It's been just over three months since the 31 July Consumer Duty deadline. Just what does that mean for firms?
In a recent speech, Nisha Arora, FCA Director of Cross Cutting Policy and Strategy, reminds firms that Consumer Duty is not a one and done endeavor. According to Arora, Consumer Duty isn't just a check the box exercise. Consumer Duty should create an enduring shift in culture across the organisation. This means firms should be assessing, testing, understanding and evidencing outcomes on an ongoing basis.
"The Duty is now an integral part of our approach and mindset at every stage of the regulatory lifecycle - including authorisations, policy development, supervision and enforcement. So, you can expect it to be a golden thread that runs through all your conversations with us."
Next Steps for Firms
Firms must be able to prove to the FCA that they are delivering good outcomes. Evidence of this includes an effective implementation plan, data and monitoring, and internal assessments. Has the firm made the changes that were set out in the implementation plan? And importantly, do these changes go far enough?
The same goes for data and monitoring processes. How is the firm harnessing the information required to measure and evidence outcomes? Is there any data that’s missing?
Firms should be thinking about their annual board report in the context of Consumer Duty. At least once a year the firm’s board or equivalent governing body must review and approve an assessment of customer outcomes. The assessment should include results of monitoring—and self-identify any evidence of poor outcomes. The report also needs to identify any required remediation to mitigate identified risks or poor outcomes and whether any changes to firm strategy are required to prevent the issue going forward. As Ashora reminds firms, this will take time to do well, so don't delay!
Firms should ask themselves these questions to review their Consumer Duty implementation and identify gaps and areas for improvement. Firms should also expect that these are exactly the questions that the FCA will be asking them when assessing their implementation of the Duty.
- Are you satisfied your products and services are well designed to meet the needs of consumers in the target market, and perform as expected? What testing has been conducted?
- How are you testing the effectiveness of your communications? How are you acting on these results?
- Do individuals throughout your firm – including those in control and support functions – understand their role and responsibility in delivering the Duty?
- Have you identified the key risks to your ability to deliver good outcomes to customers and put appropriate mitigants in place?
According to Arora, "where we have seen firms doing this well, they have focused on the outcomes they are aiming to deliver. And they have identified the data they need to measure and monitor that these outcomes are delivered. Where firms are not meeting our expectations, it’s often because they are just repackaging existing data and haven’t thought seriously about what information they would need to really understand consumer outcomes."
New Standards of Care
The FCA released the final rules and guidance around consumer duty in July 2022. The new standards of care apply to Broker Dealers working in financial services firms and impact the regulated financial advice and recommendations that they give to customers. FCA Consumer Duty means firms will have to do more than just prove that they’ve caused no harm and truly sharpen their focus on ensuring positive consumer outcomes.
At the FCA’s 2022 Annual Meeting, Interim Chair Richard Llyod described the new consumer duty as groundbreaking, “setting higher standards and requiring firms to focus on meeting their customers' needs in everything they do. We think this will be a real game changer for the level of protection consumers receive in the UK.”
A key part of the agency’s three-year strategy, FCA consumer duty requires firms to review the pricing, value and suitability of products and services, and ensure there are policies and procedures in place to ensure consumer understanding and support.
According to the FCA, consumer duty will lead to a major paradigm shift in financial services. Sheldon Mills, FCA Executive Director of Consumers and Competition noted “The Consumer Duty will lead to a major shift in financial services and will promote competition and growth based on high standards. As the Duty raises the bar for the firms we regulate, it will prevent some harm from happening and will make it easier for us to act quickly and assertively when we spot new problems.”
Fit for Purpose
Under the FCA Consumer Duty rules, firms must offer consumers products and services that are fit for purpose and offer fair value and pricing. The FCA expects that financial products and services will be designed to meet the needs, characteristics and objectives of a target group of customers and distributed appropriately. Firms must also carry out ongoing assessments to ensure that products and services are continuing to meet the needs of the consumers, that recommendations are appropriate, and that the review process is valid and up-to-date.
Manually monitoring the suitability of products and services offered to customers brings significant risk. Automated compliance software allows firms to implement rules and workflows to monitor sales practices and adherence to customer suitability policies and procedures against consumer data and trading activity. See how MCO helps firms automate Customer Suitability Monitoring.
Consumer Duty Champions
Although not prescribed under SMCR, the regulation requires that firms appoint a consumer duty champion. The role of the consumer duty champion is to support the firm’s Chair and Chief Executive Officer in making sure that the firm is moving forward with the proper policies, procedures and controls to ensure that the principles of consumer duty are embedded across the firms culture, strategy and business objectives.
The FCA has indicated that the champion should be at the board level, and at the Independent Non-Executive Director level where possible. The FCA expects that the champion should be at an appropriate Board level to insure that Consumer Duty is discussed in a meaningful way by the firm’s governing body and management.
Because the consumer duty champion role is not covered under SMCR, firms can set it up in the way that works best for the needs of their particular organisation. Firms will still need to attest however that they have someone in the role, and that the person in the role is fulfilling the duties of the Consumer Duty Champion.
Culture, Governance and Accountability
“We will make the Consumer Duty an integral part of our regulatory approach and mindset - including authorisation, supervision and enforcement priorities and processes.”
The FCA notes that Consumer Duty requires a cultural shift for many firms. Firms will be measured by four drivers of culture outlined in Chapter 10 of the FCA’s Finalised Guidance FG22/5 Final non-Handbook Guidance for firms on the Consumer Duty:
- Purpose consistent with Consumer Duty and understood across the organisation
- Leadership that is competent, accountable and aligned with Consumer Duty
- People who are trained, managed and rewarded for delivering good consumer outcomes
- Governance that includes policies, procedures and controls that identify red flags along with a strategy for tackling root causes and mitigating poor outcomes
Firms are required to provide reporting on Consumer Duty obligations and to review and assess policies, procedures and controls at least annually. Individual accountability and high standards of personal conduct will be a measure that firms are meeting their Consumer Duty obligations. The agency also expects that customer outcomes will also be a “key lens” for other organisational functions like Risk and Internal Audit.
According to PwC, having the right governance to review data, identify and action concerns will be key and firms should pay particular attention to the strengthened requirements on governance and accountability.
Most broker dealers are not bad actors, and most firms want to insure good outcomes for their clients. But, under Consumer Duty, good intentions alone aren’t enough. As FT Adviser points out, regulators are going to want to clearly see what steps firms have taken.
Firms must be able to demonstrate that they have the policies, procedures and controls in place to be compliant with consumer duty. They also need to ensure they have structured data and reporting capabilities in place to ensure they can easily provide proof of regulatory compliance.
According to FT Adviser, compliance with FCA Consumer Duty is as much about data management as it about culture. Firms that are able to measure how they are delivering on good consumer outcomes can turn management information requirements set out by the duty into a competitive advantage.
In Chapter 6 of the FCA’s Finalised Guidance FG22/5 Final non-Handbook Guidance for firms on the Consumer Duty, the regulator lists questions that the Consumer Duty champion should be asking of the firm to guide discussions around implementing and optimising Duty principles across the organisation. These questions touch on topics including suitability, disclosures, data management and reporting. Firms should look at this list to measure their progress against meeting Consumer Duty obligations - and expect that these are exactly the types of questions that the agency will expecting that firms can answer and evidence to prove compliance.
In a multi-firm review published on 25 January, 2023, the FCA noted that good practice involves robust governance frameworks for a firm's implementation work, with clear executive accountability for delivery and board oversight. Firms should also not lose sight of the extended 31 July 2024 deadline for Consumer Duty implementation for closed books and services.
Chris Cattermole, MCO’s UK-based Director of EMEA Sales, reminds firms that the scope of Consumer Duty is broad and that regulatory focus will be enduring. He notes that “All Financial Services firms are impacted by the regulation. Just because 31 July has come and gone doesn't mean that firms can stop thinking about Consumer Duty. It’s imperative that Compliance leaders are proactively assessing their programs across the entire organisation to assess gaps and ensure that they have policies and procedures of substance in place to address them – along with the right audit trails, data and reporting to provide concrete proof of compliance to the regulators.”
To meet with Chris and our team to see how MCO is helping firms ensure suitability of recommendations, track and demonstrate executive accountability and manage attestations, click here to set up some time for a demo.