Consumer Duty: Are You Prepared?

With just weeks to go before the FCA is expected to publish its final rules on the Consumer Duty, the expected implementation date of April 2023 looms large, giving firms just nine months to embed and apply the new rules.

SMCR has shown it is never worth leaving the application of new rules until as close as possible to the final date. The bedrock of Consumer Duty is a culture of putting the customer first and ethical business. Importantly, the FCA won’t be looking for this process to begin in April 2023, but will expect firms to have that culture in place from April 2023.

The last consultation on the Consumer Duty made clear what the FCA intends to achieve. Much of the regulator’s work to-date has been geared towards dealing with firms reacting to harms, arising issues and regulatory requirements. The Duty itself represents a sea-change in the UK’s regulatory framework with the ‘burden of proof’ shifting from the regulator to the firm. The question will no longer be, ‘is there evidence that harm resulted from breaches or poor practices?’ It will be ‘demonstrate how harm has not resulted from breaches or poor practices, and that customer outcomes are key.’

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The Consumer Duty brings in major new requirements, including the obligation that good consumer outcomes are demonstrated from the beginning of the product lifecycle to the end, and although the size and nature of this task will vary between firms, it is likely to be complex and time consuming.

This does not mean that a wholesale shake-up of existing processes and business models need to happen within the next nine months, but the FCA will expect to see firms have clearly and carefully thought about the Duty, and how to improve their services with the customer in mind.

Firms should be acting now to make sure they understand what the Duty will look like for them. Good outcomes will be different for different customer bases, so having a clear definition of good outcomes for your customers, against which firm actions can be measured, is a must.

The proposed rules provide an excellent basis upon which to conduct an analysis of where firm culture, practices and processes might need adjustments to meet the requirements; conducting a gap analysis sooner rather than later will allow for plans to be actioned and recommendations to be completed in time.

The Consumer Duty is not a single set of rules, but will act like a kaleidoscope. Three elements – the Principle, cross-cutting rules and four outcomes – set expectations over just about every aspect of the way business is done, and together will give the FCA a clear picture of whether the firm is achieving good customer outcomes.

The analysis should test how well current practices meet the full expectations across the elements of the Consumer Duty, but for some firms, a strong focus on a particular outcome might be necessary. Investment firms will likely need to have a robust testing programme to analyse how well they meet the Consumer Understanding outcome, and consumer credit firms will need to be sure their systems and controls meet the expectations in the ‘price and value’ and ‘products and services’ outcomes.

The Consultation sets out the importance of the whole distribution chain, so gap analysis and testing must take this into account. Helpfully, the designations of each of the four outcomes makes clear which element of the distribution chain they relate to; ‘consumer support’ will need a focus on point of sale and post-sale, ‘products and services’ will for the most part relate to product design and pre-sale activities. ‘Consumer understanding’ and ‘price and value,’ however, will require testing across the whole distribution chain.

Clear, fair and not misleading communications are repeatedly highlighted as issues throughout the Consumer Duty consultations as well as in recent Dear CEO letters. The concept of ‘clear, fair and not misleading’ is so commonplace within financial compliance that there is a risk it will be effectively omitted from pre-Duty reviews. There is an opportunity to look afresh at the meaning of the term – both within current Handbook rules and the enhanced meaning of the term to be introduced within the Duty – with the focus shifting from ‘good enough’ to ensuring good customer outcomes.

The outcome of the gap analysis should be a clear set of identified areas for improvement and a set of recommendations. The nature of the Duty is the shifting of business practice into good outcomes for customers – this perspective should be applied across the board, with an action plan designed to move the firm – business and culture – towards the spirit of the Duty. The onus is now shifting from the Regulator onto firms to ensure the right outcomes, and so documentation of reviews, decisions, actions and implementation is vital.

Our online Consumer Duty course takes learners step-by-step through the expectations of the Duty, covering the background, Principle, cross-cutting rules, and the four outcomes. Each online course is priced at just £20.

Conducting a gap analysis around a set of high-level expectations is a difficult task. We offer a Comprehensive Gap Analysis Service that benefits from our knowledge of best practice and what the regulator wants to see from experience with firms throughout the industry.

For more information, contact Rob Bell: robert.bell@rbcompliance.co.uk.