Consumer Duty: key updates and deadlines

In less than three months, the scope of the Consumer Duty will be extended to apply to closed products and services, and by then firms must have produced their first board reports assessing implementation. The Financial Conduct Authority (FCA) has been busy publishing reports and speeches in the run-up to the 31 July 2024 deadline.

In March 2024 the FCA published its 2024-25 Business Plan, in which it set out some of its ongoing and planned work on the Consumer Duty. In the coming year the FCA intends to review unit-linked pensions and long-term savings products to test the transparency of charges across value chains, how firms assess overall product value and their response where they identify unfair value. The FCA will also be undertaking multi-firm work, looking at how swiftly the insurance industry responds to claims, including where customers are more likely to show characteristics of vulnerability.

Separately, the FCA announced that it would be undertaking a review into how firms understand and respond to the needs of customers in vulnerable circumstances. The FCA reminded firms that, under the Consumer Duty, firms should act to deliver good outcomes for retail customers, including those with characteristics of vulnerability. The FCA provided an update on these plans in their most recent Regulation round-up, stating that there would be two stages of the review. This summer the FCA intends to contact around 400 firms across different sectors to gain an understanding into how they are supporting their customers. In the autumn the FCA will request more detailed information from a smaller sample of firms, both to identify good practice, and to challenge firms which are offering poor levels of customer support, particularly to vulnerable consumers. The FCA aims to share the findings of this multi-firm work early next year.

Also in March, chief executive of the FCA Nikhil Rathi gave a speech on Investing in Outcomes, in which he spoke about the 31 July deadline and said that the FCA was not aiming to ‘trip firms up by going after technical breaches’. He said that the FCA looks favourably on firms which are taking reasonable steps to identify and address concerns, even if mistakes are made. The FCA was focusing on what they considered to be the greatest harms: the cash savings markets, both in the largest banks and on platforms, and insurance products such as premium finance and GAP insurance.

In February, the FCA published a statement, announcing that it was writing to around 20 of the largest financial advice firms requesting information about their delivery of ongoing services for which they continue to charge customers after the initial advice has been given. The FCA had previously raised concerns that some consumers were paying for services such as an annual review but not receiving it.

Also in February, the FCA published three updates on the Consumer Duty, which we cover in more detail below:

• A report on firms’ implementation of the Consumer Duty, setting out good practice and areas for improvement.
• A speech by Sheldon Mills, Executive Director for Consumers and Competition, entitled ‘Consumer Duty: the art of the possible in a year’, in which he provided some helpful messages on areas of focus for firms in advance of the deadline.
• The results of a survey of smaller firms (up to 49 employees), undertaken in Autumn 2023. The FCA was particularly keen to understand how smaller firms had implemented the Consumer Duty, and whether firms had made changes to their consumer contracts and financial promotions. The survey indicated improvements had been made since Spring 2023. A key message from the FCA was that firms not only had to undertake work to embed the Consumer Duty, but also be able to evidence this activity, delivering good customer outcomes.

The report

The report sets out what the FCA considers firms are doing well, and what they could do better, in the following areas:

Culture, governance and monitoring: It has been a key part of the FCA’s messaging that firms need to embed the Consumer Duty at all levels of their organisation. The FCA noted they consider it good practice for firms to alter their company purpose to signal to staff that their actions and behaviour should focus on customer outcomes. Another example of good practice was for firms to increase focus on consumers at Board level, with firms’ senior leadership teams giving serious consideration to what the Consumer Duty means for them at a practical and a cultural level. The FCA emphasised that firms should ensure that their focus on good customer outcomes is understood at all levels, in their strategy, leadership and people policies (including their incentivisation policy).

Vulnerable consumers: Firms are reminded that consumers in vulnerable circumstances may have additional needs or be at greater risk of ham if things go wrong. Firms should take the FCA’s guidance on the fair treatment of vulnerable customers into account when considering whether the outcomes for consumers in vulnerable circumstances are as good as those for other consumers. Examples of good practice include:

• Firms fully reviewing their approach, systems and processes, and centralising their operations relating to vulnerability. This results in them being better able to direct the handling of vulnerable customers to specialist staff, collect relevant data and monitor outcomes and trends, and deliver better outcomes for vulnerable consumers.
• Offering communications in alternative formats, including in braille, audio or with enlarged text, and considering whether their information is appropriate to customers for whom English is not their first language.
  
  

Areas in which firms could improve included:

• As previously raised in a ‘Dear CEO’ letter to wealth management and stockbroking firms, the FCA is concerned that some investment firms are failing to identify any vulnerable consumers, in part due to a failure to think widely enough on vulnerability.
• Asking consumers to disclose their personal circumstances each time when being passed between internal teams or being asked to identify themselves as vulnerable and then being unnecessarily asked to provide evidence of this.

Products and services: The FCA reminds firms that they should carefully and precisely define the target market for products and services that have the potential to cause harm if sold to the wrong consumers. Firms should also look at their role in distribution chains and take steps to support good outcomes for consumers, even if they do not have a direct relationship with them, including by sharing information effectively. An example of good practice was highlighted where an investment firm which identified that some of its institutional clients had retail customers and offered them more suitable alternative investment options.

Price and Value: The FCA has spoken a lot about the price and value outcome, as it can be a tricky one to get right, and also potentially risks causing the most harm to consumers. Sheldon Mills noted that it is perhaps the most challenging outcome for firms to meet. The FCA has emphasised that fair value is not just about price. For example, unsuitable features of a product can also lead to it being poor value. The FCA sets out examples of good practice and how firms can improve as follows:

The FCA expects firms to consider the total cost to the consumer of their products, including ancillary fees and charges as well as the headline price as against their benefits. Improving the outcome for a consumer might involve the firm reducing or removing charges or offering more benefits for the same price. As with the products and services outcome, firms should consider their distribution chain, particularly where there are multiple fees added down the chain. In keeping with their concerns relating to financial advice firms, the FCA wants firms to think about whether they are charging their customers for ongoing services which they do not receive or offer little value.

Firms should not rely on benchmarking against other products in the market to demonstrate fair value. This is something that Sheldon Mills criticised in his speech, saying that the ‘equivalent of a Google Shopping search’ does not prove that a customer is getting a fair deal.

Nikhil Rathi, in the speech referred to above, reminds firms that the FCA does not want to regulate prices nor restrain profits for well-run businesses, and that firms which deliver well under the Consumer Duty should have a competitive edge. However, the FCA would act where they have concerns.

Consumer understanding: The FCA wants consumers to make informed decisions about their financial decisions. To facilitate this, consumers need to understand the information that they are given in a timely manner. The report sets out some examples of ways in which firms have improved their customer communications, including:

• Simplifying the language used and removing jargon.
• Introducing ‘in the moment’ prompts or push notifications to inform customers of costs.
• Making their websites more user-friendly.
• Testing and monitoring the impact of their communications.
  
  

Consumer support: The key message here is that customers should not face unreasonable barriers when they need to access support, including 'sludge’ practices. The FCA identified a range of good practices including when firms introduce interventions to customer journeys to provide further support, or to help consumers in other ways to make better decisions.

The FCA considered it poor practice when firms did not sufficiently train staff in how to have complex conversations with customers, or to understand individual customer circumstances, particularly when they might indicate vulnerability.

The speech

Closed products: Sheldon Mills acknowledged that firms may have particular difficulties in getting ready for the deadline for closed products, for example due to having to find data in old systems. Firms have told the FCA the main challenges they are facing are:

• Gaps in data monitoring: Firms are required to evidence that they are delivering good outcomes for consumers, but this is a challenge when firms have out of date or incomplete client records. Where firms are not able to fill gaps in their records, the FCA suggests that firms could take additional steps to mitigate the risk of harm to consumers, for example through enhanced outcomes testing.
• Fair value in closed products: The FCA notes that some closed products may offer poor value. An example given is where consumers may be paying higher prices than newer consumers on open products, where firms are competing for new business. Nevertheless, firms must assess and be able to demonstrate that their closed products provide fair value to customers. Firms can take into account costs and benefits incurred before the coming into force of the Consumer Duty, and the FCA will not judge firms retrospectively, or expect firms to re-price products.
• Keeping the customer connection: The FCA notes it can be a challenge to engage with customers, particularly elusive ones. The FCA notes that lack of customer engagement can mean that firms have customers who are paying for products they no longer need, or for which they are no longer eligible or are not able to use the product as expected because they are not aware of key changes to the product. This is not a new problem, but the FCA expects firms to go further in order to drive good outcomes. Recommended steps include communicating more effectively, providing consumers with the information they need at the right time and in a way they understand. The FCA expects firms to test, monitor and adapt their communication approach if these are not driving the right outcomes for consumers.
• Vested rights: These could include annual fees that are due or exit charges. Where firms identify a problem, the FCA expects them to take appropriate action to mitigate the harm. The FCA notes that some firms may consider giving up their vested rights, for example reconsidering fees or charges, or providing information to affected customers on how to switch to a different product. The FCA notes it is particularly important to offer extra support where the consumer of a complex product or service has characteristics of vulnerability.

Conclusion

The Consumer Duty is central to the FCA’s approach to achieving a higher level of consumer protection and the onus is on firms to meet these standards. Whilst the FCA is clear that it does not intend to punish firms for technical breaches the expectation is that it will not shy away from using its supervisory tools to sanction those firms who are not proactive in mitigating harm to consumers. As such, firms should consider these communications alongside the new rules and guidance. Firms should work towards implementing the good practice examples and removing practices the FCA has identified as at risk of causing harm.

The Consumer Duty is not a point in time event and firms should be looking to implement and monitor the outcomes of, on an ongoing basis, any changes they need to make in advance of the 31 July 2024 deadline for closed products, and their first annual board report.