For most firms, getting to 31 July 2023 was the culmination of months of hard work. But, it is essentially just the end of the first chapter. Far from relaxing into thinking that the job is done, firms need to maintain momentum and continue to build on their work to date.
The Consumer Duty reflects a seismic shift around how the industry should view good customer outcomes. Previously, the emphasis was on treating customers fairly and avoiding poor customer outcomes. Now, firms need to focus on actively seeking good customer outcomes. It may seem like an academic distinction, but in reality, it demands a significant cultural change and new behaviours to keep customers front and centre. It is not as simple as updating your policies and processes, it requires a much deeper change in the way a firm operates.
This is where the transition to business as usual is vital. You need to demonstrate that you are achieving good customer outcomes consistently, for all retail customer groups and in-scope products and services. That requires ongoing work on your cultures and behaviours to make sure the implementation is fully embedding.
Firms with closed book products face additional challenges in the run up to making those compliant by 31 July 2024. For some firms, this second wave could be even tougher. Particularly for those looking to manage large closed books of legacy business efficiently and profitably. With less than a year to go there is no time to waste.
Looking ahead, there are four key areas for you to think about:
Although the first Consumer Duty deadline has passed, you probably have some components of your initial programme that were not ready. For example, you may still be refining your management information to measure and report on good outcomes.
Your Board, senior management, and other stakeholders need assurance that your firm complies with the Consumer Duty and meets regulatory expectations. Third-party assurance can give them peace of mind that you are demonstrably delivering good outcomes for your customers.
Meeting the July 2023 deadline was tough, but you cannot afford to be complacent. You need to start looking at your closed book products to make sure you can meet the next milestone on 31 July 2024.
As you settle into live running, you will probably find that some areas need fine tuning. That includes embedding the right practices and turning some of the tactical fixes of the past few months into something more strategic and robust.
In the run-up to the July 2023 deadline, and immediately after, there were plenty of signs of the FCA flexing its new Consumer Duty muscles and showing that it really does mean business regarding good customer outcomes. Some of these challenges played out publicly, often driven by wider social, economic, and political events.
One of these events was the much-publicised debate over the banks’ right to choose who to accept as a customer. So-called ‘de-banking’ has obvious consumer outcome implications. Banks would be wise to follow the fall-out from this, while assessing their own approach to account closures. This will be a careful balancing act with their (potentially conflicting) anti-money laundering obligations and wider commercial and operational considerations.
Saving rates is another hot topic for the banking sector – specifically, whether customers are getting fair value by benefitting from rises in base rates. This is particularly relevant when some of the biggest high street banks have declared exceptional profits. On the day the Consumer Duty came into force, the FCA issued a pre-emptive 14-point action plan to banks which required immediate attention and contained the threat of ‘robust action’ by the end of 2023.
The FCA is also focusing on value and price assessments, including intermediary remuneration. The regulator’s review of fair value assessments, published in May 2023, raised questions over the effectiveness of some firms’ value frameworks. It found that many firms had more work to do to meet the price and value outcome rules. Several insurance market focused events have reinforced those concerns – in theory, this sector should be leading the way, as it has been subject to specific fair value requirements for a couple of years. The lending sector is also under scrutiny, with the regulator starting supervisory action over product governance rules, and oversight of distribution chains.
In short, the Consumer Duty has significantly increased the FCA’s capacity to intervene where it sees practices it does not like – which would have been tricky to tackle before the new rules. If anything, the intensity of regulatory, media and political focus is increasing, rather than subsiding, as the new requirements come into force.
When it comes to the Consumer Duty, the FCA has been clear and consistent in its expectations. In addition to the Policy Statement (PS22/9) and Finalised Guidance (FG22/5), it has published a range of sector-specific Dear CEO Letters. It also maintains a consolidated hub for further information, and highlighted ten key questions that firms should ask themselves in relation to the Duty. Coming just a month before the July deadline, these questions are a strong indication of what to expect from supervision and enforcement activity over the next 12 months. So reviewing these questions is a good place to start when assessing your implementation to date and planning your next steps.
Your board is responsible for ensuring that you have properly met and embedded the Consumer Duty, and the FCA will hold senior managers accountable through the Senior Managers & Certification Regime (SM&CR). Your board, or equivalent governing body, should review and approve an assessment of whether your firm is delivering good outcomes for your customers, at least annually. This assessment should include results of your ongoing monitoring, any evidence of poor outcomes and the impact on specific groups and an overview or remedial actions.
The FCA is highly likely to review a sample of these annual assessments across all sectors, and you must make your self-assessment available on request.
The FCA extended the deadline for closed books to July of next year. This is due to the sheer volume of closed product lines for some firms, the complexities associated with those books and the challenges of operating them on legacy systems. Time is ticking away, and it is important not to underestimate these challenges. You need to think about how to create good customer outcomes for products that were designed and sold years ago, when different rules, expectations and terms and conditions applied. You might also struggle with legacy knowledge of these products, as many of the people involved in designing and servicing the products may have left the business.
With extensive Consumer Duty requirements, you need to think about where to focus your assurance activity, decide who will carry it out and how. It is essential to demonstrate compliance, show that you can articulate what good customer outcomes look like and can measure them effectively. This includes showing that vulnerable customers receive as good outcomes as other customers, and testing your consumer communications to assess how they support customer decision-making. There is also fair pricing and value to consider, and you will need to carry out regular reviews and an annual assessment to assess these. You need an effective culture and robust governance arrangements to meet these requirements, support good customer outcomes and align with SM&CR requirements.
Consumer Duty requirements are broad and complex, and so far, firms have responded tactically, rather than strategically, due to the tight deadline. The FCA expects you to embed the Consumer Duty throughout your entire operations, from the Board to your front-line customer and third-party interactions. In short, striving for good customer outcomes needs to become part of your corporate DNA.
Continuous improvement is essential, and you can start refining your processes through a robust root cause analysis and stakeholder feedback. Enhancing board understanding, engagement and communication will help set the ‘tone from the top’ and embed the right culture across your firm. You need to cascade this down throughout all your teams, with appropriate communications and training. This will help you take a proactive stance to Consumer Duty, responding quickly to negative indicators and early warning signs.
Improving your existing customer tools, and implementing new ones, will help you drive customer engagement and ensure good outcomes. This includes optimising operations and supporting IT enablement to demonstrate good customer outcomes. You also need to think about how you are meeting your vulnerable customers’ needs at every stage in the customer journey.
Embedding the Consumer Duty will not happen overnight, and it requires significant cultural and specialist technical changes across the firm. It will take time, continual ongoing improvement and expert knowledge to meet the FCA’s requirements.
For more insight and guidance, contact Blandine Arzur-Kean.
