Consumer Duty - 3 months on

Introduction

The FCA’s Consumer Duty rules came into effect 3 months ago, at the end of July 2023. And the regulator was not slow in utilising their new powers. On day one they announced a plan to require banks and building societies to pass on interest rates to savers. This was followed up by the Insurance Market Priorities document in September which highlighted their expectations for improvements across all the areas of Consumer Duty. And behind the scenes, we’ve already seen s166 and enforcement activity.

Nisha Arora, from the FCA, set out the regulator’s clear intent, in her speech on the 1st of November and the expectations of how firms should be reviewing the 3-month milestone and progressing the embedding of Consumer Duty.

In contrast to the regulator, firms across multiple sectors were slow to adopt the Consumer Duty rules, and many still have work to do, to meet the requirements. For example, last week’s papers covered a large and high-profile investment firm that was seemingly struggling with a fairly fundamental interpretation of fair value – despite it being 28 months since CP21/12 was released and 3 months since the rules came into force. And this firm is not alone.

Firms must alert us (as required by SUP 15.3.11R) if they believe that they will not be able to complete all work necessary to be compliant with the Duty before the implementation deadlines.

PS22/9

Challenges of implementation

There are many reasons why individual firms are still struggling with Consumer Duty. But the areas they are struggling with are fairly consistent.

?Governance, monitoring and oversight

One of the most consistent failings has been in governance, monitoring and oversight. Firms are still not able to demonstrate that they are drawing in sufficient information to assess customer outcomes, and that senior management are taking the right actions, in response to the insights they receive:

• Insufficient evidence of the consideration of Consumer Duty in Board, Exco and Committee packs and discussions
• Strategy, forecasting and business planning decisions made without assessing customer outcomes
• Risk Appetite Statements, Risk Registers and Audit plans not updated, to reflect Consumer Duty
• Insufficient use of leading indicators and qualitative metrics in MI and monitoring
• A lack of internal horizon scanning
• Limited demonstration of effective oversight of third parties

Without these foundations in place, firms will struggle to substantiate how they are meeting the Consumer Duty outcomes, and in particular the cross-cutting rules.

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The cross-cutting rules

Across multiple sectors, there has been a common failing with firms not paying sufficient attention to the cross-cutting rules. This is a key risk, as it is likely that the FCA will favour the cross-cutting rules if they are seeking to take action against a firm - if Principles are easier to enforce than rules, then cross-cutting rules are easier still.

If firms are not focussing sufficiently on the cross-cutting rules, they are missing key elements of Consumer Duty:

• Avoiding foreseeable harm: if the firm is not using leading indicators in its MI suite, not undertaking internal horizon scanning and not performing adequate testing – how is foreseeable harm being prevented?
• Meeting customers’ financial objectives: if the product is sold outside of the target market, it does not represent fair value, customers do not understand it, and it does not deliver the required service levels – how can it be meeting the customers’ objectives?
• Act in good faith: if the firm is not applying the rules (and guidance) of Consumer Duty – how are they acting in good faith?

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Most firms were more effective in their assessment and implementation of the requirements of the four outcomes, but there were still gaps, as noted below. There was also a common tendency of firms to approach the individual outcomes in isolation – often with separate teams and workstreams. This siloed approach does not align with the expectations of Consumer Duty, which is much more holistic – for example, a customer who is receiving poor service cannot be getting fair value from a product, regardless of the headline price.

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The product and services outcome

The FCA has a long institutional memory regarding products that have been distributed to customers for whom they were not designed. So product and service is the first outcome, and the one to which most firms devoted much of their efforts. However, there were still challenges:

• Not assessing the target market with sufficient granularity
• Paying insufficient consideration to identifying those customers for whom the product may not be suitable (often a key cause of harm)
• Not fully considering customer vulnerability, particularly the vulnerabilities of financial unsophistication and financial exclusion
• Being unable to sufficiently demonstrate and evidence how they have assessed the ‘identified needs’ of customers, and undertaken the ‘appropriate level of testing’.
• Not aligning the product and services assessment with the price and value assessment

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The price and value outcome

Price and value has been the most contentious area of Consumer Duty, and one where many firms have struggled to reconcile their commercial and customer focus aspirations. Challenges have included:

• Not having sufficiently honest internal conversations about products and practices that don’t offer fair value, and not having those conversations soon enough.
• Not collecting enough evidence to justify decisions made
• Taking a disconnected approach with separate assessments of product and value
• (For those products which are intermediated), not having adequate control or oversight of the impact manufacturers/distributors have on the overall customer value
• Focussing too much on price, and not considering how ongoing service impacts the overall value customers take from a product
• Not having an appropriate framework in place to take action if harm (or potential harm) is occurring

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The consumer understanding outcome

If a customer doesn’t understand the product, or how it should be used, it can’t deliver fair value, or meet their objectives. Consumer Duty raised the regulatory bar, in an area where the FCA already had significant focus, but not all firms have responded well to this - with challenges around:

• Failure to evidence that testing and assessment have been done, and been done against suitable criteria (e.g. Layering/Engaging/Relevant/Simple/Well-timed)
• Insufficient involvement of actual customers in the testing of channel or message
• Lack of sufficient evidence that online and app-based channels are suitable for the target market
• Inadequate oversight of communication through the distribution journey

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The consumer support outcome

Many firms already had good frameworks in place, in their BAU activities, and in their response to the FG21/1 vulnerable customers guidance. However, there is clearly still work to be done. Challenges have included:

• Not recognising that service is a key element of value
• Not fully considering all vulnerability types, or the support for vulnerable customers across all touchpoints
• Failure to recognise and address clear ‘sludge practices’
• Insufficient evidencing that limited support channels (e.g. online-only) are suitable for the target market
• Inadequate oversight of 3rd parties

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Transition into BAU

The fallacy of a project management timeline (as with the fallacy of time itself), is that it is thought to be a linear journey to an endpoint, and the arrival at that endpoint is assumed to be experienced by all participants simultaneously and universally. In reality, project management, time, and even Consumer Duty are perceptions. And across firms, and within firms, there remains a very wide variance on where people are in their understanding and alignment with Consumer Duty.

Using the classic Kubler-Ross model - too many management teams don’t appreciate that a large proportion of the workforce is still in the Denial/Frustration part of the journey, and a long, long way from Integration. This goes for customer-facing areas, but far more so for back-office functions like IT and HR – areas that have a clear impact on customer outcomes, but have yet to fully appreciate it. Even Risk and Audit functions have been late to the party, despite the clear expectation from the FCA that Consumer Duty should drive their activities, going forwards.

The transition to BAU is about hearts and minds, not project milestones. It is about changing perceptions, not policies and procedures. And, in many organisations, this change in perspective won’t come without a cultural shift – particularly in 1st Line areas.

And when we’re talking about culture, we’re not talking about some intangible ‘feel good’ concepts, but the tangible: norms, values and most importantly behaviors. And this is the way the FCA views it too.

For many firms, [Consumer Duty] has required a significant shift in both culture and behaviour. Firms who have met our expectations have embraced this shift. Some have aligned their purpose and values to delivering good consumer outcomes, updating internal cultural and training materials to reflect this. And some have reviewed reward and incentive structures and performance management frameworks to ensure they reflect and support delivery of the Duty.?

Nisha Arora, FCA

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Risk and liabilities

Failure to successfully implement the Consumer Duty requirements brings risks - to the firm and also risks to individuals (under SMCR). And the risks are baked in, and this is by design. For firms who have not met the objectives, the FCA has a range of difficult questions they can ask:

• Why did you think the implementation plan was suitable and achievable, when you signed it off in October 2022? What evidence did you review? (PS22/9:12.9)
• [for those firms in scope] In April 2023, when you provided distributors with target market and fair value assessments, why were you confident these were suitable? What review did you undertake? (PS22/9:12.11.2)
• Between October 2022 and July 2023 what oversight of the implementation plan did you undertake? Why did you think the project was still on track? (PS22/9:12.11.6)
• When you became aware that you were not going to comply with the Consumer Duty requirements, why did you not inform us? (PS22/9:12.11.7)

Firms can also expect challenges from other areas too. For example, if a firm has recognised that the exit fees they are charging do not meet the Consumer Duty requirements for fair value, this may lead to increased FOS upholds and claims management activity. Particularly where the firm is aware of the issue, but is slow in taking action to address it.

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Next steps

As noted in the introduction, the FCA has been quick off the mark in applying the Consumer Duty rules. Therefore, any firm that still has gaps in its implementation programme should be addressing them as a matter of urgency.

In their Business Plan, the FCA have highlighted they are going to be more data-driven in their overall approach to regulation, and this will be applied to Consumer Duty too – they have been conducting a range of thematic reviews, and data capture exercises and have noted that they will be using existing data (complaints, reg returns etc) to identify outliers and firms to focus their attention on.

And all firms should be using the perspective of the first three months as an opportunity to step back and reassess their approach. Because in the vast majority of firms, there are still areas for improvement, particularly in relation to how Consumer Duty is being embedded within BAU, and how customer outcomes are being monitored.

You need to go back and review your implementation plan, and check you’ve made the changes you set out to make. Then ask yourself whether these changes go far enough. Make sure you are focused on whether you are delivering the outcomes you set out to achieve for the consumers in your target market, especially for customers with characteristics of vulnerability.?

Nisha Arora, FCA

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