The Consumer Duty came into force for open products and services on 31 July 2023. For a summary of the Consumer Duty, please see our previous article.
In less than one month, the Consumer Duty will also apply to closed products and services, which were sold before 31 July 2023 but have not been marketed or sold to new customers since. The deadline for firms' first annual board reports assessing compliance with the Duty is 31 July 2024.
The FCA has released various publications recently in relation to the upcoming 31 July 2024 deadline in the spirit of preparing firms to be in the position to successfully deliver higher and clearer standards of consumer protection. Firms should give adequate consideration to these updates to ensure their annual board report complies with the Duty.
This article will summarise a few of the recent important updates and will comment on what this means for firms looking to prepare for the fast-approaching deadline.
Sheldon Mills, FCA Executive Director delivered a speech titled "Consumer Duty: the art of the possible in a year" on 20 February 2024:
Sheldon commented on how significant progress has been made with many firms embracing the Consumer Duty after 6 months after the deadline for open products, reinforced by the results of the Consumer Duty firm survey (Consumer Duty firm survey – Autumn 2023 | FCA). The FCA expects that certain sectors will be impacted more by the closed products and services deadline, such as life insurance, funeral plans, consumer investments, consumer finance and retail banking. Firm's in these sectors should make arrangements to ensure their own plans respond to the main issues that Sheldon Mills identified before the deadline:
- Gaps in data monitoring: Firms are required to evidence that they are delivering good outcomes for consumers, but they face the challenge of having out-of-date/incomplete client records for closed products. The FCA suggests that in this scenario, firms should take additional steps to reduce the risk of detriment to consumers, for example through enhanced outcomes testing.
- Fair value in closed products: The FCA acknowledges that there are closed products which may offer poor value. Despite this, firms must be able to demonstrate that their closed products provide fair value to consumers. Firms can take into account the costs and benefits that were incurred before the Duty came into effect.
- Keeping customer connection: The FCA states that a further challenge for firms is attempting to engage or track down elusive customers or customers that do not want to be contacted. The lack of engagement either by a firm or customers may lead to issues such as customers paying for products they no longer require or want or are no longer eligible for. Further, customers not being aware of key changes to products over time may be unable to use those products as expected. Firms should monitor and adapt their communications approach to drive good outcomes for consumers – for example by communicating more effectively or providing consumers with required information at the right time in a consumer-friendly manner.
- Vested rights: These could include annual fees that are due or exit charges, which could lead to poor consumer outcomes with closed products if a fee is significant and undermines the product's benefits. Where a problem is identified, the FCA expects a firm to take appropriate action to mitigate the harm. The FCA states that some firms may consider giving up their vested rights (e.g., reconsidering fees or charges, or informing affected customers how to switch to a different product).
The Report: "Consumer Duty implementation: good practice and areas for improvement" dated 20 April 2024
The FCA published a report (Consumer Duty implementation: good practice and areas for improvement | FCA) to outline good practices to promote better consumer outcomes and areas of improvement in the following:
Culture, governance and monitoring:
FCA objective: Consumers to have confidence in retail financial service markets with healthy competition based on high standards and firms focussed on delivering good consumer outcomes.
Examples of good practice for firms:
- Altering their company purpose to focus on consumer outcomes, with responsibility across the business.
- Accelerating business change programmes (i.e., more direct consumer approaches such as complaints analysis or customer satisfaction surveys).
- Increasing focus on consumers at Board level, including giving serious consideration to what the Duty means both practically and culturally.
Areas for improvement:
- The Duty is considered at all levels of the business and not only compliance teams.
- Firms to address any gaps in monitoring data, to ensure that firms can evidence the outcomes that their consumers are receiving.
Vulnerable consumers:
FCA objective: Vulnerable consumers to have outcomes as good as other consumers. Firms should be aware of the FCA's guidance on the fair treatment of vulnerable customers.
Examples of good practice for firms:
- Centralising their operations relating to vulnerability and so directing the handling of vulnerable consumers to specialist staff, collecting relevant data to identify trends and monitor outcomes..
- Reviewing communications and making changes to support vulnerable consumers. For example, offering literature in alternative formats, including in braille, audio or with enlarged text, and considering whether the firm's communications are appropriate for consumers who are not native English speakers.
Areas for improvement:
- Identification and support of vulnerable consumers, particularly in the investment market.
- Asking consumers to repeatedly disclose their vulnerabilities each time when being passed internally to different teams or being unnecessarily asked to evidence their vulnerability.
Products and services:
FCA objective: Consumers to be sold products and services designed to meet their needs, characteristics, and objectives.
Examples of good practice for firms:
- Carefully and precisely define the target market for products and services that have the potential to cause harm if sold to the wrong consumers.
- Identifying the firm's role in distribution chains and taking steps to support good outcomes for direct and end-consumers (e.g., an investment firm identifying that some of its retail institutional clients had retail consumers and so the firm offered them more suitable investment options).
Areas for improvement:
- Not sharing information effectively across supply chains, not paying close attention to ensuring distribution strategies are driving good consumer outcomes or what a firm's role is and accompanying responsibilities where they do not have a direct relationship to the end consumer.
Price and Value:
FCA objective: Consumers to obtain products and services that offer fair value.
Examples of good practice include:
- Enhancing the benefits of products and services to improve value by removing charges for ongoing products or services deemed too high relative to the benefits offered or offering more benefits (e.g., increasing the amount of interest paid for certain savings and investment products and enhancing product cover for insurance firms to include new benefits).
- Firms considering their distribution chain, particularly where there are multiple fees added lower in the chain.
Areas for improvement:
- Firms adding fees along the distribution chain so that the overall cost does not represent fair value, failing to show that products offer fair value to retail consumers (e.g., relying solely on an assessment of similar product offerings in a market), structuring investment products and services such that they benefit firms instead of focussing on value for the consumer.
Consumer understanding:
FCA objective: Consumers to understand information and make informed decisions.
Examples of good practice include:
- Working with experts to improve communications across different channels and increase consumer understanding of products and services (e.g., changing layout and presentation of content, simplifying language, introducing more accessible websites).
- Being proactive with communications and updating consumer interaction points and materials.
Areas for improvement:
- Promoting products or services too high-risk or complex (e.g., firm's playing down product or portfolio risks to established clients).
- Uncertainty as to what charges apply.
Consumer support:
FCA objective: Consumers are provided with support that meets their needs.
Examples of good practice include:
- Making changes to ensure new consumers have the same level of support as old consumers, as well as creating additional engagement touchpoints.
- Consumers should not face unreasonable barriers when they need to access support.
- Introducing positive interventions to consumer journeys (e.g., consumer credit firms that direct consumers to agents for tailored support or having flexible repayment plans to support struggling consumers).
Areas for improvement:
- Failing to train staff well enough in terms of having complex conversations with consumers or taking the time to understand those in financial difficulty.
The 2024-25 Business Plan published on 19 March 2024:
The Consumer Duty was referred within the FCA's Business Plan (https://www.fca.org.uk/publications/business-plans/2024-25) and it is clear that it represents a significant focus in terms of expectations for firms to deliver good outcomes for all consumers and considering their diverse needs (e.g., vulnerable consumers). The Business Plan reflects the Four Outcomes (see our previous Consumer Duty article) required to comply with the Consumer Duty.
The FCA says it will carry out multi-firm work to increasestandards. The example provided relates to focussing on unit-linked pensions and long-term savings products as well as looking at how swiftly the insurance industry responds to claims, including specifically in relation to vulnerable customers. The FCA's plans for 2024/25 also include supervisory work to test firms' implementation of the Consumer Duty and iimprove firms' delivery of good consumer outcomes.
How can we help?
With the 31 July 2024 deadline for closed products emerging, firms should follow a clear plan to ensure compliance of closed products with the Consumer Duty and should ensure that both open and closed products are delivering the right outcomes for all types of consumers.
With the FCA demonstrating a clear focus on reviewing firms' treatment of consumers on topics such as fair value and vulnerable consumers, firms should, take note of the good practice examples outlined by the FCA, seek to move away from practices identified by the FCA as at risk of causing harm, and ensure that their policies accordingly take these good practice examples into account to deliver good consumer outcomes.
With the FCA's extensive publications and data surveys on the subject, it is anticipated that there will be increased contact from the FCA with industry sectors and firms in order to enable the FCA to effectively monitor compliance by firms with the Consumer Duty, and that enforcement powers will be used, where appropriate, in the event of non-compliance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.