Consumer Duty - Next Steps

Consumer Duty - Next Steps

On 6th December, the Financial Conduct Authority (FCA) held a live webinar to discuss key findings since the implementation of Consumer Duty, such as areas where firms have made positive improvements, along with areas the regulator feel still need lots of work.  The main outputs from the webinar are below

Closed Book Products and Annual Board Reports

Now the Consumer Duty implementation deadline has been and gone for all open book products, there is a focus on firms being ready for the next deadline of July 2024 for all closed book products.  The assessment should include a breakdown of why each financial product has been closed, for example, was it due to lack of sales, poor revenue, poor outcomes or risk of consumer harm?  Firms are expected to create a report on each closed book product.  As the products are no longer live, there will be no expectation to have a target market or distribution strategy, but all other aspects of the Duty should be followed.

The July 2024 date is also the deadline for firms to have completed their first Annual Board Report.  This should fully detail a firm’s adherence to Consumer Duty, including how they have implemented, what changes have been made, the outcomes of those changes, and any changes still ongoing.  Boards are then expected to sign the reports off to confirm they agree with the activities both already undertaken and planned by the firm, making any comment or remark as they see fit.  At present, there is no requirement for firms to provide documented evidence of their reports to the FCA, however, the FCA have the right at any time to ask a firm for sight of its annual report and will be asking for a sample of reports from a range of sectors. 

The implementation of Consumer Duty has increased the time firms spend focusing on consumer outcomes.  Boards should continue discussing and covering all areas and understand both the frameworks in place and the resources required for embedding and ongoing monitoring of the Duty.
 
On a recent survey, the FCA advised that the amount of work involved with implementing the Duty has surprised a lot of firms and this has increased their resource requirement to ensure that the implementation can be carried out to the correct standard.
 
There is no set criteria for the Board Report, but the FCA have confirmed that data points should be reviewed, along with a review of the commitments stated in firm implementation plans.  There should be a clear action plan and where changes have been made, have these changes worked and are there more changes required?

Next steps and supervision

The FCA have advised firms to keep reviewing the final rules and guidance, as the regulator will be keeping both up to date along with sending firms sector related support via Dear CEO letters, general information on the regulators website and speaking at events.

There was a reiteration that the Duty should be independent as it should be interpreted by each firm to fit around their consumers, their activities, business size and risk level, therefore a templated approach has the potential to result in too much work, or too little.

The FCA will intervene where it feels necessary and will be carrying out individual assessments, along with multi-firm and multi-sector work.  One of the key areas that will be a focus for the FCA will be complaints management and handling.  This is an area of management information (MI) where firms need to place a focus, and not only look at the complaint, but how the customer was handled, the time scales, sharing of information with other parties in the distribution chain and any root cause analysis.

However, 70% of firms have advised that thay feel confident they have fully and correctly implemented the Duty.  The FCA stated some positive changes they have seen as a result of the implementation of Consumer Duty have been:
 

  • A culture shift which focuses more on the customer
  • An increase in digitalisation
  • An increase in Management Information and analysis of trends
  • Introduction of new service matrix’s
 Along with the positive changes, the FCA also shared some areas where many firms need to improve. 
  • Lots of firms need to do more in regard to the implementation, gap analysis and monitoring of outcomes.
  • The Duty is still driven by a specific team or an individual rather than being embedded throughout the firm.
  • More attention needs to be given to the importance of the Duty, including if required, increasing the level of resource focused on ensuring it is managed and monitored as an ongoing piece of regulation.

 Price and Value Outcome

The FCA discussed they feel there to be a significant lack of consideration on price and value, specifically around commission disclosures (in the insurance sector).   In regard to the Consumer Finance sector, although many firms will be classed as a distributor, therefore will not have to do a full assessment of their own in regard to target market and distribution strategy, firms will still need to consider if their customers are at risk of suffering a non-financial loss, and this should be documented in a price and vale assessment.

An example provided by the FCA was a 0% finance agreement having the potential to move to interest bearing.  Are firms confident that should a customer go from interest free to interest bearing that their affordability would still be the same, or would the increase in monthly payments put the customer at risk of financial harm?

The key takeaway on this area from the FCA was that firms should not be using the price and value assessment to justify its current pricing structure.

Vulnerability

A lot of improvements have been made in this area; however, firms need to consider vulnerabilities such as hearing and visually impaired customers and their accessibility to products and services.  Firms should be providing clear communications which are laid out in an understandable format for the reader.  Firms should also consider temporary vulnerabilities and customers in vulnerable situations, such as the cost-of-living crisis.  Firms should be available to individual customers and rather than following strict processes, should be listening to customers and understanding their individual needs to ensure they are reaching their desired financial outcomes.

The FCA also made comment that there is a lack of ability by firms to track progress of any vulnerable consumers, with evidence suggesting that vulnerability is still seen as a low priority for many firms.  Based on recent studies, 50% of adults in the UK will experience vulnerability at least once within their life and firms need to have processes in place for monitoring this not only at the initial stages of a customer’s journey, but throughout their relationships with the firm.

Although the Duty has helped highlight any gaps, firms now need to act on what they have found and should not be using a ‘blanket approach’, for example assuming all customers over the age of 80 would be classed as vulnerable, or wealthier customer are less likely to experience vulnerability.

The FCA highlighted a concern that firms are asking consumers to confirm themselves if they think they are vulnerable and request a box to be ticked if this is the case.   Consumers see this question and tick box as a blocker for them to have access to finance, so are not completing.  Any assessments of vulnerability should be done by the firm and should be monitored and managed throughout the relationship.

Information sharing

This appears to be a part of the Duty which is not happening.  All firms within a distribution chain should be working together to ensure the best outcomes for a consumer.

The FCA provided the example of a broker passing a customer to a 3rd party debt collection agency. If the broker is aware that the customer is visually impaired and needs support in reading the documents, this can save time for the debt collection firm, and provide a smoother experience for the customer as they do not have to go through their needs and requirements again.

Good Outcomes Monitoring

When firms are reviewing MI, they should consider what actions may need to be taken from what the data is telling them.  Firms should not use data gathered as a means to justify the processes currently in place.

Firms should also be gaining a range of data, for example rather than just number of complaints, any trends and root cause analysis.

Firms should also consider the structure they have in place and what will be done with the data.  Many firms are gathering a wide range of data sets, but this is meaningless unless something is being done with that data.

Although firms need to review the level of MI gained and what is being done with the data, the review should be proportionate depending on the individual firm and the profile of the business.   However, if firms take a reduced data gathering approach, there should be a clearly documented rationale as to why this approach has been taken.

The FCA made further comment that firms have a responsibility to understand its customer needs and objectives.  A customer may have an idea about what they want, but the outcome may be different to what they expected based on a firm’s higher level of knowledge and expertise.

General Comments

The Consumer Duty implementation is proportionate to the risk profile and activities of each firm and should be bespoke to them.  It is about evidencing and showing how a firm has met the four consumer outcomes.

Firms should be going back to their Consumer Duty framework, rather than setting up and stepping back.  Consumer Duty is a continual project, not a once done exercise.

There has been lots of work done, with some positive progress from both larger and smaller firms, but there is still work to be done and the focus should be on the embedding of the Duty.   The FCA noted that an example of some good outcomes they have seen from the Duty is significant reviews of pay and bonus structures and how many of these now take into consideration both quality and compliance measures.  An example of where work still needs to be done is on internal staff training.  There appears to be a lack of training and understanding around vulnerable consumers which many firms need to address.

Key messages
  • Don’t stop now, this is an ongoing and evolving piece or work.
  • Be pro-active. Don’t wait for the FCA to act or intervene.
  • Don’t think because the Duty is implemented the job is done.
If you are struggling with your Consumer Duty implementation, need support with your closed book products or assistance in getting ready for your first annual report, then please get in touch and we will be happy to work with you in ensuring you are fully compliant with the Duty.   PPL can offer a range of technology solutions which will assist you to obtain the necessary MI required for the Duty without using valuable resource.