Start the year as you mean to go on... the Consumer Duty way.

Findings from the FCA Consumer Duty Webinar – 6 December 2023

The FCA presented its long-awaited Consumer Duty webinar last month, which was one of the longest webinars they have hosted. They used the time to discuss their expectations of firms and their governing bodies in overseeing adherence to the Duty on an ongoing basis and the supervisory and enforcement tools they will use to focus on areas of greatest harm. They also shared a number of insights about what they are seeing across firm types, including insurance, banking, consumer investments, and consumer credit. 

The FCA spoke positively about the early signs of change they are seeing, with some firms overhauling their product suitability assessments, reviewing their communications and introducing management information and data to assess their firm’s adherence to Consumer Duty requirements.

They did, however, repeat that Consumer Duty is not a once and done exercise. Firms need to really challenge themselves about whether they are meeting requirements, focus on monitoring and measuring how they are doing on an ongoing basis, and use data to provide assurance that they are delivering outcomes that are in their customer’s interests. This article will address the highlights from the FCA’s webinar and will give firms advice on how they can get themselves in the best position to ensure they meet their obligations in 2024.

Closed Products and Services:

The next immediate Consumer Duty deadline for firms who have closed products* is to complete their reviews and assess whether any aspects of the design of their closed products are harmful, could lead to foreseeable harm, or hinder customers in fulfilling their financial objectives.

Firms will be pleased to hear that they don’t need to identify the target market and distribution strategy for closed products, but the Duty applies in full otherwise and firms need to meet all of the cross-cutting rules. The rules for closed products come into force on 31 July 2024.

*closed products and services are no longer on sale to new customers or available for renewal by existing customers.

The FCA expects firms to make sure that customers with closed products receive the support they need, when they need it, as well as receiving communications they understand and that these products continue to offer fair value. Firms should be analysing whether products were closed for a particular reason. Were complaints received about the product offering poor value? Or the level of support provided was not as good as it used to be?  Also, firms should be asking themselves what can they do to make sure this doesn’t happen again?

Role of the Board / Governing Body:

The FCA also highlighted their expectation that firm’s boards, or governing bodies, should review and approve an assessment of whether the firm is delivering good outcomes for its customers which are consistent with the Duty, on at least an annual basis.

This assessment should include the results of monitoring that the firm has undertaken to assess the outcomes its products and services are delivering. It should also include any evidence of poor outcomes, including whether there are any groups of customers who are receiving poorer outcomes when compared to other customer groups, and an evaluation of the root cause and impact of this.

An overview of the actions taken to address any risks or issues and how the firm’s future business strategy is consistent with acting to deliver good outcomes under the Duty, should also be included in the Board report.

The FCA said that they will be asking firms for copies of the board report and will look at the actions that are being taken and evidence to demonstrate that firms are putting things right when they go wrong. They will also consider the extent to which boards are scrutinising the report and how seriously they are taking it.

The FCA also wants to see boards and governing bodies working with senior management to ensure they are doing the right thing. Delivering good customer outcomes should be a key factor in setting a firm’s strategy for the coming year and on an ongoing basis. For example, if changes are planned to alter the way in which customers can contact you, has consideration been given to whether these changes will cause issues for the customer and whether alternatives will be made available if required?

Fair Value Assessments:

Fair value is about ensuring that what the customer pays is reasonable compared to the overall benefits they receive. The FCA said that fair value assessments should look at the overall value of the product or service, including the level of support offered, the quality of the product features, the level of flexibility in terms of distribution channels etc, and not just the price. For example, some customers want peace of mind, or greater accessibility to staff and may be willing to pay more for a higher level of service. Also, advisory services will cost more to provide than non-advisory services and this should be taken into account when carrying out fair value assessments. On the other hand, the FCA highlighted Guaranteed Asset Protection (GAP) insurance as an area where a lot of money is paid in commission to garages and brokers etc. and manufacturers of this product must show how they provide fair value.

There is evidence that some firms are assessing and overhauling their fee structures, but this is not once and done, fair value assessments need to be continually reviewed.

Vulnerable Customers:

Consumer Duty raises the expectation that firms will support customers where they are facing challenges. The FCA has found weaknesses in frameworks to support vulnerable customers, including an inability to identify these customers and provide them with the right support channels.

Many firms still don’t recognise that some of their customers are vulnerable and don’t have the ability to deal with them appropriately. Other firms are taking a narrow view of vulnerability and not thinking widely enough about this topic. For example, some firms automatically assess all customers over a certain age as vulnerable. The FCA doesn’t believe that this blanket approach is appropriate and firms need to be more nuanced in the way they deal with them.

Some firms are engaging with vulnerability and are doing it well, such as centralising vulnerable customer processes into one area and having experienced staff deal with them. This has led to improvements and consistency in the handling of vulnerable customers and the quality of data and compliance monitoring. However, this approach won’t suit every firm - many won’t have the resources to do it and may not need to if they already know their customers personally.

The FCA has also seen evidence of firms reviewing communications and making changes to the content and formatting to provide a higher level of accessibility for hearing or visually-impaired clients. Before rolling out products, firms should be testing their customer’s understanding and continually doing this. They should also ask customers to play back their understanding of the risks and the benefits of products they are thinking of buying. Other firms are carrying out outreach calls to customers who appear to be struggling which is driven by their ability to identify, record and monitor customers who may be vulnerable. Some firms are monitoring trading activity and where customers are slipping into gambling they are reaching out to see if they can support them better, or are turning off a customer’s ability to trade in gambling products. Other firms have recognised that there is no point in trying to communicate via email with a customer who is digitally excluded as they won’t receive it.

Firms are expected to work out the most appropriate approach they should take when dealing with these customers and make sure that staff are confident in dealing with them – it will make the experience so much better for everyone.

Information sharing:

Consumer Duty requires manufacturers and distributors to share information that can be used to develop suitable products for the target market, inform distributors about who they should be selling to, and highlight issues with products and services so that improvements can be made and customers receive better outcomes as a result.

The FCA is aware that there have been issues in this space with some firms saying that they can’t do it, or that it is too difficult. Other firms are providing insufficient information that doesn’t help another firm to assess value, or they are providing too much information such as line-by-line customer data.

Information sharing should be proportionate and shouldn’t result in a cottage industry where it causes frustration for firms and results in a cost to the consumer. Manufacturers and distributors need to work better together and agree the information that should be shared to improve customer outcomes.

FCA Supervision and Enforcement Activity and Consumer Duty:

The FCA considers Consumer Duty to be the golden thread running through all of its work and as such, part of the webinar was taken up with the FCA explaining how they will use their supervisory and enforcement tools to take action against firms who are not delivering good customer outcomes, focussing on the areas of greatest harm.

If the FCA finds that firms are not delivering good customer outcomes, they will have supervisory conversations with those firms and their experience is that firms normally make changes, without having to use formal powers. However, if this doesn’t happen, they will use other tools available to them and intervene where poor conduct is causing significant harm, or where firms are slow or ineffective at addressing problems voluntarily. They may stop firms from doing activities and may go even further, such as censuring firms.

In summary…

The FCA plans to carry out multi-firm reviews where they see problems across a sector and thematic reviews to address issues that arise across multiple sectors. They may also carry out cross-sector reviews to assess whether firms are dealing fairly and robustly with complaints and are carrying out root cause analysis, to prevent the same problems from recurring.

One thing is certain, the FCA is serious about Consumer Duty and it is set to be high on the supervisory agenda this year. The FCA doesn’t want firms to wait for it to intervene, it wants them to be proactive in continuing to monitor outcomes and will be assertive in taking action where it is required.