
For information on how DWF can help you ensure your systems and controls meet the FCA's expectations, please get in touch.

Further Reading