FCA Review of Consumer Duty Implementation in the Payments Sector: Key Findings and Action Points

Recently, I examined the Consumer Duty regulations that came into effect for open products and services in July 2023, and for closed products and services in July 2024. I wrote this article about it with a particular focus on their implementation.

Background

The Financial Conduct Authority (FCA) has conducted a comprehensive review of how payment service providers, e-money issuers, money remitters, merchant acquirers, and open banking firms have implemented the new Consumer Duty regulations. The review, which assessed 23 firms, revealed a mixed bag of results, with a significant minority falling short of the required standards. This article delves into the key findings of the FCA's review and outlines the crucial steps these organisations need to take to ensure full compliance with the Consumer Duty.

Understanding the Consumer Duty

The Consumer Duty represents a significant shift in the FCA's regulatory approach. It aims to ensure that financial services firms, including those in the payments sector, place customers' needs at the heart of their operations. The Duty sets higher standards of consumer protection and requires firms to:

• Act in good faith towards customers
• Avoid causing foreseeable harm to customers
• Enable and support customers to pursue their financial objectives

Key Findings from the FCA Review

The FCA's review highlighted several areas where firms in the payments sector need to improve their implementation of the Consumer Duty:

• Approach to Implementation: While some firms demonstrated a systematic approach with robust governance frameworks, others failed to recognise the need for significant changes to comply with the Duty. Some firms even mistakenly believed that their existing practices were sufficient.
• Products and Services: A number of firms had broadly defined target markets, making it difficult to identify and assess potential harm to specific customer segments. This lack of granularity hinders their ability to tailor products and services appropriately and mitigate risks effectively.
• Agent Oversight: The FCA raised concerns about firms' oversight of their agents and distributors. Many firms lacked adequate processes to monitor whether their agents were adhering to the Consumer Duty, potentially leaving customers vulnerable to mis-selling and poor service.
• Fair Value Assessments: Firms were not consistently conducting robust fair value assessments of their products and services. This is a critical requirement of the Consumer Duty, ensuring that customers receive value for their money. The FCA found instances where firms' assessments were superficial or lacked clear justification for their conclusions.
• Consumer Understanding: Many firms struggled to effectively monitor consumer understanding of their products and services. Some relied on outdated or inadequate methods, such as website traffic or call centre volumes, rather than directly measuring customer comprehension.
• Consumer Support: The review found instances of unclear signposting of customer support services, making it difficult for customers to access help when needed. Furthermore, high volumes of complaints at some firms indicated potential shortcomings in their customer support operations.
• Governance: Boards were not consistently challenging management on their Consumer Duty implementation plans or considering how remuneration and incentive policies might impact customer outcomes. This lack of board-level engagement raises concerns about the overall commitment to the Duty.
• Management Information (MI): Many firms faced challenges in developing a robust MI suite to monitor compliance with the Consumer Duty. This included difficulties in identifying relevant metrics, collecting data, and using data effectively to drive improvements.

Action Points for Payment Firms

In light of these findings, payment firms must take decisive action to ensure full compliance with the Consumer Duty. Here are some key steps they should consider:

• Embed the Consumer Duty: Firms need to go beyond simply acknowledging the Duty and embed it into their culture, governance frameworks, and day-to-day operations. This requires a top-down commitment from the board and senior management.
• Refine Target Markets: Firms should clearly define their target markets and customer segments to better understand their needs and vulnerabilities. This will enable them to design products and services that are appropriate and offer fair value.
• Strengthen Agent Oversight: Implement robust oversight mechanisms to ensure that agents and distributors comply with the Consumer Duty. This includes clear contractual obligations, regular monitoring, and appropriate training.
• Conduct Thorough Fair Value Assessments: Develop and implement a rigorous framework for assessing the fair value of products and services. These assessments should be comprehensive, well-documented, and regularly reviewed.
• Measure Consumer Understanding: Employ effective methods to measure consumer understanding of products and services. This could include surveys, customer feedback mechanisms, and mystery shopping exercises.
• Enhance Customer Support: Ensure that customer support services are easily accessible and effectively address customer needs. This includes clear signposting, well-trained staff, and efficient complaint handling procedures.
• Engage the Board: The board should actively engage with the firm's Consumer Duty implementation plans and challenge management on their progress. Remuneration and incentive policies should be reviewed to ensure they align with the Duty's principles.
• Develop Robust MI: Invest in developing a comprehensive MI suite to monitor compliance with the Consumer Duty. This should include relevant metrics, effective data collection processes, and the ability to analyse data to identify trends and areas for improvement.

Conclusion

The FCA's review serves as a timely reminder of the importance of fully implementing the Consumer Duty. Payment firms that fail to meet the required standards risk regulatory action and reputational damage. By taking the necessary steps to embed the Duty into their operations, firms can ensure they are treating customers fairly and delivering good outcomes. The FCA has pledged to continue monitoring firms' progress and will take appropriate action where necessary.

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About Shakeel Aslam

Shakeel Aslam joined MHA during the second half of 2021, and is a Fellow Chartered Accountant as well as a Fellow of the Chartered Management Institute with more than 25 years of Financial Services experience in the areas of governance, risk, compliance, internal audit and controls across banking, brokerage, wealth management and payment institutions.