FOREWARNED IS FOREARMED
THE IMPACT OF CONSUMER DUTY AND WHY FIRMS SHOULD ACT NOW

Huntswood

In May 2021, the Financial Conduct Authority (FCA) published its Consumer Duty Consultation paper, setting out its expectations of firms to provide higher standards of care for their consumers.

We commented on this and how long firms had to prepare for changes (CCTA publication July 2021) and we now further explore what firms should be doing, and what we are already seeing in the sector in anticipation of the final policy statement expected later this year.

WHAT IS THE CONSUMER DUTY?
The Consumer Duty consists of three key elements:

1. The consumer principle will set out a clear tone for firms, and the language used will reflect the overall standards of behaviour the FCA will come to expect moving forwards

2. The ‘cross-cutting rules’ provide guidance on how businesses should be conducting themselves in practice

3. The ‘four outcomes’ is a suite of rules and guidance that set more detailed expectations for firms in relation to key elements in the firm-customer relationship: Communications, Products and Services, Customer Service, Price and Value.

PRACTICAL IMPLICATIONS AND WHAT FIRMS SHOULD DO NOW
The impact the new rules will have for firms will naturally differ, however, there are actions all firms can take now to ensure they are well prepared for the imminent changes:

Project management – firms should consider establishing specific projects to understand the scope and impact of the expected rules on their business model, taking early action where possible. Any implementation projects should reflect statements of responsibilities and should be sufficiently resourced, reflecting its fundamental importance to the firm and its business plan.

Customer journey – firms will need to consider the entire product lifecycle and the way that they engage with their clients at each point to ensure customers achieve their agreed outcomes. This will include focusing on initial interactions within the sales journey, such as the accuracy and fairness of financial promotions and other marketing material for products.

Here, firms will also need to interrogate customer behaviour more rigorously to understand where behavioural biases may lead to poor outcomes, and how information provision and communication strategies should be re-engineered to help customers achieve their financial objectives.

Product governance – firms will wish to carefully consider the ways in which the expectations around value delivery and benefits can be accommodated within existing product governance processes, and where changes are needed. Within this context, it is clear that firms will need to regularly monitor customer behaviour and product performance to satisfy themselves that they are achieving the outcomes required by the new duty.

WHAT WE ARE CURRENTLY SEEING
We are seeing firms complete scoping and impact assessment exercises and the mobilisation of Consumer Duty project teams. We strongly recommend that firms take a similarly proactive approach, as results from initial deep dives have revealed the need for a greater focus on outcomes testing and general weaknesses in firms’ overall control frameworks.

Whilst not under the Consumer Duty banner, we can see that the FCA have already engaged with firms regarding the customer journey, and in particular, online interactions and the availability of information for customers. Firms should therefore include these as key areas of focus.

NEXT STEPS
The FCA is inviting feedback on their second consultation by 15 February 2022, and plan to publish the policy statement summarising responses and the inclusion of any amendments by 31 July 2022. The FCA will expect firms to have these rules implemented by March 2023.