Observations from the ‘Consumer Duty: One Year On Webinar’ - 31st July 2024

‘A Feast of Frogs’

On the 31^st July 2024, the FCA presented a webinar on the ‘Consumer Duty – One Year on’ attended by over 1,000 people. With firms recently completing their first-ever Consumer Duty Board Reports in time for the 31^st July 2024 deadline, all eyes were on the FCA to understand their take on the impacts of the Duty, examples of good practice, areas for improvement, and what the next steps might be.

Sheldon Mills (FCA executive director of consumers and competition), was first up to the podium with a speech that started with some good news by acknowledging the significant improvements firms have made to deliver better consumer outcomes, and that the Duty had made a tangible positive impact across the industry. Indeed, in what was to be several references to frogs and lily ponds throughout the speech, Sheldon Mills stated the FCA had seen a ‘feast of frogs’ since the implementation of the Duty; meaning that most firms had embraced and acted upon their Consumer Duty obligations accordingly.

The deliberate outcomes-based nature of the Duty was reiterated during the speech, along with the reflection that the Duty added further complexity to the rulebook, With that in mind, a call for input was repeated to firms to provide feedback to the regulator on how best to address areas of complexity, duplication, or over-prescription which create compliance costs for firms with limited consumer benefit. The regulator is keen, and mentioned at several points, that it wants to provide firms with flexibility, allowing for proportionate application, and for rules to be responsive to future market changes and innovation. Nevertheless, there is a discussion to be had with the industry about when prescriptive rules are needed. Another example of the flexibility noted by the regulator given to firms was the Consumer Duty Board Reports. It was noted that there is no prescribed template for Boards, giving firms flexibility in terms of content and application; however, the FCA was also quick to point to the array of Consumer Duty guidance that has been made available via its website where challenged.

Price and Value was stated as an area that firms have found challenging. The regulator is keen to reiterate that its role is not to set prices, rather to ensure that firms robustly assess whether they are offering fair value to customers and take appropriate action where products and services do not offer fair value. Additionally, both Consumer Understanding and Consumer Support requirements are noted as areas where poor value may be compounded – so should be a focus. It isn’t solely about price, service levels and quality are absolutely important. The FCA will take a holistic approach to both their application of the Duty and firm price and value assessments. Ultimately, the price a customer pays must be reasonable compared to the overall benefits they receive.

It was notable that the regulator majored on the good practices seen across the industry, and spent very little time on the negative.

Good Practice

The FCA was eager to point out the importance of culture, and that it had seen a shift in the culture in firms and the sentiment in how the Duty was being embedded throughout firms. When the Duty is applied holistically and at the heart of the business, everything is joined up and there is a ‘culture of continuous improvement and action’. The FCA was keen to iterate that the most successful firms are those that have embraced the Duty with a ‘spirit of challenge and enquiry’. The regulator has seen changes to firms’ purpose and values, staff and employee remuneration and incentives, enhanced training materials, and amendments made to customer facing materials. The regulator also cited a healthy culture of challenge, particularly with Consumer Duty Board Champions working effectively (where present), and Senior Executives and Board Members providing appropriate challenge. Where Consumer Duty was previously seen as a compliance addendum to business practices, it is now being engrained into the day to day operations, thinking and decisions. Notably the FCA stated that a three lines of defence model is not always appropriate for smaller firms, and therefore flexibility around how firms gain assurance of business practices can be adopted.

In respect of product design , the FCA had generally seen a holistic and data led approach adopted, with consideration given to the cross cutting rules as well as the four outcomes.

Key Challenges

The two biggest challenges facing firms since the implementation of the Duty according to the FCA are Fair Value Assessments and Outcomes Monitoring.

Fair Value Assessments

This is one of the big change areas, according to the FCA, that firms appear to be struggling with. The FCA will provide further examples of good practice, poor practice and lessons learned. The FCA offered the following ‘key ingredients’:

Benchmarking is required, but is a starting point only
Solid and credible evidence to support conclusions are required
Customers need to be assessed by different segments / cohorts / target markets and by potential vulnerability
There should be an analysis of total price paid versus the benefits received by the customer over time
There should be a holistic approach adopted, ensuring the firm are not just focused on price, but also customer service, support and understanding

Outcomes Monitoring

The FCA stated that firms still have weaknesses in their approach to outcomes monitoring, and encouraged firms to review the outputs published in June 2024 of their Insurance Multi-Firm Review of Outcomes Monitoring and FG22/5.

The FCA offered the following ‘key ingredients’:

Clearly define your customer outcomes across the different customer journeys
Firms should use a mix of quantitative and qualitative information and analysis to evidence outcomes
Identify where poor outcomes or harm may be experienced and therefore what prevention controls and monitoring arrangements should be in place
Take action to address weaknesses, and poor outcomes – not just at case level
Evaluate the impact of the changes implemented to evidence whether outcomes are improving

Supervision

One of the questions raised to the FCA panel was whether any firms have been taken to enforcement in respect of non-compliance with Consumer Duty.

The FCA were keen to point out that they are trying to be collaborative and will take a proportionate approach. The first step is not to reach for the big stick, but….

Firms that are outliers might prick the FCA’s attention, and those firms that are outliers would be expected to have appropriate rationale and justification as to why this may be the case. The FCA expects firms to be responding to its requests and feedback clearly, honestly and effectively. Firms will have a chance to fix any issues the regulator identifies, however, if the issues are not resolved promptly, then those firms can expect the FCA to ‘come knocking.

Complaints

The FCA were joined by the FOS who outlined some of impacts that Consumer Duty has had on complaints handling. Namely, what constitutes a ‘fair and reasonable’ outcome – the FOS applied principle to their decision making. Many customers complain as a result of not adequately understanding the product or service they have bought, and the FOS finds that firms could still do more to personalise how customers are treated to their individual needs. Both the FCA and FOS posed the question – do you treat your customers how you would expect to be treated – which is not a new barometer that firms should be adopting. The FOS also iterated that where firm good practice can be evidenced, they are much more likely to decide in their favour.

Next Steps

In the coming weeks, the FCA will be publishing their forward programme of Consumer Duty work. They will be prioritising initiatives, firstly where there is a need to act to address harm, or potential harm, to retail customers. Secondly, it wants a greater understanding of how firms are embedding the Duty and where potential issues are emerging. Finally, it will be sharing more good practice and regulatory expectations to help drive better outcomes.

Under its forward work programme, the FCA will undertake thematic work across multiple sectors, and will keep a keen focus on price and value. It was stated that a post-implementation review would also be commissioned in a ‘couple of years’.

In the closing remarks, the FCA outlined some of their success measures. In particular, the FCA wants to see consumer trust increasing across the industry – which will be measured in the financial lives survey. They also want to see a reduction in complaint volumes and upheld complaints as well as firms moving to a more ‘data led approach’ to customer outcomes management.

How can Square 4 help?

At Square 4 we specialise in regulatory compliance across the FCA agenda throughout the Wealth and Retail Lending sectors. Our specialist consultants have been supporting our clients in successfully delivering and reviewing Outcomes Monitoring Frameworks, Price and Value assessments, developing MI, governance and control frameworks, writing and reviewing Consumer Duty Board Reports, and other Consumer Duty and conduct-related issues.

Please get in touch with us at hello@square4.com, or the team below, should you wish to discuss how we might be able to support your firm further.