On 31 July 2023, the Consumer Duty came into force for retail financial services firms with the purpose of ensuring that FCA regulated firms act to deliver good outcomes for retail customers.
The Consumer Duty applied new rules in relation to all new and existing products and services offered which were open to sale or renewal.
Fast forward a year and 31 July 2024 is an important deadline for two reasons: (1) it is the first annual board report submission date; and (2) the Consumer Duty rules will now be implemented for financial services firms dealing with closed products and services.
What does this mean for you as an FCA regulated firm that is subject to these requirements?
Closed products for the purposes of the FCA Glossary are products where (1) there are existing contracts with retail customers entered into before 31 July 2023; and (2) which are not marketed or distributed to retail customers (including by way of renewal) on or after 31 July 2023.
The FCA expected that some regulated firms would have a large volume of closed products and services, and therefore an additional year was allocated so that they had ample time to manage implementation of the Consumer Duty for these products (whilst doing so on a smaller scale for any of its new products and services).
There will be elements of the open products and services outcomes that won't be applicable to the closed products and services outcomes, such as there are no requirements for firms to have a target market or distribution strategy as by their very definition they are not to be marketed or distributed to retail customers.
For an idea of what the FCA considers to be closed products and services, it has indicated (in its Dear CEO letter on the implementation of the Consumer Duty) the following examples:
Closed products
- Life insurance portfolios that have been acquired from other firms,
- a mortgage lender that has exited the equity release market but still has existing customers,
- an easy access savings account which is no longer on sale to new customers or a 5-year structured product sold in 2022, with terms and conditions that aren't replicated into new launches.
Closed service
- where a wealth manager used to have a mass affluent managed portfolio service as well as a separate high net worth service with different terms and conditions. Sometime before 31 July 2023, it chose to focus only on high-net-worth investors. It continues to manage portfolios for existing mass affluent customers but hasn't accepted any new mass affluent customers since the Duty came into force. The mass affluent service therefore meets the conditions to be a closed service."
The Consumer Duty imposes a greater degree of protection of consumers interests on FCA regulated firms in the provision of financial services. Firms must ensure that their products and services are meeting their clients needs (this changes over time, and so is an ongoing obligation not just to be determined as at the date the products or services are entered into) and (ii) they are offering fair value to their retail customers.
Priority areas for FCA regulated firms
The FCA published their latest "Dear CEO" letter in May 2024 which highlighted the following five key issues as priority areas in advance of the 31 July 2024 deadline:
- Gaps in firms' customer data – the FCA provided that FCA regulated firms must take steps in advance of 31 July 2024 to ensure that basic customer details are up-to-date;
- Fair value – as of 31 July 2024, FCA regulated firms must ensure that there is and remains a reasonable relationship between the price that customers pay and the benefits of the product or service offered;
- Treatment of consumers with characteristics of vulnerability – FCA regulated firms must ensure that characteristics of vulnerability have been factored into their product offering and that they have acted upon such information in a positive and proactive way. For example, adapting communication to suit the vulnerable customers' needs etc.
- Gone-away or disengaged customers – the FCA requires FCA regulated firms to be proactive in relation to disengaged clients. The most appropriate course of action will vary firm to firm, however the underlying goal is to ensure that customers are not paying for products they no longer need, want, or are eligible for.
- Vested contractual rights – FCA regulated firms not expected to give these up. However, firms must determine whether something is a vested contractual right and consider how it can prevent or manage harm to existing customers. Worth noting that an expectation to receive ongoing future payments is clearly not a vested right.
Essentially, these points go to the root of the Consumer Duty which imposes obligations on FCA regulated firms to sufficiently capture and analyse data, which highlights the need for good systems and processes to be in place.
How to incorporate this into your day to day practice
- Consumer support services must be easily accessible and useful – for example, they cannot be hidden on your company website and in practice be impossible for customers to find. If a customer has a problem, such services should make it easy for them to resolve this issue.
- Information must be presented in a timely and clear way, meaning that customers are provided with regular updates so that they can make informed decisions in pursuit of their financial goals without feeling like this information is being withheld from them.
- Your firm must have suitable products for your targeted audience of investors and must not have hidden charges which come to light further down the line so that when a customer is making their decision, they can see whether the products and services being offered to them offer them fair value.
- There needs to be procedures in place to identify if a customer is in a vulnerable situation – if this has been identified because of poor health or financial troubles (etc.), the company needs to be mindful of these considerations when dealing with them. Such these details need to be carefully recorded and the firm must be satisfied that it is meeting this individual's needs and responding to them consistently in its practices.
- If your firm has not applied a fair value framework consistently to open and closed products and services, it must be able to justify any different approaches taken. In assessing the expected total price to be paid by or become due from retail customers, consideration must be given to whether the total price is reasonable relative to the potential benefits provided by the product or service to retail customers.
- Lastly, how is your firm determining whether you are meeting customer outcomes? What action (if any) is the firm taking where there is evidence of poor customer outcomes? Firms need to demonstrate that they are acting on these appropriately.
The first annual board report submission due date on 31 July 2024
The report should confirm that the firm has complied with its Consumer Duty obligations, how it has done so and how it will continue to do so, based on the relevant changes to be taken into consideration for the year ahead (aligning with the business strategy).
"The best defence is a good offence" and as such, having robust governance systems in place to monitor your firm's progress in this regard is the best way to satisfy the board that the firm is in fact complying with its Consumer Duty obligations and it is tracking this throughout the year (not just in the weeks before the report is due).
Key elements be included in the report:
- Results of monitoring customer outcomes in relation to the products and services offered, and evidence of this information being analysed and acted upon;
- Evidence that remediation action generally has been taken in relation to all findings of discrepancies or shortfalls in the firms Consumer Duty obligations (this could be in relation to issues with the firms own governance, treatment of vulnerable customers or product pricing etc.); and
- An opinion as to whether the firms existing business plan continues to align with the FCA Consumer Duty requirements, or whether it needs to be revisited to ensure that the Consumer Duty requirements are at the core of the decision making of the business.
What happens if you don't comply with your obligations and submit a board report on time? We understand that firms do not have to send its board report to the FCA , however the FCA may request a copy of it. If your firm cannot provide a copy, then the firm will have failed to comply with its regulatory obligations and could face sanctions by the FCA.
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.