New year, same Consumer Duty

As we near the end of the first month of 2024, the Financial Conduct Authority (FCA) wants firms to remember that the Consumer Duty is “not a once and done exercise” but an obligation that is binding on firms for the long term; a “golden thread” that runs through all elements of the business of firms that deal with retail customers.

In a webinar delivered on 6 December 2023 (Consumer Duty: the next steps) (the Webinar), the FCA made it clear that the Duty is an ongoing commitment; one that needs to be front and centre in a firm’s culture and organisation from implementation and for years to come.   

The Duty, enshrined as an FCA “Principle for Business” is the obligation on all regulated firms in relation to their retail market business to “act to deliver good outcomes for retail customers”. The Duty is underpinned by three “cross-cutting” obligations: (1) Act in good faith; (2) Avoid causing foreseeable harm; and (3) Enable and support retail customers. Further detail is found in outcome rules divided into four categories: (1) Products and services; (2) Price and value; (3) Consumer understanding; and (4) Consumer support. The Duty came into force in relation to new and existing products and services that are open to sale or renewal from 31 July 2023.

The first implementation hurdle

Turning to the first implementation deadline in July of last year, the FCA acknowledged that firms had worked hard to meet this deadline which has led to higher standards and a growing trust in the financial markets. However, firms should continue to challenge themselves and focus in on consumer outcomes now and going forwards; reviewing, monitoring, and measuring consumer outcomes is a key tenant of the Duty. The FCA gave specific examples of where firms could make improvements, notably around value assessments and consumer understanding. The FCA was generally disappointed with firms’ approach to vulnerable customers, and suggested a more bespoke approach (rather than bundling customers as to categories of vulnerability for example, age). 

Focus for the coming months

The FCA addressed the key focus areas regarding the Duty for the coming months:

Closed products

Closed products (i.e. products closed prior to 31 July 2023) will come within scope of the Duty on 31 July 2024. The FCA made the following points regarding the imminent implementation deadline:

1. Firms should make sure they are on track to meet the deadline; the Duty is no less important with respect to closed products and firms should conduct a thorough assessment of these products against the Duty. 
   
   
2. Closed products may need to be scrutinised more closely; why were they closed? Is there anything to indicate poor outcomes to customers which lead to the closure? Did numerous complaints lead to the product being closed?
   
   
3. Closed products should be reviewed against all elements of the Duty (including the cross-cutting rules) to identify any gaps. Could these products stop consumers pursuing their financial objectives? Is there any likely foreseeable harm in the way these products are operated? Do customers understand them and are they continuing to offer fair value?
   
   
4. The FCA will be taking this next implementation deadline seriously and their message to firms is that they should do the same.

The annual board report

Next on the agenda for firms is the annual board report (the first being due in July of this year).  The boards of in-scope firms must, at least annually, review and approve a report detailing the extent to which the firm is delivering good outcomes for customers consistent with the Duty. The FCA makes the following points regarding this document:

1. As firms will be aware, the Duty obliges the boards of regulated firms to review and approve the annual board report; it is a key piece of internal governance and in the FCA’s eyes very important. 
   
   
2. Firms should be delivering outcomes for customers and embedding the Duty based on the strategy set out in this document. 
   
   
3. Monitoring outcomes is very important to the board report; this exercise should feed into a gap analysis and identify actions to be taken to enhance compliance with the Duty.
   
   
4. The board report should not be a tick box exercise; it should be contemplated with the right data and management information in mind. 
   
   
5. The FCA will be asking to see the board reports; in time, the FCA will review a sample of these and will want to check firms have included data to evidence consumer outcomes.

The FCA and the Duty

The FCA confirms that it will continue to send letters out to firms (in the form of “Dear CEO” letters) and will publish findings reports. The FCA will also be speaking at lots of events to raise awareness around the Duty. 

The regulator also set out its approach to supervision and enforcement:

1. Firms should be applying the Duty to their own circumstances without the need for the regulator to intervene. 
   
   
2. Nevertheless, the FCA is ready to put its supervisory and enforcement powers to good use. The focus will be on the areas of greatest consumer harm. 
   
   
3. To begin with, the approach will be a supervisory conversation in the hope that firms will make necessary changes without the need for FCA powers to be employed. If the firm is slow to make the changes, more formal tools may need to be brought into play. 
   
   
4. Where there is egregious non-compliance leading to consumer harm, the FCA will make use of its enforcement tools of penalties and censures.

The wider ramifications of the Duty

Finally, the FCA appeals to firms to never lose sight of consumers. The FCA makes the point that not only will this lead to better outcomes for consumers of UK financial services, but it will lead to higher standards and growth. This in turn will enhance the appearance of the UK on the global stage, providing a post-Brexit environment where retail customers are placed at the heart of financial services businesses. Without doubt, the Duty will remain a key part of the regulatory agenda for years to come.