Consumer Duty – Start to Prepare Now
Preparations should be well underway now for the implementation of the Financial Conduct Authority’s Consumer Duty. The final proposals are due to be published in July 2022, with the start date currently set for late April 2023. The FCA’s initial consultation took place last year, so although there are likely to be a few adjustments in the final rules, the foundations of the Duty will remain as they are and impose a higher standard of service, and of evidencing that service, than currently exists. With under a year to implementation, preparing to meet the new expectations should be well underway during H1 2022.
The aim of the Consumer Duty is fairly simply summed up as “selling someone the right product with suitable customer service.” So far, so straightforward. For firms that aim to keep up with the FCA’s direction of travel, the new requirements should contain no real surprises. But the Consumer Duty is a set of requirements that will take some getting used to: potentially switching one of the Individual Conduct Rules, imposing a new Principle, and setting three new rules and four new outcomes that firms must be able to evidence compliance with.
Together, the Principle, rules and outcomes will usher in the next step in the FCA’s regulatory transformation, with a clear focus on outcomes, in addition to the traditional rules and principles format. The aim of the Duty - as outlined by FCA Chief Executive Nikhil Rathi in a speech on 26 April – is to guide firms to “take account of the actual impact of their services and product suitability on consumers”, placing much of the responsibility for meeting customer needs to the firm.
Given that the UK economy is entering the most difficult period seen in decades with inflation set to reach a 40-year high and bills rising much faster than wages, Rathi highlights that the least able to bear the rises will be hit the hardest. The extent of the difficulties means that a higher proportion of consumers than ever are likely to find the cost of living very difficult. Coming as it does at this point in time, the Consumer Duty will mean that firms will need to understand a rapidly shifting customer base, their needs, and how to support them to meet their financial objectives, during a period of great economic uncertainty.
The FCA have signalled that they expect firms to spend the time between now and the implementation date fully preparing for the Consumer Duty, and if we have learned anything from the Senior Managers and Certification Regime, it’s that early engagement pays off. Getting to grips with the raft of expectations, understanding how it will impact your firm, and then conducting audits and putting new processes and literature into place takes time. And the new requirements are comprehensive.
It is difficult – as with any new regime – to imagine what the principle, rules and outcomes will look like on the ground. Take communications as an example, specifically a firm’s pre-contract information. A number of rules already exist about fairness, accuracy, plain language and mandatory wording. A brief read through of the Consultation might suggest that there is not likely to be any real work required to review and get the information in line with the Consumer Duty. Together, the principle, rules and outcomes require firms to carefully consider the impact of the communication on its customer base, and to do this, it must understand the characteristics of its base and what their needs might be. This requires, at least, research, analysis and recording decisions.
One of the major requirements is evidencing how the information meets the customer needs. If there are any issues found in a documentation review, then changes should be made to amend the information provided so that it helps customer understanding as fully as is reasonable. There’s also an expectation of ongoing review – so firms must be able to evidence that they are capturing how well the communication is meeting customer needs and helping with customer understanding on an ongoing basis.
Understanding the customer base is a key step in meeting the expectations of the Consumer Duty. The expectations of the FCA’s vulnerable customer guidance means many will be on track with identifying the characteristics of their vulnerable customers and be familiar with some of the FCA’s suggested techniques for customer base analysis. Although the Consumer Duty imposes an obligation to understand and aim to meet the needs of all customers, identification of and work to support vulnerable customers is a vital keystone.
The requirements are constructed in such a way as to be proportionate and flexible to differing business and it is up to firms how they implement it. This allows for differences in firm types and sizes; having said that the impact on firms will be fairly similar and a wholesale review of processes and communications is needed to be able to hit the ground running in April 2023.
Our webinar on Consumer Duty will be available in the coming weeks. This webinar is designed to give your firm a clear understanding of regulator expectation and industry practice.
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