How to Comply with the Consumer Duty

How do I comply with the Consumer Duty? This is a question I get a lot. Consumer Duty compliance is important, especially as the FCA’s duty is an evolving beast, early compliance concentrated on completion of the product reviews and value assessments with many firms taking a tick box approach to compliance. Such an approach is understandable during the implementation phase as compliance teams, let alone other business areas, fought to get their head around the requirements.

Since the implementation of the duty, back in July 2023, the FCA have provided several pieces of feedback, deriving from a series of multi-firm reviews. Designed to make us think again about our approach to the duty, the reviews have certainly ‘put the meat on the bones’ of the original final guidance, giving a much clearer picture of regulatory expectations.

As the author of “A Practical Guide to the FCAs Consumer Duty – Law Brief Publishing” (‘A Practical Guide to the Financial Conduct Authority (FCA) Consumer Duty’ by Robert Bell – Law Brief Publishing) I’ve been asked to summarise how to comply with the duty several times, here is my best shot:

Product Governance

The duty is best thought of as a form of product governance, with the product governance framework consisting of a product approval / review (as set out in PRIN 2A.3), value assessment (PRIN 2A.4) before creating the distribution strategy. The distribution strategy is often thought of as the sales process, however its meaning can differ for firm’s not selling their product, instead think of it as the set of procedures relating to your product or service. As part of this communication needs to be designed and tested (PRIN 2A.5) as does the support provision (PRIN 2A.6). Like any governance framework it does not stop at the point of roll-out, instead its performance should be monitored (outcomes monitoring) and reported to the relevant committee.

How to Define the Target Market under the Consumer Duty

The key starting point, to be able to meet regulatory requirements under the duty, including outcomes monitoring and supporting vulnerable customers is to define the target market. A good target market analysis is not limited to a sweeping statement such as “customers who require X on finance” but an actual review of those who the product is designed for, including the following factors:

·       Age and experience of the typical customer who would use the product

·       Likely objectives

·       Education levels

·       Likely wealth or financial situation, and

·       Understanding of the specific financial services being sold

Another key point is, where possible, to have more than one target market. This, in the FCA’s literature (Consumer Duty | FCA), is often referred to as ‘groups of customers’ and it is an important point. It may be that your product attracts several distinct groups of customers, some with experience of financial services, some without and perhaps several groups of vulnerable customers. Taking your target market analysis to this group level helps you to identify specific harms for each group and take steps, in the distribution strategy, to avoid them. The groups can then be applied to outcomes monitoring as well.

Impact on the Value Assessment

The target market analysis also has a clear impact on the value assessment. Firms should look to identify the financial goals for each group of customers, risks to those goals and then this can be used in the initial value assessment to put in place measures to make it more likely that each group will receive good value, such as using all of the service.

Value assessments need to be revisited regularly, in fact they should be seen as more of a living document. If there are external changes (economic, competitor, market rates, etc.) which may impact the value of your product a new assessment may be triggered, equally if outcomes monitoring is demonstrating a concern, then a re-assessment may be required. At this point the assessment should look different to the initial assessment, as we now have a plethora of data to understand whether the groups of customers have actually received value.

To assist we have released an updated version of our value assessment covering the re-assessment criteria and ensuring it is up to date with the FCA’s latest feedback: Consumer Duty Value Assessment Template

How to Design Communications under the Consumer Duty

Communications are designed when the products distribution strategy is created, or if you prefer to think of this stage as building the procedures relating to the product. This is where you put into practice the lessons learned from the target market analysis. You’ve understood the characteristics of each group, you’re then able to identify potential harms for those individuals and mitigate those harms by way of creating communications which provide the customer with the information they need, at the right time and in a way they can understand, i.e. in accordance with their reading age. 

Testing is required under the duty, as even those communications created with the best intentions may not achieve their aims. Testing can be conducted by A/B testing, using AI or focus groups. As it can be quite difficult to create focus groups one suggestion from the FCA has been to create a group from members of staff with similar characteristics to the customers in the target market.

Consumer Support

The same theory is applied to consumer support as communications, now you understand the potential harms to your customers you’re able to put in place strategies to mitigate those harms. Providing support to customers through well trained (see our FCA Compliance E-learning: Compliance E-Learning | RB Compliance Consultancy) staff who are able to provide flexible solutions to the needs of customers (this also demonstrates good faith and is likely to contribute to the financial objectives of customers) is key.

Outcomes Monitoring

Outcomes monitoring has been one of the more challenging aspects of Consumer Duty compliance, but there is a simple formula that can be applied to develop your monitoring:

1. Start with understanding what good looks like for each group of customers identified, this can be different for each group, for example one group of vulnerable customers may look to have easy access to online tools which make it simple to manage their account whereas another group of customers may require more hands-on intervention.

2. Consider what data tells you if that good outcome has been met, by way of an example this could include business persistence, default rates, complaints, feedback or product usage. Apply to same to value received on an ongoing basis as detailed above.

3. Report to the board, the FCA [Consumer Duty Board Reports: good practice and areas for improvement | FCA] have provided detailed feedback. The highlights include avoiding reporting on whether your firm is compliant with the duty, i.e. whether reviews have been completed on time, instead focus on whether customers are receiving good outcomes. Where they are not, cross referencing issues with concerns raised in Dear CEO letters is suggested as well as an analysis of the root cause, especially if the cause is the business strategy, purpose or culture.

4. Take demonstratable action and record it. Too often firms identify issues with the product but fail to track mitigating actions through to completion. Equally too many firms view compliance with the duty as the reviews detailing their products function perfectly for customers, it is not. Compliance with the duty is identifying areas where you product can be improved, this should be the goal.

To assist we have two offerings which may be of interest, the first is a number of templates which can help you ensure your assessments are up to standard: Consumer Duty Templates | RB Compliance Consultancy

For a more ‘hands on service’ we have our consumer duty ongoing support service: Compliance Consultancy & Training Services | RB Compliance Consultancy