With the deadline to have a plan on how your institution will comply with the new FCA’s Consumer Duty rules approaching next Monday, I thought it might be useful to share a summary of 7 things firms should be doing now.
- Board assessment, review and governance
Firms should have finalised their implementation plan and be in the process of rolling out Board briefing on the Consumer Duty requirements and expectations. In its previous consultations, the FCA stated that Boards must review, at least annually, an assessment of whether their firm is delivering good consumer outcomes in line with the Duty and approve plans to address poor outcomes. The requirement for an annual Board report on compliance with the Duty is maintained and the first Board report is expected within 12 months of the rules coming into effect. This means that the first report must be finalised before end of July 2024.
In addition, Boards must assure themselves that their firm is complying with the Duty by the end of the implementation period – 31 July 2023. Boards must also ensure that the firm has identified any gaps or weaknesses and that there is a plan of action to remedy them. This means that although a formal report is not required until mid-2024, Boards are expected to assess compliance from the end of the implementation period.
Firms need to ensure that they have appropriate and effective management information to provide the Board with the evidence they require on whether the firm is achieving good customer outcomes.
The FCA also expects firms to reflect the Duty in their strategy, governance, leadership and people policies, including incentives. This is intended to ensure that the Duty is embedded in the firm’s culture and that its culture is focused on enabling good consumer outcomes. Furthermore, firms will need to appoint a “Duty Champion” at Board level to help ensure, alongside the CEO and Chair, that the Duty is discussed regularly. Firms need to be prepared to share with the FCA the content of these discussions and the MI used.
- Monitoring Duty compliance and the FCA’s supervisory approach
Firms should begin to put in place appropriate monitoring programmes. Throughout the final rules and guidance, the FCA emphasises the importance of monitoring outcomes with a special focus on vulnerable customers and other distinct groups of customers. The FCA now expects firms to identify whether particular groups of customers are receiving worse outcomes. The guidance sets out what the firms should do to ensure that customers in vulnerable circumstances experience outcomes as good as those for other consumers. Firms are likely to struggle to assemble the necessary data to assess this. However, this is a sensitive topic that could reveal potential areas of harm to groups of customers that firms have not previously identified.
As such, whilst the rules focuses on the requirement of paying specific attention to customers with vulnerabilities, it also raises a bar for the treatment of all customers. Therefore, Principles 6 and 7, rules related to the treatment of vulnerable customers are complimentary to the Consumer Duty requirements.
The FCA is taking an active approach to ensuring that firms implement the Duty effectively and measure the consumer outcomes accurately. Throughout the implementation period, the FCA will conduct high-profile campaigns to raise awareness of the Duty and assist firms in understanding the FCA’s expectations of them in line with the Duty. Additionally, the FCA is requiring firms to be able to demonstrate that they meet the standards of the Duty at the authorisation gateway. The FCA will only authorise firms if they are able to demonstrate that the Duty is embedded throughout the organisation.
In line with the FCA’s three-year strategy, the FCA will monitor the set of metrics of its outcomes on fair value and suitability & treatment, coupled with data from the Financial Lives Survey and Financial Ombudsman Service’s complaints to track the progress of the Duty. The FCA intends to develop a wider range of data sets, including sectoral data, to assess the extent to which firms are delivering good outcomes for consumers.
The FCA expects the implementation of the Duty to be iterative as industry good practice emerges. Firms should build sufficient flexibility into their implementation plans to enable them to adapt their policies, procedures and practices. The FCA plans to undertake a post-implementation review of the Duty but has not set a timeline for it.
- Owning responsibilities across the value chain
Firms should understand their role and responsibilities across the value chain. The Consumer Duty rules apply across the distribution chain to all payment/electronic money institutions that have a material influence over, or determine, retail customer outcomes. It means that the firm, whether or not it is directly interacting with the customer, will be bound by the Consumer Duty and will be responsible for ensuring its adherence. In practice, it means that principal payment/electronic money institutions will bear the responsibility for the actions of their agents/distributors as they influenced the design of the product which was developed. It means that all your PSD Agents, EMD Agents and E-money Distributors must comply with the Consumer Duty rules as explained in this summary.
Similarly, any outsourced activity that is undertaken on behalf of the firm will be subject to the FCA Consumer Duty and the firm will need to consider how any of its service providers (e.g. customer support) will be affecting its compliance. The FCA has confirmed that, while all firms in the distribution chain will have responsibilities under the Duty, they will only have liability for their own activities and will not be responsible for outcomes arising from the actions of other firms in the chain. However, the FCA has introduced a new rule requiring firms to notify the FCA if they become aware that another firm in the chain is not or may not be complying with the Duty.
A firm must also notify another firm in the chain if it thinks that firm has caused or contributed to harm to retail customers. This means that in practice firms will still need to pay attention to information they receive about what other firms are doing. This raises the question of what will be notifiable and whether the FCA might challenge a firm if evidence comes to light that indicates it should have known that another firm was in breach of the Duty. Firms will need to consider this new requirement from both a legal and process perspective to ensure they are able to comply.
- Noting interaction of the Consumer Duty rules with Principle 6 and 7 rules
Firms should note that whilst, Principles 6 and 7 already apply to the interests of the customers and their information needs, they won’t apply where the new Consumer Duty rules apply so, they are complementary rather than contradictory. The new Principle 12 also reflects positive and proactive expectations that the FCA has of the firm’s conduct and placing customers’ interest at the heart of any activity.
- Having clarity over key concepts such as “foreseeable harm” and “good faith”
Firms should note explicit guidance on what it means to act in good faith, to avoid causing foreseeable harm and to enable customers to pursue their financial objectives. There are more examples and detail on what is and is not expected within each rule.
The introduction of the Duty does not extend the definition of consumer harm but firms will need to challenge themselves about what foreseeable harm means (for example, whether a product is unaffordable or unsuitable and how to deal with the dynamic nature of harm), recognising that all financial services products come with a level of risk.
The requirement to mitigate harm exists today. However, the Duty means that firms will need more data and evidence to demonstrate that they have acted reasonably to meet the three cross‑cutting rules.
- Understanding how to apply the rules to closed book/existing products
Whilst the Duty will not apply retrospectively to past business, the FCA is proceeding with its proposal to apply the Duty on a forward-looking basis to existing products and services which are still being sold to new customers, or closed products and services that are not being renewed or sold. The FCA is giving a further 12 months for firms to implement the Duty to closed books so firms should begin to assess how they will apply the rules to their closed book.
The FCA acknowledges that the rules under the price and value outcome are difficult to apply to closed books as they are linked to original contractual terms. Some of these contractual terms will be vested rights. Although the FCA states that it will not infringe on vested rights, it expects firms to seek alternative methods to prevent harm for existing customers under these products.
Firms are expected to assess whether a product exploits lack of knowledge / behavioural biases, has an overly complex charging structure and whether there is a good relationship between price and benefits.
Firms are expected to build the expectations set out above into the due diligence process and information gathering they carry out before purchasing a book of business from a third party.
- Knowing the applicability of the Consumer Duty rules to ancillary activities such as for example, crypto activities?
Firms should note most importantly that the new Consumer Duty applies to authorised firms conducting ancillary activities. This means that even other activities which are not per se within the ambit of the regulation of the FCA will be subject to the duty if they are provided in connection with the regulated activities. The most common example within the electronic money/payments sector is currency exchange which is considered to be an ancillary activity.
However, the rules do not apply to cryptoasset activities like crypto exchange and custody unless the crypto firm is also an authorised firm (e.g., an EMI and PI). In my opinion, cryptoasset activities may be considered ancillary if the firm in question has a direct link between the crypto exchange and payment/electronic money services. This could happen when the firm is supervised by the FCA as an EMI and cryptoasset exchange provider which offers payment cards linked to the payment account that can be topped up solely via the exchange of crypto.