Alongside the release of the report, Executive Director Sheldon Mills gave a speech on 20 February 2024, highlighting the progress the FCA has seen so far in firms' implementation of the Duty, and the key challenges it believes firms will face in meeting regulatory expectations ahead of the upcoming deadline for closed products. Mr. Mills stated that progress over the 6 months since the deadline for open products passing has been promising, with a large number of firms wholeheartedly embracing the duty, with board-level leaders giving serious consideration to what the Duty means for them culturally and operationally. Additionally, reflecting on a survey conducted in autumn 2023 for smaller firms, the FCA has observed significant progress since their last survey.
Moreover, after a brief hiatus, the FCA has released a number of publications in Q1 2024, reiterating their commitment to the Consumer Duty and good consumer outcomes across all financial services sectors. For example, the FCA recently issued a request for information to 20 of the largest advice firms for information about their delivery of ongoing advice services, for which their clients continue to be charged for after advice has been given. The FCA has also announced that it will be conducting a review of firms' treatment of customers in vulnerable circumstances. Most recently, the FCA published the retirement income advice thematic review which investigated how firms were providing advice and found examples of both good and bad practices.
Having already been through one implementation deadline, it is clear that Consumer Duty remains at the forefront of the regulators thinking and that the Duty is now an integral part of its approach at every stage of the regulatory lifecycle including authorisations, policy development, supervision and enforcement with the FCA using the Duty as a "golden thread" throughout ongoing engagement with firms. Whilst the FCA has noted that it is not opposed to further interventions it has said that any supervisory or enforcement approach will be proportionate to the harm, or risk of harm to consumers, is yet to be seen what the FCA will consider to be a serious breach. However, what can be said is that following the deadline for closed products, the FCA may be less lenient in their approach to firms that it believes are not taking active steps to ensure compliance with the Duty. The data and insights gathered from recent requests for information will likely be used as benchmarks following the deadline, further supporting the view that the FCA will become more active in their supervision and enforcement activities focusing on firms that are outliers.
The recently released publication detailing examples of good and bad practice are likely the FCA's latest attempt at providing clarity and demonstrating to firms what is likely to be considered as failures to meet the expectations set under the outcomes-based Duty. In the rest of this article, we share some of the key points raised here including:
- Culture, governance and monitoring
- Consumers in vulnerable circumstances
- Products and services
- Price and value
- Consumer understanding
- Consumer support
Culture, governance and monitoring
The FCA states they want to give consumers confidence in retail financial markets, with healthy competition based on high standards and firms focused on helping customers.
Areas of good practice they have observed in this area include firms:
- Altering their company purpose to focus on consumers;
- Accelerating business change programmes to deliver better consumer outcomes such as focused investment on consumer-facing services; and
- Increasing focus on consumers at a board or management body level, including giving serious consideration to what the Duty means at both a practical and cultural level.
For continued improvement, firms should ensure that the Duty is considered not only by risk and compliance teams, but by all teams and all levels within the business. According to the FCA, firms can improve by being proactive, rather than waiting for the FCA to raise a specific issue with the firm or with specific sectors. The FCA also notes that in some instances, firms have repackaged existing data rather than seriously considering what new and additional data points may be required to really understand customers' outcomes.
Alongside this, the FCA expects firms to address any gaps in monitoring data, and that firms should be able to evidence the outcomes their customers are receiving. Firms should be taking reasonable steps to ensure they have sufficient information on closed products customers' files, such as characteristics, needs, sales records and historic performance of the product. Where these records are incomplete and/or the firm cannot fill in the gaps, they should take additional steps to mitigate the risk of harm to consumers.
Following the deadline for closed products, firms can expect intervention from the FCA, and penalties, if they fail to address the above issues.
Consumers in vulnerable circumstances
In the current political and economic climate, the FCA continues to focus on how firms are treating vulnerable customers. In February 2021 the FCA released its Finalised Guidance (FG21/1) for firms on the treatment of vulnerable customers, stating that firms need to understand vulnerable customers' needs, ensure frontline staff have the necessary skills and capability, implement sufficient monitoring and evaluation of whether or not they have met the needs of vulnerable customers, and design their products and services in a way that vulnerable customers are able to interact and use them effectively.
The FCA has noted several areas of good practice in this regard, including firms:
- Implementing new ways of identity verification to accommodate for elderly customers with a view to reducing fraud;
- Offering alternative formats of literature such as braille, audio and enlarged text; and
- Implementing systems to better identify potentially problematic trading patterns which may reveal potential customer vulnerabilities, which in turn can be passed onto frontline teams.
However, the FCA has also observed that some firms have failed to address weaknesses in processes to track vulnerable customers. Firms in the investment market have been observed to not be prioritising the identification and support of vulnerable customers, with 49% of portfolio managers and 69% of stockbrokers identifying no vulnerable customers in their customer base. The FCA has also noted instances, where firms have asked consumers to identify themselves as vulnerable and requesting evidence of this, as well as caveating that the service vulnerable customers may receive, might be affected as a result of the customer's vulnerability. The FCA have warned against this, which they believe acts as a clear barrier to identifying and servicing vulnerable customers.
As noted above, the FCA recently announced that it will be conducting a review of firms' treatment of customers in vulnerable circumstances, 7 years after their initial announcement in 2017, and 3 years after they released their Finalised Guidance. It likely no coincidence that this announcement comes close to the deadline for closed products on 31 July 2024. Given the above statistics, the FCA will likely use results of the aforementioned survey as a benchmark to determine how firms are treating vulnerable customers, as well as a basis for determining future complaints it receives from customers. Firms must be ready to address most if not all of the issues stated above in relation to good practice, or risk supervisory and or enforcement from the FCA if it comes to light that a firm's vulnerable customers are not receiving outcomes as good as the outcomes of other consumers.
Products and services
The Products and Services outcome aims to ensure that products and services are effectively designed to give good outcomes for consumers, and that they are fit for purpose.
Good examples listed by the FCA include firms:
- Carefully and precisely defining the target market for products and services;
- Assessing the harm that could be caused if said products and services were to be distributed outside of this target market;
- Introducing controls to limit exposure to financial loss to avoid the risk of foreseeable harm to consumers; and
- Having a greater focus on how new products meet the needs of a specified target market and deliver good outcomes for them.
Areas where firms can improve include information sharing, consideration of distribution strategies and their role within the distribution chain. Firms need to share and obtain information within the same distribution chain to ensure that products and services remain appropriate for the target market. Firms also need to consider their distribution strategies, for example where a lender uses third-party brokers to sell their product or service. The manufacturer in this case will need to remain aware of how their product is being sold and marketed, and consider what further information needs to be provided to brokers to enable them to distribute in accordance with the manufacturers product specifications.
In a speech delivered on the 1 November 2023, Nisha Arora, Director of Cross Cutting Policy and Strategy, delivered a speech detailing the FCA's views on next steps and what firms should be considering in light of the upcoming closed products deadline. She stated that firms need to give adequate consideration to their annual board report - a requirement of the Duty is to review and approve an assessment of whether the firm is delivering good outcomes for customer. She states that this assessment should include the results of monitoring exercises on whether products and services are delivering expected outcomes in line with the Duty alongside any evidence of poor outcomes.
This emphasis on board-level engagement and formal consideration of whether the firm is delivering good outcomes gives further credence to the potential view that the FCA will be looking for a high degree of compliance and notes the importance of culture and governance to the success of the Duty.
Price and value
This outcome aims to ensure that consumers receive products and services which offer fair value. Whilst the FCA is not a price regulator, the relationship between price and value continues to be particularly important against the back drop of the ongoing cost of living crisis. The FCA reminds firms to consider more than just price when conducting fair value assessments. Instead, consideration should be given to the product as a whole when considering value. For example, firms should question if there are unsuitable features which can lead to foreseeable harm or frustrate the customer's effective use of the product or service, or if they are providing suitable communications and consumer support alongside the product or service.
Some examples of instances where the FCA has seen good practice include firms:
- Considering whether the total cost to consumers of their products, including fees, charges and other costs, provides fair value to their customers;
- Updating their pricing models because of their fair value assessments, reducing or altogether removing some fees, putting controls in place for certain groups of consumers, and moving some investment clients to simpler model portfolios that are better suited to the size of the customer's investment; and
- Removing or waiving fees entirely where they cannot justify the product's cost, as well as taking steps to monitor products where the value propositions risks causing poor customer outcomes.
However, the FCA cautions that there are still significant areas of improvement required. In particular, the FCA notes that some firms have not conducted a fair value assessment of their own products and have relied solely on comparative assessments in relation to similar product offerings in the market. The expectation is that firms will need to look at more than just benchmark prices in the market when considering their pricing, and should consider a fuller range of factors, including the real value that a customer derives from a product/service compared to the price they pay.
The relationship between price and value might look different for closed products. For example, vested rights pose an interesting challenge for firms with closed products. For example, annual fees that are due or exit charges. A significant fee may undermine the benefits a consumer receives from a product. The FCA states that where a problem is identified in a closed product, they should take appropriate action to mitigate them. For closed products specifically, the FCA believes that some closed products may offer poor value, with some customers in legacy products paying higher charges than they would for open products. Whilst the Consumer Duty is forward looking, the key message delivered by Mr. Mills noted that if a firm could have reasonably known that its assumptions were significantly wrong at the time the product was sold, the FCA will consider if the firm complied with the rules that were in place at the time.
It has also been observed that some firms have made unsubstantiated claims regarding the benefits they provide. In some cases, firms have been seen to charge customers for a service they are not benefitting from, or structuring their fees in a complex way which makes it unclear what benefit the client is receiving for said fees. As noted above, the FCA has requested information from a number of financial advice firms requesting information about their delivery of ongoing advice services for which their clients continue to be charged after advice has been given.
Price and value has been a key outcome that the FCA wishes firms to consider when implementing the Duty. In their assessment of fair value frameworks, the FCA stated that whilst overall frameworks had carefully considered price and value requirements, the effectiveness of certain firms' frameworks in practice still needed to be addressed to sufficiently meet the price and value outcomes.
Another common failure the FCA has observed whilst reviewing fair value assessments is that they are disproportionately firm focused without being viewed through the lens of the customer. Failure to adhere to these requirements may result in consequences such as targeted engagement disciplinary sanctions where necessary. In particular, firms need to consider broader contextual factors and their impact on fair value.
Consumer understanding
The FCA expects that firms take responsibility for ensuring their customers sufficiently understand the products and services the firm offers and are provided with the enough information to make informed decisions including providing the right information at the right time and that is presented in a way that customers can understand.
Some good examples the FCA has noticed includes firms:
- Improving their communications by changing the layout and presentation of content to improve clarity and boost customer understanding, simplifying language and including a "jargon-buster" and FAQs;
- Improving accessibility to websites by making it easier to access contact details for further support;
- Developing customer understanding frameworks, producing more balanced information in light of the fact that certain methods of marketing exploited customers' behavioural biases; and
- Becoming more proactive with customers to make them aware of any product charges/fees and make them aware of any follow-on options.
However, the FCA has observed some firms continuing undermine consumers' trust by pushing inappropriate products and services that are too high risk or complex, and not providing enough information about these to the customer. It specifically notes that some investment portfolio managers take advantage of long-established relationships with clients to downplay the risk of portfolios that benefit the firm, but are not aligned with the client's risk profile. Firms should improve on this by being clearer about the charges that apply to products and services, and considering the Duty when approving financial promotions, ensuring that Consumers will understand the content being proposed.
Firms also need to consider whether customers may be paying for products they no longer need/want, they are no longer eligible for, or whether customers are aware of key changes to products over time. Firms will need to test, monitor, and where necessary adapt their communications approach if these are not driving the right outcomes for consumers or certain cohorts of customers.
Consumer support
Lastly, the FCA has emphasised the importance of the after-care the clients receive when dealing with firms and that firms should not just be focused on the initial suitability of products and services and support pre-sale. This is likely to be significant in relation to closed products or products that have a long term. A product or service that a customer cannot use properly and enjoy is unlikely to offer fair value.
Some good examples the FCA has observed include firms:
- Making changes to ensure the same level of support is offered to new customers as well as existing customers;
- Becoming proactive in the review and removal of negative obstacles and 'sludge" practices that make it more difficult for customers to interact with and or leave the firm;
- Introducing positive interventions in customer journeys to ensure customers receive tailored support. For example, in the consumer credit sector, firms are introducing flexible payment plans to avoid customers overstretching themselves; and
- Putting processes in place to monitor the support that staff are providing and to identify areas for improvement. A specific example of this includes a firm launching an online panel to provide feedback and new customers receiving regular invites to join online surveys.
The FCA states that areas for improvement include training staff sufficiently to have complex conversations with customers and avoiding 'gamification' practices on online trading application platforms, which can lead to risky short-term lending, increasing consumer harm. The FCA observed examples of insufficient systems and controls to protect and help consumers from loss of investments, savings, or personal data due to fraud or cyber-attacks. Lastly, forbearance solutions for customers in financial difficulty should be appropriate for the customer's specific circumstances and account of non-financial costs such as stress and unnecessary delay. The FCA will expect that these gaps are addressed immediately, and that firms are able to provide any necessary support in when dealing with any instances of fraud or cyber-attacks.
How DWF can help
As the FCA has stated, the Consumer Duty is not a "once and done" exercise. With a team of experts working across the full range of financial services sector, DWF is well placed to advise firms on the continued implementation of the Consumer Duty, and how firms can adapt their current policies and procedures to show due consideration of the Duty. Our work involves advising retail banks, motor finance lenders, (re)insurers, payment services firm, consumer credit firms and mortgage broker/lending firms. We have assisted retail firms in building policies and procedures for authorisation applications considering the Duty, as well as reviewing firms' implementation plans and fair value assessments alongside FCA rules and expectations.
If you have any questions, require further clarification, or would like to explore how our tailored solutions can benefit your business, please do not hesitate to contact us.
Written by Tom Castel, Rachel Kpiki and Patrick McGovern
