On 25 January 2023, the FCA published its key findings on the state of implementation of firms’ plans to embed the new Consumer Duty within their businesses. The Consumer Duty will apply from 31 July 2023 in relation to new and existing products and services, and from 31 July 2024 in relation to closed products.1
As a reminder, the Consumer Duty consists of:
1. A new principle (which will be added to the existing 11 Principles for Businesses): Principle 12, requiring that “A firm must act to deliver good outcomes for retail clients.”
2. “Four outcomes” for firms to meet regarding their provision of products and services to consumers, relating to:
a. Quality of products and services;
b. Price and value of products and services;
c. Consumer understanding; and
d. Consumer support.
3. A set of “cross-cutting rules” and guidance, which set out the behaviours that the FCA expects from firms in order to satisfy the Consumer Duty.
Firms were required to have their governing bodies put in place plans for implementing the Consumer Duty by 31 October 2022, and for these plans to be available to the FCA for review on request.
The FCA has now reviewed the implementation plans of a number of larger firms with dedicated FCA supervision teams and has shared a number of findings, which will be relevant to other firms looking to finalise their own implementation projects.
The FCA notes that many of the plans it reviewed showed that firms have understood and embraced the shift to focus on consumer outcomes, established extensive programmes of work to embed the Consumer Duty, and are engaging with the substantive requirements. However, the FCA has found that a number of firms were further behind in their thinking and planning for the Consumer Duty than the FCA expected, leading to a risk that such plans may not be ready to be fully compliant with the Consumer Duty from the implementation date. The FCA has therefore made a number of suggestions for firms outlining good practices and areas which required improvement, touching on the areas of:
1. Governance and Oversight
The FCA found that some plans gave little detail on the assignment of responsibilities within the firm for implementation of the programme, a lack of evidence of scrutiny by the governing body of the firm, and a lack of timings for meeting milestones.
2. Culture and People
The FCA found that plans were lacking in detail about how the Consumer Duty would be embedded in firms’ culture.
The FCA found that some firms’ implementation plans still had gap analyses at an early stage and were unclear about the allocation of resources to ensure that the programme would be implemented in time.
4. Third Parties
The Consumer Duty still applies to firms with a key role in delivering retail customer outcomes, even if the firm has no direct customer relationship itself (e.g. product manufacturers). In such circumstances, the role of third parties in the distribution chain is crucial. The FCA has said a milestone of end of April 2023 for manufacturers to complete all necessary reviews and to share information with distributors to enable them to meet their obligations.
The FCA identified as good practice one firm’s approach of engaging in a series of face-to-face workshops with its key third party agents to design their approach to the consumer duty. Another firm had set a cross-outcome objective to work with its partners to ensure cooperation.
5. The Four Outcomes
In the FCA’s view the most effective plans in this area attempted to define good customer outcomes in the context of their business and considered how to deliver these through improvements to their products and services, communications and the support they provide.
6. Data Strategies
The FCA found that not all plans clearly explained the data required to monitor compliance with the Consumer Duty and in some cases were basing their data strategy largely on repackaging existing data, rather than considering the types and granularity of data they will actually need to monitor and evidence the four outcomes effectively.
It should be mentioned that a number of firms in the investment funds space may be less advanced in their implementation of the Consumer Duty, on the basis of having taken into account the FCA’s policy statement introducing the Consumer Duty in July 2022, which provided that financial instruments with a minimum denomination or otherwise a minimum investment of £50,000 are to be considered “non-retail financial instruments” and therefore out of scope of the Consumer Duty. The FCA has subsequently brought out a proposed amendment, to the effect that this exclusion would not apply where the financial instrument is a unit or share in a collective investment scheme or alternative investment fund.
The FCA has also highlighted three key areas where firms should particularly focus their attention during the second half of the implementation period (to 31 July 2023):
- Effective prioritisation: Firms should make sure they are prioritising appropriately, focusing on reducing the risk of poor consumer outcomes and assessing where they are likely to be furthest away from the requirements of the Consumer Duty.
- Embedding the substantive requirements: While plans are likely to be high level given the early stage at which the FCA reviewed them, the FCA is concerned that some plans suggested firms may have considered the requirements superficially or are over-confident that their existing policies and processes will be adequate. The FCA urges firms to carefully consider the substantive requirements of the Consumer Duty, as set out in its final rules and guidance, and that firms identify and make the changes needed to meet the new standards.
- Working with other firms: To implement the Consumer Duty on time, firms need to work together and share information with other firms in the distribution chain. However, the FCA found some plans gave little focus to this area, suggesting that some firms may need to accelerate their work on this important aspect of implementation.
1) This includes products that have not been wound down and in which retail customers are still invested, but which are no longer being distributed or open to investment by retail customers.