The launch date for the FCA’s Consumer Duty is drawing near. The new rules affecting existing and new products and services open for sale and renewal come into force on July 31st. Financial Services companies should be nearly ready to go live, having completed their product and service reviews against the new rules and finalising their implementation plans to achieve full compliance on time.
Companies behind schedule should focus on deploying internal mechanisms and frameworks to reduce the risk of consumer harm, particularly in the key risk areas identified by the FCA in their reviews. The FCA expects significant change to realise the positive impact the Duty is designed to achieve. The onus is on companies demonstrating fresh thinking in their approach to protecting consumers rather than simply tinkering with existing systems and frameworks. The FCA will want to see evidence of action, for instance, the simplifying of customer communications following testing or changing product fees after assessing their value.
The FCA means business
The Consumer Duty is a keystone of the FCA’s three-year strategy to prevent and reduce consumer harm, set and test higher standards, and promote competition and positive change. The FCA is determined that the Duty will be implemented on time and will dedicate significant supervisory and enforcement resources to ensure companies are fully committed to its aims. Offenders can expect interventions, investigations and possible disciplinary sanctions. Companies making only minor changes should be prepared for close scrutiny.
Sheldon Mills, FCA Executive Director of Consumers and Competition, has recently warned companies that ignore the new rules to expect robust action to be taken against them and that the regulator will act ‘swiftly and assertively’ where they find evidence of harm or risk of harm to consumers.
Since the FCA set out the Final Rules in July 2022, it has conducted in-depth reviews and discussions with companies in different sectors to assess their progress. The FCA has published its key findings with examples of good practice and examples where companies’ approach to implementation need improvement to aid all companies in their implementation planning. With time rapidly running out before the launch date, it is worth recapping the key points of the most recent FCA reviews.
Review of implementation plans
The review of implementation plans published in January concluded that many companies understood and welcomed the ‘shift to focus on consumer outcomes.’ They were engaging with the four consumer outcomes and had established extensive work programmes to comply with it properly. Companies found to be so behind in their planning that it jeopardised their ability to implement the Consumer Duty on time were encouraged to accelerate their efforts.
The key areas that the FCA wanted firms to focus on in the remaining time particularly were:
- Prioritising: particularly in the areas that will have the biggest impact on outcomes for consumers, with a clear rationale for prioritisation
- Making necessary changes: that ensure consumers receive communications they can understand, products and services that meet their needs and offer fair value, and get effective customer support when they need it
- Working with other firms: to share information and work closely with partners so they all deliver good customer outcomes.
The review made other points that companies should act upon:
- The FCA will hold companies, their boards and senior managers accountable for delivering good outcomes for consumers
- Companies should establish a champion role to support the Chair and CEO by raising the Duty in all relevant discussions and challenging senior management on how they are embedding the Duty and focusing on consumer outcomes
- Risk and compliance or internal audit functions should scrutinise the implementation work
- Relying on past initiatives or existing frameworks to comply with the Duty is unlikely to be sufficient, particularly current data and MI systems. The FCA wants fresh thinking about how outcomes are monitored and evidenced
- The FCA wants a pragmatic approach to implementing the Duty in time especially in engaging with third parties. Implementing tactical fixes by the deadline followed by a fuller strategic strategy is seen as a pragmatic approach
- The FCA accepts cultural embedding may take longer but expects tangible action to be taken now. These might include the review of reward and incentive schemes, performance management frameworks and training strategy.
Review of fair value frameworks
The FCA published the findings from its review of fair value frameworks in May. Fourteen, mainly large, companies were assessed against the stated aim that a fair value framework enables companies to ensure the price a customer pays for a product or service is reasonable when compared to the overall benefits of the product or service. The review findings are relevant for smaller companies too.
The review concluded that companies had carefully considered price and value requirements and significant effort had gone into their fair value frameworks. Still, some companies have more work to do to ensure their frameworks are effective in practice. The FCA set out five criteria for demonstrating good practice and the areas of improvement that will enable firms to ascertain how effective their frameworks will be in practice. Sheldon Mills identified the risk that certain categories of consumers, such as those on low incomes or in vulnerable circumstances, were receiving poor value.
The FCA identified four key areas for companies to focus on:
- Collection and monitoring of data to evidence the fair value of products and services
- Clear oversight and accountability for remedial action where fair value is not provided
- Sufficient analysis of the distribution of outcomes beyond general averages to demonstrate how different groups of consumers receive fair value
- Clearly presenting fair value assessments internally to enable decision-makers to ‘robustly discuss’ whether products and services provide fair value, including clarity about any limitations in the analysis or evidence.
Customer communications and data analysis
Two areas that companies should pay particular attention to are financial promotions and data analysis. A company’s ability to deliver good outcomes depends a great deal on the way it communicates with existing and new customers so they can make good and timely financial decisions. This particularly affects financial promotions, pre-and post-sale disclosures and business-as-usual communications. This may require companies to test, monitor and adapt their communications and review their current financial promotions approval process.
The analysis of good quality data collected in sufficient quantity from throughout the company and its distributers will be vital for decisions about fair value. This may impact companies deploying tactical solutions to meet the deadline rather than undertaking wider technology improvement.
The first step
Companies lagging behind in their implementation planning should act quickly. The FCA sees the July 31st deadline as a first step. Ongoing monitoring, review and assessment of how outcomes are delivered will be essential to meeting FCA expectations. A significant workload will again be required to prepare for the 31st July 2024 deadline for closed products and services, which may present challenges for some companies in terms of data availability.
Perivan’s Marketing Distribution Platform, Enable, includes workflow tools that streamlines financial promotions approval processes and ensures all content is compliant before it is used. If you would like to find out more about Enable and our range of marketing solutions, please get in touch with the Perivan team to arrange a demo and answer your questions.