With the key deadline for the FCA’s Consumer Duty now less than six months away, the FCA has kicked off 2023 with a bumper pack of material designed to support firms with implementation.
I’ve picked out key points from a number of recent publications:
- Consumer Duty implementation plans – good practice and areas for improvement
- Dear CEO / Director sector letters – with a focus on the Consumer Investments sector
- Inside FCA podcasts
Taken together, these represent a significant amount of new resources to clarify FCA expectations, as firms deliver on their implementation plans and prepare for the 31 July ‘go live’ date.
1. Consumer Duty implementation plans – good practice and areas for improvement
The FCA set a deadline of 31 October 2022 for all firms to have prepared a Consumer Duty implementation plan, with evidence it had been properly scrutinised and challenged by the firm’s Board or equivalent governance committee. While these plans weren’t intended to cover every minute detail, they had to represent a credible approach for being compliant by the deadline.
The FCA asked for copies of these plans from larger ‘fixed supervision’ firms and published a summary of its multi-firm review findings. Importantly, the FCA stresses the findings are relevant to all sizes of firms preparing for implementation. It found many examples of good practice, but also identified some concerns over speed or robustness of implementation and has set out areas for improvement.
There are three key areas the FCA wants firms and management bodies to particularly focus on and challenge:
- Effective prioritisation – priority given to reducing the risk of poor consumer outcomes and on areas furthest away from the Duty requirements.
- Embedding the substantive requirements of the four outcomes (products and services, price and value, consumer understanding and consumer support) – making sure they’re not treating these superficially or being over-confident.
- Working with other firms across the distribution chain – including sharing information.
The paper then sets out good practice examples and areas for improvement. Here I’ve picked out some points under the six key headings the FCA uses in the paper.
1. Governance and oversight
The FCA expects senior managers and boards to actively challenge and take accountability for compliance, supported by an appropriately senior individual as Consumer Duty champion. It expects to see robust governance frameworks, with:
- Clear timings
- Clear executive accountability
- The involvement of risk and internal audit functions
- Scrutiny and challenge including around adequacy of resourcing of implementation
- An ongoing assurance framework
2. Culture and people
The FCA believes the higher Duty standards will require a ‘significant change in many firms’ culture’, covering strategies, leadership and people policies including incentives. Training initiatives, potentially tailored to different roles, should make sure staff understand their responsibilities.
Linking the firm’s purpose and values to delivering good consumer outcomes is seen as good practice, as is setting out tangible actions.
3. Deliverability of implementation plans
The FCA expects firms to have:
- Analysed all relevant areas
- Scoped required work
- Set out clear workstreams and milestones
- Agreed appropriate resourcing including IT
- Documented key risks and mitigation strategies
- Put in place means of tracking progress
Some workstreams might be based on the four outcomes while others could be ‘enablers’ such as Management Information (MI) and culture. Seeking appropriate support from external experts is also highlighted as good practice. The key ‘effective prioritisation’ aim is particularly relevant here. The FCA recognises implementation may require some ‘tactical fixes’ ahead of ‘fuller strategic solutions’.
4. Third-party collaboration
Delivering good outcomes requires collaboration across the distribution chain, including those with no direct customer relationship and where delivery is outsourced to third parties. Central to this is manufacturers and distributors working closely together and sharing information, with an end of April deadline for manufacturers to provide distributors with the outcomes of their value assessments.
5. The four outcomes
Firms should be carefully considering the substantive requirements under the four outcomes. In places, this will involve building on existing approaches. The FCA cautions against plans being too vague or firms being too complacent.
- Products and services – priority should be given to those with greatest risk of causing consumer harm, including for those with characteristics of vulnerability.
- Price and value – it’s important to make sure there’s a reasonable relationship between costs and benefits. This is to consider any hidden or unexpected costs and to address any issues of high fees meaning certain groups won’t receive fair value.
- Consumer understanding – implementation plans around consumer understanding could involve many aspects, depending on the nature of the firm and how it communicates. Providing information customers need, at the right time, to aid understanding and effective decision making is key. Firms may wish to review language and layout, carry out consumer testing of understanding and / or put in place MI to monitor subsequent behaviours.
- Consumer support – focus areas within consumer support may include assessing turnaround times and reviewing specific customer journeys. It could also involve introducing new means to allow customers to notify firms of vulnerabilities and enhancing support in key area such as bereavement, fraud and complaints.
6. Data strategies
It’s very likely that firms will need to enhance existing data strategies to make sure they’ll be able to assess, test, understand and evidence good outcomes. The types of information needed will depend on the firm’s role, size and client base. Data may in future need to be more granular, for example to monitor the outcomes of different groups including those with vulnerabilities.
In terms of next steps, a sample of firms of all sizes will receive an anonymised survey to help the FCA understand progress with implementation. There are more sector-specificcommunications to consider, which I discuss in section 2. The FCA is also now holding regional in-person events between now and June 2023.
2. Dear CEO / Director sector letter – consumer investments sector
The FCA had been promising more sector-specific guidance for many months. In late January, CEO’s and Directors of firms in various sectors received letters setting out FCA priorities and expectations. I’ll focus on the consumer investments sector, but if your firm is active in another sector – such as life insurance, general insurance including pure protection or asset management – other letters may also be of interest. The letters build on the feedback on implementation plans, as discussed in the first section of this article.
For consumer investments, the FCA highlights four initial areas where it expects firms to focus in particular. It says these are likely to be the primary focus of future supervisory work.
1. Mainstream investments
Firms need to review whether products and services are delivering fair value. The FCA says it will be ‘paying particular attention to how platforms, wealth management firms and financial advisers deal with the price and value requirements’. It says more needs done to speed up transfers between investment platforms and to improve non-advised consumer support.
2. Higher-risk investments
The FCA is concerned some consumers are investing in unsuitable high-risk investments. It’s important to design any investment for a defined target market and distribute it accordingly. There’s a specific call to have effective oversight of introducers, with additional scrutiny of any unregulated introducers.
3. Scams and fraud
Helping consumers to avoid falling victim to scams and fraud is essential to ‘avoiding foreseeable harm’.
4. Consumer redress
The FCA expects firms to act in good faith, taking proactive steps when they’ve caused harm, including paying redress promptly where appropriate.
Other points covered which may be of particular interest to adviser firms include:
- Ongoing services – concerns that some clients of financial advisers are receiving ongoing services that don’t meet their needs and/or don’t represent value for money. The FCA refers to the 2020 evaluation of the impact of the Retail Distribution Review (RDR) and Financial Advice and Market review (FAMR). This showed more expensive advice services don’t have noticeably different features from cheaper services.
- Firm acquisitions – concerns that if a firm acquires clients following the acquisition of another firm that these clients may not be receiving fair value. This includes if clients are placed in default solutions that don’t meet their needs. There are also references to post-acquisition differences in the products and services recommended, and the associated level of charges – plus ‘frequency of transactions and charged borne by clients prior to and following the acquisition process’.
- Poor advice – the FCA remains concerned that ‘the cost and impact of poor advice is too high’, with a specific mention of SIPPs and other pensions claims, and the impact on FSCS levies.
- Due diligence – an expectation that firms carry out adequate due diligence of any investments they provide access to, including through investment platforms or SIPPs.
- Concerns over fixed monetary fees.
- Discounts – if granting significant discounts to standard fees to certain clients, the need for appropriate justification or clear parameters to ensure consistency.
If you want to delve deeper, you can find even more detail in the full letter.
3. Inside FCA podcasts
I’d recommend spending some time listening to the series of four short ‘Inside FCA’ podcasts. In various places, the FCA mentions the 39 examples of questions in the non-handbook guidance which firms should be asking themselves – and which the FCA may in turn ask of firms. I’d suggest keeping these questions handy when monitoring progress with implementation and recording your answers as you go.
Understanding the Consumer Duty products and services outcome
In Understanding the Consumer Duty products and services outcome, there’s a useful discussion around how the outcome does apply equally to products and services. While existing regulations already cover much of this for products which are in scope of the Product Intervention and Product Governance Sourcebook (PROD), the application to services such as advice is newer.
The FCA explains that a distributor firm will often be a manufacturer of their own distribution service as well as the distributor. So, advice services need to be designed for a target market and offer value. On target markets, these should be defined with enough detail to avoid including groups of customers who would suffer harm, with more complex products requiring greater granularity.
What is the price and value outcome?
In What is the price and value outcome? the FCA sets out what a good value assessment looks like, including:
- How to compare overall price to the customer with likely benefits
- The importance of demonstrating fair value within different groups including where there is price differentiation
- Considerations around what’s driving the price at firm and market level, including a firm’s underlying costs and the effectiveness of competition.
While the references are to ‘products’, the description could equally be applied to adviser services. There’s also a particularly interesting section on how manufacturers and distributors need to collaborate to assess fair value. Manufacturers are responsible for assessing fair value of the product, allowing for their distribution strategy. Distributors then need to check that their fees or charges represent fair value for the additional distribution services they are providing.
Explaining the Consumer Duty consumer understanding outcome
The Explaining the Consumer Duty consumer understanding outcome podcast emphasises the importance of the right information at the right time, presented in an understandable way to support effective decision making. Not only should this reduce complaints, it should drive healthy competition by stamping out any firm issuing misleading communications.
The podcast gives insights into the extent to which the FCA expects communications to be tailored to target groups. There’s also a section on testing for consumer understanding with an emphasis on thinking about how important the communication is to decision making. The FCA doesn’t expect smaller firms to carry out as much testing as larger firms. As a rule of thumb, it suggests firms need to carry out as much testing on consumer outcomes as they do on communications to maximise sales or revenue.
What does the Consumer Duty consumer support outcome mean?
In the fourth podcast, What does the Consumer Duty consumer support outcome mean? the FCA discusses making sure consumers get the necessary support to use and enjoy the full benefits of the products and services they buy.
There’s clarification on considerations around multi-channel support. The importance of adapting to support customers with vulnerabilities is highlighted. If you want more clarity on the definition of ‘good friction’ versus ‘sludge practices’, listen in. And last but not least, the podcast touches on monitoring and the need for data.
Get ready for Consumer Duty
The FCA is clearly putting a lot of effort into clarifying its expectations as firms progress with implementing the Consumer Duty. While I’ve pulled out some key points, I’d recommend reading or listening to these resources in full. The implications are different between firms.
I suspect we’ll see more updates as we move closer to 31 July. Keep checking our Consumer Duty hub for further analysis.