Our industry is in the final stages of preparation for the FCA’s Consumer Duty, with the 31 July deadline for all new and ‘open’ products and services fast approaching. This brings a major shift in the FCA’s regulation of firms across the retail financial services market. The focus is on delivering and evidencing good outcomes for retail customers, and this means different things to different firms in different parts of the industry.
Along the way, the FCA has provided and continues to provide a huge amount of material to study. Alongside the final rules and non-handbook guidance, this includes website updates, ‘inside FCA’ podcasts, speeches, sector specific letters, findings from reviews and local presentations. While these are all helpful, the volume can be overwhelming and it’s important in these last few weeks to make sure we’re all still focusing on the original aims.
Here are my top ten tips for making the most of the final stretch as we run up that hill towards the finishing line.
- Evidence delivery of your implementation plan
- Review the FCA’s 39 example questions
- Document your target markets and segmentation
- Finalise value assessments
- Check your Management Information (MI) against the FCA’s suggestions list
- Formalise your approach to vulnerable customers
- Review your customer feedback
- Read the latest FCA material
- Keep prioritising
- Get your records in order
1. Evidence delivery of your implementation plan
The first deadline the FCA set on the Consumer Duty journey was for all firms to have an implementation plan in place by end October 2022. Much may have moved on since then, but it’s worth revisiting your original plan and documenting the actions you’ve taken to show that you’ve delivered. It may be that as you advanced preparations and explored the Duty further, you adjusted your plans or added more detail. If so, make sure you’ve documented your rationale behind any major changes to show why the actions you have taken support good outcomes.
2. Review the FCA’s 39 example questions
In the final non-handbook guidance, the FCA set out 39 examples of questions for firms to ask themselves and which the FCA may in turn ask firms. At that time, most firms wouldn’t have been in a position to answer them as they’d need to work through necessary Consumer Duty preparation and changes. In addition, not all are relevant to all types of firm, with some targeted more at manufacturers or distributors. But by the deadline, firms should check they can answer all questions relevant to them and document this. We’ve pulled together the 39 examples for you to review.
3. Document your target markets and segmentation
Product manufacturers must design products to meet the needs, characteristics and objectives of a specified target market of customers. Similarly, as the ‘manufacturer’ of your advice services, you should also design these with target customer groups in mind. Some specialist services such as advice on defined benefit transfers may have quite granular target markets. But the ‘target’ for more holistic financial planning services may be much wider and it may help to specify which types of clients are not in your target market.
If your target market is very wide, you may want to consider segmenting clients who’ll use that service, for example when constructing an approach to charging. The FCA has suggested it may not represent fair value to charge a client with a large sum invested the same percentage as one with a much smaller investment amount.
4. Finalise value assessments
As advisers, you have a dual role to play in assessing value.
First, you must check that on a standalone basis, you’re charging your clients a reasonable fee compared to the benefits they’re likely to receive from your service. This should cover initial and any ongoing charges and services. When carrying out this analysis, you may choose to compare yourself to others in the market offering similar services. You might also find it helpful to be able to show your charges are reasonable compared to what it costs you to provide a service. The FCA recently published findings from its review of fair value frameworks which may offer you further insights.
In addition, you must also check that your customers are receiving fair value from products and services you recommend – allowing for all charges from ‘higher up’ the distribution chain as well as your own charges. Manufacturers had a deadline of 30 April to provide distributors with information on their products’ benefits and charges, target markets and intended distribution strategies and to confirm the outcome of their product value assessments. At Aegon, these are available in a single document for each product on our Consumer Duty hub. We’ve allowed for typical costs of distribution in our analysis.
5. Check your Management Information against the FCA’s suggestions list
Your Consumer Duty Management Information (MI) must be able to demonstrate that you’re delivering good outcomes. The FCA suggested various types of data or MI which firms might use to demonstrate compliance with the Consumer Duty. This is brought together in Paragraph 11.33 of the Final Guidance. The FCA is clear that appropriate MI for a firm will depend on the nature, scale and complexity of the firm’s business. Checking back to review the FCA’s MI suggestions may help refine what you have and help demonstrate you’re complying with not just the four outcomes, but also the cross-cutting rules. It may also be helpful to review how you ‘present’ or package up your existing MI to link it back to the Duty.
6. Formalise your approach to vulnerable customers
Throughout the Consumer Duty material, the FCA places a major emphasis on customers with characteristics of vulnerability, which can be permanent or transient. Firms must be able to identify vulnerabilities and adapt their approach to make sure such customers get at least as good outcomes as other customers. This is a topic which is ever evolving – the pandemic and the cost-of-living crisis have both led to new instances of vulnerabilities. While advisers are already well equipped to deal with each individual’s needs through their one-to-one advice services, the FCA may ask for examples of the types of vulnerability you look to identify and the ways in which you respond to these as part of your advice services. For example, you may offer additional support to someone with a serious illness or who has been made redundant.
7. Review your customer feedback
It makes great business sense to collect feedback and learn from a cross-section of your customers. Collating customer feedback can also help you check that you’re delivering the good outcomes required by the Duty. You can do this as part of one-to-one advice sessions, confirming understanding of the key points of your advice as you go, and documenting this. If you supplement this with separate customer surveys, I’d avoid focussing solely on ‘satisfaction’ with the service. To reflect the Duty, you could build in questions around the client’s understanding of the service – of the foreseeable harms you’re looking to avoid and generally how you’re supporting them to meet their financial objectives.
8. Read the latest FCA material
As the months have progressed, the FCA has sought to clarify its expectations further. It was particularly helpful that this included sector specific or ‘portfolio letters’. The rules and final guidance apply to a wide range of types of firms in different sectors, and it isn’t always obvious which aspects are particularly targeted at certain sectors. The portfolio letters set out the key FCA priorities by sector so I’d recommend reviewing your preparations against these. For many adviser firms, the consumer investments letter from January 2023 may be the most relevant.
9. Keep prioritising
Hopefully, most adviser firms will be well advanced in their preparations for 31 July. However, delivering good outcomes is not something which will ‘stand still’. I expect we’ll all constantly evolve how we go about doing this, not least because of the changing external environment. If you still have a lot to complete before the deadline, I’d recommend following the FCA’s steer in its consumer investments letter. That is, to prioritise the key actions which will reduce the risk of poor outcomes or foreseeable harm and where you’re currently furthest away from the Duty requirements.
10. Get your records in order
The FCA has warned firms that they shouldn’t be over-confident or treat the Duty superficially. So however much or little you’re changing your business model and client services, it’s really important to record the considerations you’ve been through. This could be through formal Board minutes, outputs of workshops and analysis or keeping an actions log. As well as recording what you’ve changed and why, I’d recommend also documenting when you’ve reviewed something but concluded it already complies with the Duty, so doesn’t need to be changed. This will clearly show the FCA that you have taken the Duty seriously, irrespective of how many actual changes you’ve made.
Get ready for Consumer Duty
We’re all at different stages of readiness for the Consumer Duty but I hope these tips may be of help in that final stretch. You can find more information and resources including three implementation guides covering how adviser firms are responding on our Consumer Duty hub.