Consumer Duty Q&A
We’re now deep into the implementation stage of the Consumer Duty, most firms have now more or less got their head around the requirements and are actively taking steps to create the relevant reviews and processes. As always, when we start to dig deep into pieces of work questions arise, we thought it would be useful to set out some of the questions we have been asked in relation to the Duty.
Question: What are the key changes a business should make to be compliant with the duty?
The consumer duty sets a new standard of care that businesses must apply to their customers when designing and distributing products and services. The duty requires firms to take steps to comply with the cross-cutting rules including acting in good faith, taking steps to identify and avoid harm which could be caused by products or services and ensure they are designed in a way which allows customers to pursue their financial objectives, such as switching if the customer’s circumstances change.
The method by which firms can ensure compliance with the cross-cutting rules can be found in the four outcomes where firms are required to improve product governance through a formal approval process and product reviews as well as value assessments. Each of these reviews are an opportunity to evaluate the firm’s compliance with each cross-cutting rule as well as ensuring communication is understandable and the customer service provision is to an acceptable standard.
This can be best summarised by the following statement from the FCA: “Our rules require firms to consider the needs, characteristics and objectives of their customers – including those with characteristics of vulnerability – and how they behave, at every stage of the customer journey. As well as acting to deliver good customer outcomes, firms will need to understand and evidence whether those outcomes are being met.” [FCA PS 22/9]
Question: What should be the content of the product approval process?
The FCA has been fairly prescriptive in PRIN 2A, setting out some of the content which must be reviewed as part of product approvals. These include the characteristics of the target market, risks inherent within the target market and explanation as to how the product or sales process seeks to avoid such risks and benefits the target customer. Equally, vulnerabilities within the target market must be reviewed and mitigated in the same way. A full list of areas to be assessed can be found in PRIN 2A, however we have created a product approval template through pulling out the required areas.
Question: When do we need to use the product approval process?
It must be used whenever your firm intends to bring a new financial services product or service to the market or where a significant change to a current product or service is proposed.
Question: Your material keeps referencing PRIN 2A but I can’t find it
This is because the rules have not been brought into the FCA Handbook yet, currently PRIN 2 sets out the 11 principles for businesses [soon to be 12] and a new PRIN 2A will be inserted beneath. However, you can see the content in the final pages of the FCA’s policy statement.
Equally you can download our PRIN checklist for free, this is essentially PRIN 2A copied out of the policy statement and presented in a more user friendly manner: Consumer Duty PRIN Checklist.
Question: What is the role of the consumer champion?
A member of the governing body needs to be designated the consumer champion, ideally this will be a NED. Think of the consumer champion as similar to any other role a NED would take, as someone not motivated by profitability, they should oversee the outcome the duty has on the culture of the firm, ensuring decisions are made with the customer and duty in mind. Their role is largely to ensure the business is measuring the impact the duty has had on customer service levels, encouraging action to be taken where the firm falls short of expectations.
Question: What changes to senior managers statements of responsibilities or our responsibilities maps do you foresee?
Following on from the question above, certainly the senior manager designated as the consumer champion will need to have the role added to their statement of responsibilities. This is not a new senior manager function so a simple change to the statement and responsibilities map will suffice. I would expect there to be a significant impact on the firm’s governance framework, as firms tighten their product governance. As such product governance arrangements must be reflected in the governance section of the responsibilities map.
There are requirements for the senior leadership team to review the firm’s performance in respect of the duty, these are set out in PRIN 2A.8 and should be added to the responsibilities map as well as a senior manager's statement of responsibilities. A different senior manager to the consumer champion may also be given responsibility for implementation and/or maintaining the duty.
Question: Are there other changes to SMCR we should be aware of?
The other significant change is in relation to the conduct rules. A new individual conduct rule 6 will be added requiring all conduct rules staff to ‘act to deliver good outcomes for retail customers’ where the activities of the firm fall within the scope of the duty.
This individual conduct rule applies to the extent that it is reasonable and proportionate: the scope of a person’s job and their seniority may affect the scope of their obligations under the rule. So, the more senior a person is and the more relevant their role is to the duty, the more the regulator is likely to expect from them in delivering good outcomes for customers.
Question: Can you point me in the direction of the expected content of a product review?
This is set out in PRIN 2A.3, again we have created a template open product review including all required content: Consumer Duty: Open Product Review Template.
Question: Are debt collection agencies manufacturers or distributors?
Debt collection agencies are manufacturers under the FCA’s definition. Which is:
Manufacturer “a firm which creates, develops, designs, issues, operates or underwrites a product” (or did so historically for a closed product or an existing product)”
Product “any specified investment, or the provision of a service in the course of carrying on a regulated activity, or an ancillary activity, distributed or to be distributed to retail customers and which, unless the context requires otherwise, is not intended to relate to an individual contract”
We can see that a manufacturer under the duty is a firm that [amongst other things] operates a product. Then we consult the definition of a product, which presents an interesting point when it states, ‘the provision of a service in the course of carrying on a regulated activity.’ It is not a push to identify debt collection as the provision of a service or, actually, an ancillary activity for that matter. Additionally, it is also one which is ‘in the course of carrying on a regulated activity.’ Therefore, joining the two definitions together, debt collection meets the definition of a product which therefore means debt collection agencies and buyers meet the definition of a manufacturer.
Question: What changes will we need to make in respect of communications?
The new duty places a higher burden on firms to ensure communications are understandable rather than ‘clear, fair and not misleading’ as was the previous standard set out in the seventh principle. Therefore we need to apply some subjectivity to our communications, opposed to them simply being objectively clear, etc. The mechanism which can be used to achieve this is the product review. This is where you will identify the characteristics of your target market and identify ways to adapt your product or service to that target market, including communications which should be written so they are understandable for that specific target market. Testing may also be used to evidence compliance in this regard.
Question: Will training need to be rolled out?
Absolutely, a key requirement is that firms improve their customer service provision. Training should be focused on areas of weakness within individual firms as well as key risks such as vulnerable customers, financial difficulties and of course, the duty itself. We have developed online e-learning in all of these areas, if you are interested in The Consumer Duty course you can sign-up here.