The countdown is on! With July 2023 coming up fast, is your firm prepared for the UK Financial Conduct Authority's new Consumer Duty?
As the final deadline rapidly approaches, the FCA continues to release guidance to firms, including a multi-firm review of where Consumer Duty implementation plans stand to date and Dear CEO Letters with guidance specific to industry sectors.
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 will require firms to review the pricing, value and suitability of products and services, and insure there are policies and procedures in place to ensure consumer understanding and support.
Read more about how the FCA’s 2022-2025 Strategy Focuses on Data, Conduct Risk and Consumer Outcomes
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 new 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 will require 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 will be 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.
Monitoring Outcomes
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 will also need 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 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.
Move the Focus to Implementation
In the multi-firm review published on 25 January, 2023, the FCA notes that while many firms established sufficient programmes to embed the Duty and its substantive requirements, others are falling behind in their thinking and planning. The agency notes that it has observed firms who have only considered the requirements superficially or are over-confident that their existing policies and processes will be adequate. Key areas where firms should be focusing on in the approach to 31 July 2023 include:
- Effective prioritization
- Embedding the substantive requirements
- Working with other firms
According to the report, good practice involves robust governance frameworks for a firm's implementation work, with clear executive accountability for delivery and board oversight.
The Dear CEO letter sent to Asset Management, Custody & Fund Services and Alternatives firms points out that in Asset Management, Custody & Fund Services and Alternatives space many firms have been hard at work on documenting their implementation plans, but it’s now time for firms to move toward making substantial progress toward the implementation and embedding of Consumer Duty principles.
Chris Cattermole, MCO’s UK-based Director of EMEA Sales, reminds firms that the scope of Consumer Duty is broad. He notes that “All Financial Services firms will be impacted by the regulation, and 31 July is coming up quickly. And it's clear that while the FC A thinks that some progress has been made, there's clearly significant work still to be done. 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.
