SFE Insight | Why the Consumer Duty is a journey, not a destination
Lindsay Lee, Senior Associate in Banking and Finance, Brodies LLP
The Consumer Duty compliance deadline of 31 July 2023 might be mistaken for an end point or terminus in firms' Consumer Duty compliance journeys. It is, after all, the date which for such a long time has marked the long stop for completion of financial services firms' Consumer Duty implementation activities.
The date, however, is quite the contrary. It is the milestone that plots the beginning of a new regulatory landscape for firms. It is the date upon which the expectations of the Financial Conduct Authority (FCA) shift as clearer and higher regulatory standards of consumer protection apply, and from which firms with existing products and services for retail customers must act to deliver good customer outcomes.
To date, the FCA has played a valuable and integral role in supporting firms in their Consumer Duty implementation journey. We look at the details of that support and, as the new rules come into effect, the next steps that firms should be taking and how the FCA will approach non-compliance.
The road to implementation
Firms have enjoyed a degree of FCA hand-holding in the pre-implementation period. Recognising the fundamental shift in financial services that the Consumer Duty would lead, and the major operational, governance and cultural changes it would require for many affected firms, the FCA rolled out a support programme for firms wrestling with the new regulatory framework.
The FCA has run webinars and in-person events, published speeches and information updates addressing common queries, shared the findings of its review of firms' implementation plans, issued "Dear CEO" portfolio letters and created a dedicated Consumer Duty webpage.
Closer to the July deadline, a preparedness survey of over 1000 firms revealed that those working towards the compliance milestone would benefit from additional support around outcomes monitoring and the price and value outcome. In response, the FCA released a podcast on outcomes monitoring and published its findings from a review of firms' fair value assessment frameworks. Both the podcast and the findings provide guidance around the regulator's expectations of firms on these two elements of the Consumer Duty.
With just one month to go before the implementation deadline, the FCA published a reminder of ten key questions that firms should be asking themselves as they embedded the Consumer Duty. These were a curated set covering the four outcomes and issues of governance, culture and accountability taken from the FCA's finalised guidance. They were specifically selected to focus firms' minds, and activities, as the compliance milestone neared.
Each FCA publication and Consumer Duty update remains a key resource for firms seeking a clear understanding of the regulator's expectations under the new principles-based regulatory framework.
The implementation timetable, even with the three-month extension, was tight and challenging for such a mammoth change programme. The key message for firms struggling to complete all the work required before the deadline has consistently been to make maximum use of the remaining time available and to prioritise action that will most improve customer outcomes and best mitigate risk of harm. Boards were to have oversight of this prioritisation.
Next steps for firms
The FCA has previously split firms into three categories according to the degree of Consumer Duty preparedness – those that were confident they would meet the deadline, those that had made good progress but were running out of time, and those that were way-off meeting the requirements. While some critical additional work will be required of those who have not managed to meet the deadline, all firms, regardless of their preparedness, could usefully undertake certain actions after 31 July, to the extent that they have not already done so. Some of these recommended actions are highlighted below.
Revisit FCA guidance and updates: firms and their boards should revisit the finalised guidance and other pre-implementation updates and support from the FCA as these set out the regulator's expectations beyond the Handbook changes. Firms should pay particular attention to the curated list of ten questions highlighted by the FCA, and other questions for firms in the finalised guidance, as they remain key for firms post-July. Those questions are examples of the type that should be being discussed at board level and are the type that firms should expect to be asked in their interactions with the FCA in relation to delivery of the Consumer Duty. Firms with documented and regularly reviewed and updated responses to those questions will be best placed to demonstrate thoughtful consideration of the key issues and to answer further challenging questions they might be asked by the regulator.
Review post implementation activities: firms should continually interrogate their implementation activities, including end-to-end processes, procedures and communications, to ensure they are aligned with the requirements of the Consumer Duty. An internal audit or review of the implementation project against Consumer Duty requirements would be prudent and would be beneficial for firms to evidence compliance and identify gaps and address those. It would also be a useful tool when the board carries out its (at least) annual review and assessment of the firm's delivery of good outcomes consistent with the Consumer Duty. Boards should require detailed analysis of all breaches and complaints so appropriate remediation can be implemented.
Address workarounds: where firms have had to adopt workarounds, or risk mitigation practices on a temporary basis due to time or other constraints in order to meet the deadline, they should prioritise the additional work required to address those temporary fixes and roll out a compliant permanent solution.
Embed the Consumer Duty into business as usual: firms need to plan to ensure that the Consumer Duty remains central to their culture, that the requirements of the Consumer Duty continue to be understood by senior management, and that appropriate regular training of staff ensures an understanding across the wider business. Firms should monitor the impact of remuneration policies, staff incentives and performance management frameworks on delivering good outcomes for customers, and should ensure that consumer outcomes are a key lens for risk and internal audit functions. Boards should be considering how their firms' future strategies are consistent with the Consumer Duty.
Develop a data strategy: firms should be developing a strategy to improve the data and analytics that they need to evidence and understand customer outcomes better, and to assess the root causes of any poor outcomes. This is an area that the FCA does not expect "brilliance from day one" and is willing to work pragmatically and openly with firms on.
Learn and develop from emerging practice: firms should consider carefully the need for any changes to their businesses following publication of good and poor practice examples or other updates by the FCA as the regulator carries out post-implementation reviews or takes enforcement action. Financial Ombudsman Service activity should also be closely monitored and analysed.
Policing the highway
Firms that have not quite met the compliance deadline should redouble efforts to complete those actions, and be prepared to answer challenging questions from the regulator. An explanation of why the deadline has not been achieved will be expected, as well as any implementation gaps or weaknesses that have been identified by the board and what plans have been developed to remedy these.
For example, additional project resource may have been brought in at a late stage, Consumer Duty compliance may have been re-prioritised over other essential competing projects, or existing resource may have been upskilled (or external advisers or consultants engaged) to fully and better understand the new requirements and their scope. Boards should maintain clear and detailed records of considered prioritisation of areas that will have the greatest impact in terms of consumer harm, of implementation plans for outstanding actions and remediation plans where they have fallen short of the requirements.
Firms in significant breach of the Consumer Duty must notify the FCA and should be prepared for robust action if the failure to comply will cause actual or potential harm to consumers.
The FCA's approach to supervision and enforcement will be proportionate to the harm, or risk of harm, to consumers, with the most serious breaches being prioritised. In some cases, the FCA will take robust action, for example by investigation or intervention, possibly with disciplinary sanctions. Senior managers could be held to account if they have failed to act to implement the Consumer Duty and prevent harm. Earlier than usual intervention by the FCA is not unexpected since the Consumer Duty is coming into effect at a time when households are feeling intense pressures on their finances. This could lead to increased scrutiny not only of consumer credit and mortgage firms, but also of firms offering savings products. Following the results of the preparedness survey, retail finance providers and debt advice firms can also expect heightened attention from the regulator.
"Are we there yet?"
Firms have, with guidance from the FCA, come some distance but the Consumer Duty journey has just begun in earnest, for firms and the regulator alike. As they navigate the new regulatory landscape, the challenge will be embedding and maintaining the Consumer Duty in their culture and their business-as-usual practices, while remaining alert to expected further FCA guidance. FCA guidance and updates cannot, however, cover all scenarios for all sectors. For that reason, it is important that firms work continuously to develop their understanding, interpretation and application of the new principles-based rules in the context of the markets in which they operate, as they continue on their Consumer Duty journeys.