The Consumer Duty has been presented by the Financial Conduct Authority (FCA) as a paradigm shift for how firms treat retail customers. Market participants expect that the regulation will create heavy workloads for firms within its scope – particularly those that have not previously focused on reviewing retail customers’ interests and experiences with their products and/or services.
The requirements are built on the underlying principle that financial services firms should provide good outcomes for retail customers. This approach, the broad nature of the rules, and vague language laid out by the FCA will be among the key challenges for compliance teams.
“The new Consumer Duty requires firms to formalise their assessment of the best interests of consumers,” said Alison Donnelly, director of risk consultancy at fscom and project regulator lead at Emerging Payments Association. “Firms must consider how customers and prospective customers are impacted by their business, whether intentionally or unintentionally.”
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How heavy the regulatory duty will feel for firms will be dictated by their work so far.
“For some, this will be a relatively straightforward process because they have been doing this all along, so the data is at hand,” said Donnelly. “For others there will be effort required to gather and analyse data and enhance product governance frameworks so that the evidence is captured at each stage.”
The wide-ranging proposals will require firms to review their product suite, communications and end-to-end customer journey. Firms may have to bring in new policies in wide-ranging areas, such as governance, accountability, reporting, product design, pricing and distribution.
As well as covering large swathes of the lifetimes of financial products, the scope of the regulation includes a broad range of firms.
“The Consumer Duty applies across the entire distribution chain for all retail customers across all FCA firms who have a material impact on consumer outcomes,” said Mark Spiers, consumer duty lead at Bovill, during a recent webinar. “It’s important to consider that even if you're at the top of the chain and you don't directly interact with consumers, you may well be affected by the Consumer Duty.”
When will it be implemented?
There are two final implementation deadlines. For open products and services that are still available to be bought by consumers, the Consumer Duty must be applied by July 31, 2023. For close products which can no longer be bought, the deadline is July 31, 2024.
However, as a part of its assertive approach to enforcement, the FCA have also set interim deadlines. Boards must approve implementation plans by October 31, 2022, and by April 30, 2023, manufacturers must have completed all necessary review for open products.
“While it’s good news that the implementation deadline has been extended slightly to July 31, 2023, there is a huge amount to fit into that time,” said James Black, partner at Hogan Lovells. “Implementation of the Consumer Duty is not just a question of making uplifts to existing arrangements: this is a cultural shift to the way firms operate, from the development of propositions through to servicing customers.”
The broad-reaching nature of the proposals means there will be a lot of work to do to prepare implementation by the end of October.
“It's almost impossible for most firms to produce a detailed deliverable schedule line-by-line for implementation plans,” said Spiers. “Most firms will still be reviewing what they do before this deadline and after the deadline.”
Rather than a thorough and final plan for implementation of the Consumer Duty, the October deadline is more likely to provide a useful indicator to take forward.
“At this stage, firms will know maybe some of the large gaps and some of the large areas that they comply with,” he continued. “But [after the October deadline] they’ll want to do more detailed work – either on what the individual work packages are to close those big gaps, or to assure themselves that they actually don't have any gaps.”
Key challenges
A further challenge for compliance teams will be working with the vague language provided by the FCA.
The regulation involves one overarching principle, cross-cutting rules, and four outcomes. The principle requires that financial firms provide good outcomes for retail customers. The cross-cutting rules require that firms act in good faith toward retail customers, avoid foreseeable harm and enable and support retail customers in pursuing their financial objectives. Subjective definitions of terms such as “foreseeable harm” and “good faith” are likely to be central to the FCA’s enforcement regime on the Duty.
To tackle this, firms should focus on compiling supporting data.
“Evidencing good outcomes through effective monitoring and reporting is crucial,” said Spiers. “This all starts from identifying the good outcomes that you expect your customers to have from your products and services. Then the effective monitoring and management information reporting should be put in place to ensure that you are achieving those good outcomes consistently and fairly.”
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How to approach compliance?
The FCA has said it will take an assertive approach to non-compliant firms. This increases the pressure for firms working with the regulation.
“By the end of October 2022 firms should have agreed their implementation plans and be able to demonstrate that they have ensured their plans are deliverable and robust,” said Daniel Hirschfield, senior professional support lawyer at Taylor Wessing.
This will be important to achieve, as its likely firms will be challenged on their plans by supervisors, he continued.
The first step in these plans should be conducting a gap analysis on a firm’s current situation compared to where they need to be to comply.
“In some ways the most challenging aspects of the Consumer Duty will be determining how the detailed rules and guidance under it apply to different business models,” said Max Savoie, partner at Sidley Austin and member of Project Regulator at the Payments Association. “This will be particularly difficult for firms that don’t contract directly with consumers but whose services could affect them indirectly. Conducting an initial mapping exercise of the rules and building that into a gap analysis of existing policies and procedures will be key.”
Firms will need to embed Consumer Duty assessments within their product development and change management processes, he continued.
Training will also be key to ensuring compliance across firms. “The FCA will expect a firm’s senior management and business functions to understand and apply the duty, as well as the detailed rules and guidance under it,” added Savoie. “Compliance functions should be planning training and providing management updates.”
