The new Consumer Duty is a package of measures that consists of a new principle, rules, and guidance. There are three key elements which underpin the proposed duty, which include; The consumer principle: which is designed to improve overall standards of behaviour with the requirement that ‘a firm must act to deliver good outcomes for retail clients’. Evidencing specific behaviours: the regulator wishes to see three key behaviours from firms: taking all reasonable steps to avoid foreseeable harm to customers, taking all reasonable steps to enable customers to pursue their financial objectives and to act in good faith. Finally, the focus on four outcomes: the duty is expected to set more detailed expectations around four specific outcomes: communications, products and services, customer service and price and value.
In brief, under these proposals, firms will have a duty to make sure their customers are receiving fair value and fair products, that they understand how to use their products and services and receive the support they need to do so. Firms will have to consider the needs of their customers – including those in vulnerable circumstances – and how they behave, at every stage of the product/service life cycle, extending their focus beyond ensuring narrow compliance with specific rules, to also focus on delivering good outcomes for customers.
Since the final Consultation Paper (CP21/36) was issued in December 2021, we’ve been engaging on all aspects of the new Consumer Duty with stakeholders across the industry; thought leadership, blogs, webinars, roundtables and of course, direct firm support. Many of the firms are experiencing common challenges and in the spirit of ‘a problem shared is a problem halved’, we thought it would be useful to outline some of these common challenges together with our view as to how to go about successfully implementing the Consumer Duty.
Common challenges faced by firms:
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Don’t go too early on the gap analysis – we have seen many firms take positive steps and in this regard are cracking on with their gap analysis. We would encourage firms to take time to understand the drivers and purpose behind the Consumer Duty before commencing their gap analysis. A key difference of the new Consumer Duty is the focus on outcomes, not process. Unless firms have a thorough understanding of the drivers and purpose behind the new Consumer Duty, it’s impossible to critically assess current standards against the ‘higher standards’ required to comply with the new regime. Notwithstanding the many new rules inherent in each of the four outcomes, this is not about narrow compliance with specific rules. Firms will need to consider the irrational nature of consumers, the behavioural biases they display, whether their products are fit for purpose and provide fair value, the level of financial literacy of their target market and the imbalance of knowledge that exists between firms and consumers. Where firms are undertaking the gap analysis in-house, we would encourage firms in the first instance to socialise, discuss and debate the new Consumer Duty thoroughly with a wide group of stakeholders.
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Get buy in and support from the first line – most activity today appears to be driven by the second line. This is consistent with the role of compliance to promote ethical conduct and adherence to rules, regulations and standard processes that govern how firms should conduct business. It is only natural given staff in the compliance function must stay on top of the latest laws, regulations and business trends to be able to support the wider business. However, first-line stakeholder engagement and ownership are critical given the all-encompassing requirements of the new Consumer Duty. We would encourage ownership within the first line, with compliance playing a crucial inform, support and assurance role.
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Think evolution not revolution – Notwithstanding the points referenced above and the need to think about the drivers and purpose of the new Consumer Duty, this is enhancing current practices to take account of the raised standards and higher expectations that firms will be held to account on. Many firms will have outcomes testing methodologies in place today to turn lagging indicators of conduct failings into leading indicators. These can be enhanced and extended to take account of the new regime and support the ongoing and annual assessment of compliance against the Consumer Duty.
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Marking your own homework – In undertaking your gap analysis, it’s hard for firms to critically assess against standards they’ve designed and embedded. I read a recent poll in the Wealth sector which highlighted that 53% were worried about the new rules, 17% thought it would have an impact on their firm and 30% thought it would have no impact. It was the latter statistic in this poll which surprised me the most. I don’t know the details and standards these firms are operating today; however, I find this difficult to comprehend based on my reading of the rules and the work we’ve been doing with firms. The gap analysis is critically important and will drive activity within any subsequent implementation plan. I would encourage firms to take the necessary steps to ensure appropriate assurance and reliance before moving forward.
What’s the staged approach to getting this right?
Firms should actively consider:
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Strategic reflection
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Socialise and get buy-in for the challenge and approach
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Undertaking a thorough gap analysis
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Establish governance to oversee the implementation of the plan
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Refine reporting framework to inform management and ultimately the Board’s annual assessment
All respondents to the FCA’s consultation papers saw the new Consumer Duty and the shift towards outcomes-based regulation as a significant undertaking which would succeed or fail based on the FCA’s supervision and enforcement. We would encourage firms to be proactive in this high-priority area and to assess the outcomes that the regulator is looking for.
To read more around our thought leadership on the Consumer Duty – please click here.
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