Consumer Duty – Next Steps

The new year gets off to as intense a start as 2019 did thanks to SM&CR, as the Consumer Duty implementation deadline looms on 31 July. The expectations around the Duty are such that the FCA believes that most firms should now be close to completing the actions identified in implementation plans.

The Consumer Duty will usher in a significant change, as the SM&CR has done. It will represent the next stage in the fair treatment of customers, and as such implementing the Duty requires a fairly holistic approach. The rules and outcomes mean that firms must design new approaches to the fair treatment of their customers, understanding who they are, what they need, what harms are most likely and how they could impact their customers. Proactivity is the key here – retroactive actions won’t cut it in the Consumer Duty.

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Consumer Duty: Value Assessment Template

Consumer Duty: Product Approval Process

Consumer Duty: Open Product Review Template

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With so much going on, it’s difficult to make sure that nothing falls by the wayside – whether routine compliance obligations or working towards the Duty. The following key steps should be well underway by now:

• Identify whether your firm is a manufacturer, distributor, and whether they have any co-manufacturers;

• Define the firm’s target market;

• Understand the potential vulnerabilities experienced by customers in the target market;

• Ask what outcomes customers – including both target market and vulnerable customers – would expect from their products / services;

• Complete reviews and any testing in good time to make sure that any changes that are needed can be made;

• Don’t think about the implementation as an end point, but rather as the first stage in an ongoing cycle – draft procedural and process updates that will be needed to implement and maintain the changes required.

Firms must identify what good outcomes look like in the context of their business and customers, and then make sure that these outcomes are achieved. This means reviewing current products and services, communications, support and the treatment of those with characteristics of vulnerability.

The requirement to take steps to understand the features of products – including the risks and benefits – is formalised in a set of criteria – the product approval process. In the longer term, the PAP will be the ‘first line of defence’ against poorly functioning products and the resulting risk of harm. The Product Review will become the second line of defence.

The PAP needs to identify the type of customer the product will be beneficial for. As such, the target market must be assessed, and the characteristics of the target market - including risk profile and any vulnerabilities which may impact the product performance - should be understood in the context of the product. Ultimately firms need to assess whether there is a defined benefit to the target market.

The design of the product must also be assessed. The Product Review should cover the key risks of the product and steps taken to mitigate those risks. In other words, it must be clear how the mitigations treat or prevent the specific risks. Firms should be looking for aspects of the product which prevents its full usage, whether by those with vulnerabilities or through other identified risks. The crux of the matter is in understanding whether the product will provide good value; the results of the value assessment can be utilised for this element, for details on the value assessment see: The Consumer Duty: Value Assessments

At this point, most firms will be undertaking reviews of their products and services. How this affects them depends on how they are categorised under the Duty; manufacturers, distributors, or both.

It pays to make sure the reviews are comprehensive and are ‘right first time.’ Although amendments are to be expected, putting the work in to make sure the reviews comprehensively cover the requirements will mean less work in the longer term. Having to unpick issues along the way, particularly post 31 July, is a false economy.

Given that the past three years have not been light on regulatory changes, the impending deadline can feel like a mammoth task ahead. While reviews will take a lot of work, we have created templates to help guide firms through their reviews.

Our templates support firms in making their ‘first’ and ‘second’ line of defence assessments. The Product Approval Process Template contains all of the FCA required check points. Our Open Product Review Template covers all of the areas the FCA requires firms to review.