FCA finds firms have been working hard to embed the Duty, but there remains room for improvement.
On 20 February 2024, the FCA published more information on the Consumer Duty, including a publication highlighting good practices and areas for improvement. The FCA also used a related speech to remind firms of the 31 July 2024 deadline for applying the Duty to closed products and services, and for producing the first annual board report assessing whether the firm is delivering good outcomes for customers. Lastly, the FCA published the findings from a survey in autumn 2023 which looked at how firms have been managing their implementation of the Duty.
Firms should take note of the good practices and areas for improvement highlighted by the FCA, and should consider conducting a gap analysis of their frameworks against these comments to make any necessary adjustments. The FCA has made clear previously that implementing the Consumer Duty is not a “once and done” exercise, and firms need to continually strive to ensure that they are delivering good consumer outcomes; this effort will include responding to output from the FCA.
Therefore, firms should be able to show the regulator that they are giving due attention to the Duty’s requirements on an ongoing basis. The FCA also emphasises that it will look to firms’ board reports to evidence the steps firms are taking to drive good outcomes, and firms should be able to evidence that both public and private feedback from the regulator is being considered at appropriate levels within the business.
Areas Identified for Improvement
The FCA has provided feedback in six areas summarised below.
Culture, Governance, and Monitoring
The FCA highlights that firms need the right culture and governance to be proactive in delivering good customer outcomes, and suggests that boards could give the Duty more of their attention. However, it wants to see the Duty permeate all levels of a firm so that it is considered across the business, not just by the board or by risk and compliance. This point is also repeated in the related speech, suggesting it is a particular area of focus for the FCA.
The FCA emphasises that firms often need better data and monitoring strategies so that they can truly understand customer outcomes. In the speech, the FCA states that firms need to move away from simply repackaging existing information. It also expects firms to tackle problems when they arise rather than waiting for the regulator to intervene. Further, the FCA suggests that firms could consider updating staff bonus and incentive structures to ensure that incentivisation is in line with the aims of the Duty, if this has not already been done.
Consumers in Vulnerable Circumstances
The FCA makes clear that it expects firms to consider the needs of vulnerable customers as part of their product and service design, and firms will need to show that this occurs in practice. It also suggests that firms might consider undertaking a full review of their approach, systems, and processes, and centralising operations relating to vulnerability to ensure consistent outcomes and a joined-up approach.
The FCA states that firms need to ensure that they address any weaknesses they might identify in processes to track vulnerable customers across multiple product sets, and gaps in data and servicing capabilities. The FCA emphasises that all firms will likely deal with vulnerable customers, and so firms must prioritise identifying and supporting such customers. The FCA has been surprised to find that some firms believe that they do not have any vulnerable customers. The regulator also raises concerns about firms asking consumers to identify themselves as vulnerable and then unnecessarily requesting evidence of this, firms telling those who identify as vulnerable that it might affect their ability to receive the service, and firms asking consumers to repeatedly disclose their additional needs or personal circumstances when passed between teams.
Products and Services
The FCA highlights as good practice firms carefully and precisely defining the target market for products and services that could cause harm if sold to the wrong consumers, firms ensuring products are sold appropriately, and firms tracking customers who may have bought a product or service despite falling outside of the target market to monitor for potential harm. The FCA seems particularly concerned that firms are not sharing information appropriately across distribution chains, or ensuring that good customer outcomes are being achieved. The FCA also emphasises that firms do sometimes need to consider actions by other parties in the distribution chain, particularly if they become aware that their products are not being distributed to the intended target market. This is important, as generally firms are only responsible for their own activities under the Duty. However, the FCA clearly expects that firms will look beyond their own conduct in some circumstances and consider actions they can take, such as providing clearer information to distributors and acting on information received from distributors.
Price and Value
The FCA identifies this area as the most challenging for firms, with various areas for improvement. The FCA reminds firms that fair value is about more than just price. It is concerned that some firms are failing to show how products offer fair value, with many fair value assessments not relying on solid data and other credible evidence to justify the products’ value to customers. The FCA has also seen firms relying solely on benchmarking against the market when considering their pricing, rather than considering a fuller range including the real value that a consumer derives compared to the price they pay. The FCA stresses that it wants to see firms considering all the aspects of fair value at the product level and considering the impact on different consumers. These points are repeated in the speech, again indicating that they are significant areas of concern.
The FCA is also particularly worried about firms potentially charging customers for services they are not benefitting from or adding unjustified fees along the distribution chain. The FCA considers that firms could improve their practices by examining where they can reduce costs, enhancing product benefits to improve overall value, and considering whether distributors they are working with are preventing customers from receiving fair value.
Consumer Understanding
The FCA has seen firms undermine customers’ trust by pushing products or services that are too high-risk or complex for them. It has also seen firms being unclear with customers about what charges apply and when. The FCA suggests firms could work with experts to improve communications across different channels, develop customer understanding frameworks, and redesign customer journeys. The FCA also encourages firms to be more proactive with their communications, and develop ways to test customer understanding.
Consumer Support
The FCA emphasises the importance of proper staff training, and taking the time to understand customer circumstances. The FCA expects firms to ensure that they offer the same level of support to both existing and new customers, and encourages firms to review customer journeys and include positive interventions when appropriate. It also suggests that firms implement processes to monitor the support they provide and identify areas for improvement, such as by soliciting regular customer feedback.
Firm Survey
The survey involved 634 firms and so has provided the FCA with a detailed understanding of firms’ progress to date. The FCA reports various improvements since its spring 2023 firm survey. In particular, most firms have now completed a fair value assessment and many have revised communications following a review. However, firms are finding outcomes monitoring the most difficult aspect to implement, which is borne out in the FCA’s feedback. The survey may provide a useful tool for firms to benchmark their own implementation, and attempt to bring their implementation into line with the market when they are behind the curve.
Closed Products and Services
The speech also contains some guidance for firms around preparing for the 31 July 2024 implementation deadline for closed products and services. The FCA makes clear that it expects firms to take a risk-based approach to prioritisation, and it seems the FCA will be taking the same approach to its supervision.
The FCA identifies four key challenges that firms face in relation to closed products, and clarifies its expectations in relation to each.
1. Evidencing good outcomes and addressing data gaps
The FCA explains that if a firm cannot fill gaps in its records, it should take additional steps to mitigate the risk of harm to consumers, such as through enhanced outcomes testing for these customers.
2. Determining fair value on closed products
The FCA emphasises that firms can take into account the costs and benefits incurred before the Duty came into force, and it will not judge firms with the benefit of hindsight. If there were evident issues at the time a product was sold, the FCA will consider whether the firm complied with rules that were in place at the time.
3. Less engaged and “gone away” customers
The FCA expects firms to go further to drive good outcomes for these customers. This might include communicating more effectively, for example by providing consumers with the information they need at the right time and presenting it in a way they understand. Firms will be expected to test, monitor, and adapt their communications approach if these steps are not driving the right outcomes for consumers.
4. Vested rights
The FCA explains that some firms may take the view that giving up their “vested right” and reconsidering fees or charges is the most appropriate way of delivering a good outcome to their customers. Others may decide they can best support their customers through clearer communications on what other deals are available and support on how to switch. The FCA emphasises the importance of offering extra support when vulnerable consumers and complex products are involved.
Key Takeaways for Firms
Some of the key messages from the FCA include the need for the board to give the Duty sufficient attention, and the expectation that the Duty will be considered throughout all levels of the firm on an ongoing basis. Firms have clearly been facing challenges in trying to ensure they have appropriate data to monitor consumer outcomes — a high-priority area for improvement. Without the necessary data, firms will face difficulties with monitoring outcomes in the granular way the FCA expects, and may struggle to sign off on the annual report on compliance with the Duty.
Price and value assessments are another difficult area for firms. The FCA suggests that firms are perhaps approaching these with too narrow a mindset and need to give more consideration to the customer journey and life cycle. In its feedback, the FCA highlights end-to-end reviews of the consumer journey several times as helping to achieve good outcomes as it enables firms to consider a customer’s complete experience.
Overarching themes that arise in the FCA’s feedback include the need for firms to be proactive and the benefits of firms holistically considering the whole consumer journey. The FCA has been clear from the outset that it expects higher standards under the Duty and firms need to consider how they can go “above and beyond” for customers, particularly those that are vulnerable. This might include, for example, proactively suggesting alternative products if monitoring data reveals customers are not getting good value. Firms should consider which elements of the FCA’s feedback are applicable to them and ensure they document how they are working to meet regulatory expectations.
