The FCA’s second consultation on the Consumer Duty highlights the huge changes involved in implementing the duty in practice. The Consumer Duty effectively updates the concept of Treating Customers Fairly (TCF), introducing a ‘higher standard’ of protections for customers. And it goes much further than that.
The FCA has been increasingly concerned about customer harms in areas such as communication, product design and mis-selling. The Duty places the obligation on firms to meet the new high standard of conduct across the board. In practice, this is likely to mean that where some practices were justifiable or ‘just within the rules’ previously, the type of conduct that could harm consumers now needs to be identified and dealt with by the firm before the point of harm. The industry, up until now, has worked on the premise that many harms will be identified and dealt with by the regulator. The Consumer Duty places the responsibility for identifying and mitigating issues onto firms, and the Regulator will take decisive action where it finds that firms have failed to do this.
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The incentives to be able to meet the requirements of the Consumer Duty from the proposed implementation date of April 2023 are clear; there is relatively little time in which to prepare for a sea-change in approach to the fair treatment of customers and to the way business is done and products are designed. The FCA have signalled a clear intention to take more proactive action against firms and senior individuals where they see evidence of harm to consumers, meaning that non-compliance could carry potentially serious consequences.
Ultimately, the Duty will ask firms to place the customer at the centre of business and whereas previously the aim to “get it right first time” was good enough, the expectation from April 2023 will be that now it must be right first time. The incentives to start planning now to be able to carry out the FCA’s expectations from the implementation date is clear.
The Consumer Duty is made up of three elements, all of which are interlinked. The Consumer Principle reflects the high standard expected from firms; the cross-cutting rules interpret the principle into three specific requirements to act in good faith, avoid foreseeable harm, and to enable customers to pursue their financial objectives; the four outcomes provide clear expectations across the customer journey.
The good news is that much of the expectations enshrined within the Duty are not innovative – they embody good practice and fair treatment of customers, much of which are already required. Firms that have not yet worked the latest guidance around fair treatment of vulnerable customers or embedded the SM&CR into business will have further to go.
In preparation, firms will need to understand and evaluate how the Consumer Duty will impact the entire customer journey – from preparing for product design to post-sale – and assess whether current processes are fit for purpose, leaving time to amend and develop these where needed.
The following key areas should form the basis of any gap analysis:
Understanding the customer base. This is vital as it will inform the firm’s understanding of the needs of its customers, and the ability to identify what gap or demand a new product might fill. New products must answer a customer need, rather than be designed solely to build profit for the firm.
Understanding the value of products. This is linked to price, but goes much further. Firms will need to be able to articulate how their products reflect good value for the customer. This means understanding the cost to the customer, the price and features of competitor products, price and charges of all aspects of the distribution chain, revenue for the firm, and the function and features of the product the customer has paid for and is able to use.
Outcomes testing. Testing features heavily in the Consultations, and firms will need to implement robust testing across the board, but particularly for customer outcomes. This will also benefit from properly understanding the customer base: to understand what a good outcome looks like, firms will need to understand what their customer base typically needs both from the product and from service provided. Testing must be thorough and meaningful – attempting to design testing so that the paper trail is in place won’t cut the requirements of the Consumer Duty. Testing should be able to provide clear, evidence-based data and the Board should be able to use this to inform strategy.
Firms that have not traditionally had to worry too much about FCA scrutiny – particularly those that offer services rather than products, and those that carry out a ‘distribution’ activity rather than having a direct relationship with the customer – will now be within the remit of the Consumer Duty.
The first step in preparing for the Consumer Duty is a robust gap analysis. Careful scrutiny of current processes against the draft rules – to be confirmed in July 2022 – must form the basis of the project to implement the Consumer Duty in 2023. The scope of the Duty, going beyond simply product or service level to imposing expectations firm-wide as well as to third-party suppliers, means that Consumer Duty projects must start sooner rather than later.
We offer a comprehensive gap analysis service. Our experience with the FCA means we understand what the Regulator wants to see. Our experience across the industry means we can benchmark processes and practices against competitor firms.
For more information, contact Rob Bell: robert.bell@rbcompliance.co.uk.
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