Consumer Duty — A Different Approach to Financial Services Regulation

The FCA has published final rules and guidance introducing a new Consumer Principle, which, at its heart, will require firms to “act to deliver good outcomes for retail customers.”

The principle along with three new cross-cutting rules and four prescribed consumer outcomes represent the headlines of the FCA’s new Consumer Duty (the “Duty”). This follows two consultation papers in 2021 and a final policy statement, with extensive accompanying guidance, on July 27, 2022.

The FCA has put firms’ governing bodies (which for most firms will be the board) on notice, with a requirement to scrutinize and agree implementation plans no later than October 31, 2022. The rules must be implemented for new and existing products and services by July 31, 2023 and for closed-book products no later than July 31, 2024.

In a recent speech by the FCA’s Sheldon Mills, Executive Director of Consumers and Competition, delivered at the Financial Services Summit, it was confirmed that the regulator appears to be taking a proportionate approach to the October 31 deadline. When discussing the approaching deadline, Sheldon said: “We do not expect firms to have necessarily fully scoped all work required to embed the Duty by the October deadline, but firms’ plans’ should be sufficiently developed to provide their governing bodies and us with assurance that the Duty will be fully implemented for new and existing products by next July.”

This pragmatic approach is welcome news for firms; however, this should not be seen as an indication that the FCA expects anything less than full implementation by the July 2023/24 deadlines.

The breadth and depth of the new duty gives the regulator more scope than ever before to hold regulated firms to account in their dealing with retail customers across all sectors. 

When compared to the Treating Customers Fairly (TCF) regime that it replaces, the Consumer Duty can be seen to set a higher standard, with more focus than ever before on customer outcomes and firms “doing the right thing.”

Focus on “the Board” and Its Role in Implementation

Throughout its consultation of the Consumer Duty, the FCA has been keen to emphasize the role it expects the board to play. The FCA wants to see cultural change, and this must be driven from the upper echelons of the organization, with the final burden-of-proof being placed onto the board.

Perhaps not surprisingly from a cultural standpoint, it seems that the FCA wishes firms who adopt a business-led, rather than compliance-led approach to the Consumer Duty. In our view, the Duty offers firms an opportunity to stand back and take stock of their existing culture, improving the attitudes, behaviors and day-to-day practices to how customer outcomes are considered within their organization.

We have also seen the FCA take a bold step by using the policy statement to set out an implementation timetable, in which it expects a firm’s board to have scrutinized and approved an implementation plan by 31 October 2022. They are clearly seeking to ensure momentum is maintained through the initial 12-month period. However, while firms will be glad that the FCA has been clear about its expectations, they have set a challenging timetable.

As of the date of publication of the final rules, boards were given three months to ensure that progress is underway. The FCA will be keen to check this progress from November 2022 onwards, clearly stating its intention to request evidence that progress has been made. Such evidence will include the final approved implementation plan; however, it could also extend to copies of board minutes and action logs, with the FCA looking for clear evidence of challenge and understanding by the Board, rather than merely being rubber stamped.

Further, boards are required to maintain oversight of their implementation plan, ensuring it remains on track and that any work carried out is sufficient to ensure the firm meets the new Duty standards.

At the end of the implementation period, boards will need to satisfy themselves that their firm is complying with the new standards and be satisfied that any gaps or weaknesses, which may cause poor outcomes for customers or potential customers, have been identified and will be fixed in a timely manner.

Annual Reviews and a New Consumer Champion

The FCA expects the new Duty to drive a cultural shift in how firms think and deal with customers at every stage of a product or services lifecycle from product “cradle to grave.”

To achieve this, the FCA intends to improve standards of governance, accountability and oversight by requiring the board to commission an annual Consumer Duty report.

The new rules require an annual report to be signed off by the board, and it should include, as a minimum, details on:

• The results of the monitoring that the firm has undertaken to assess whether products and services are delivering expected outcomes in line with the Duty
• Any evidence of poor outcomes, including whether any group of customers is receiving worse outcomes compared to another group, and an evaluation of the impact and the root cause
• An overview of the actions taken to address any risks or issues
• How the firm’s future business strategy is consistent with acting to deliver good outcomes under the Duty

As firms develop their annual reports, the FCA hopes that areas will be identified where risks may exist and/or where clear action is required to address poor outcomes, either current or foreseeable. 

Where this is the case, it is advisable that the board clearly agree to the action and record this decision in a way that can easily be evidenced to demonstrate accountability and oversight. The old adage of “if it’s not written down, it didn’t happen” is no less important than now.

The importance of accountability is further highlighted with the FCA suggesting that firms should allocate a “Consumer Duty Champion” from the board members who, along with the CEO and Chair, would ensure that the Duty is being discussed regularly and raised when necessary.

The FCA guidance suggests that this individual should be an independent non-executive director (iNED) where possible. Although where firms do not have an iNED role, we also believe the role of the Consumer Duty Champion (the Champion”) could sit comfortably with the Chief Compliance Officer (SMF 16). However, the overall responsibility must remain with the board, with the Champion acting more in a challenge and stewardship capacity.

It should also be noted that there is no suggestion that the Consumer Duty Champion should take full responsibility for delivery of the Duty as this still sits with the overall board and the relevant SMF function holders. In fact, it is unlikely that allocating one individual the firm’s responsibility, under the new Duty, would drive the required culture and behaviors that are desirable of the changes—such an approach can create a “them not me” mentality among other board members and senior managers.

What Should Firms Be Doing Between Now and 31 October 2022?

As previously noted, the FCA has been clear about its expectations and timelines. With that in mind, boards of firms should be immediately taking steps to:

• Designating a board “Consumer Duty” champion, ensuring this individual has independence and, if necessary, relevant training to support the role
• Engaging with relevant internal stakeholders and ensuring each part of the business understands its obligations and timelines and is ready and able to support the implementation process
• If not already done, conduct a gap analysis of the processes and procedures of each business area to understand where further work may be necessary to bridge any gap between TCF and Consumer Duty requirements. We consider that a useful starting point is to map each product and service journey, highlighting where customer interaction takes place.
• Develop internal lines of communication to provide regular updates and information relating to the Duty and the firm’s progress against any set timelines. We believe all staff should feel engaged as part of the journey to help shape and develop a culture of understanding of what the new Consumer Duty will mean at all levels.
• Prepare a coherent and realistic implementation plan by the end of October 2022. Ensure the plan is clear on what actions need to be completed, by when and who will be overseeing their delivery.

It is likely the FCA, through its supervisory channels, may now be asking boards to explain where they are on their implementation journey, and certainly after 31 October, firms should be ready to provide a copy of their implementation plan and evidence of its challenge and approval by the relevant governing body.

How We Can Help

The impact of the Consumer Duty on firms’ resources should not be underestimated, with some firms having considerable ground to make up between now and 31 October 2022.  

We have deep knowledge of consumer protection matters, enabling us to support your firm to navigate the gray areas, reach pragmatic solutions when interpreting FCA requirements and identify gaps where further work may be needed. For example, we can:

• Offer tailored briefings to your governing body, setting out what the Consumer Duty will mean for the firm and what the implications for senior leadership will be
• Provide training to your designated Consumer Champion to equip them to fulfil their role over the coming 24 months
• Provide templated documentation to support your transition, including Consumer Duty ready board packs, revised terms of reference and implementation plan template
• Plain English support with interpretation of the rules, including commercially considered advice on implementation for your business
• A comprehensive review of any product/service line communications (including customer journey, documentation, etc.) to identify any gaps between existing expectations, and those of the Duty

In addition, and as outlined in this article, implementation plans will need to be carefully considered and appropriately challenged to ensure they are “FCA ready,” especially given the increased likelihood that the regulator may ask to see your firm’s output.

We are able to offer an independent review of your implementation plan, prior to your governing body agreeing to its contents, so you can be sure that any gaps or areas the FCA may home in on, are clear to your firm so you can be fully prepared.

Please reach out to us here.