Firms have worked hard to write the prologue of their Consumer Duty (the Duty) story by ensuring that they are substantively compliant with the Financial Conduct Authority’s (FCA) new outcomes-focused regime by 31 July 2023, when the rules (for open products) take effect. Alex Ellerton, David Morrey and Blandine Arzur-Kean look at what firms should focus on now and in the near future.

Firms should not drop their guard on ensuring compliance with the FCA new requirements and consider the risk to their ongoing programme.

Assessing compliance

On 28 June 2023 the FCA published a useful 10 key questions for firms to test their adherence to the Duty. These questions cover all key components of the Duty from customer outcomes to personal accountability. We have seen a considerable amount of activity by firms to enhance the design of their systems and controls, however these questions go further. Firms need to ask themselves how far they are in the implementation of their approach and what they do about any area of potential harms they are aware of.

The FCA wants firms to really challenge themselves: ‘Is every aspect of what we do and how we do it geared towards the achievement of good outcomes we have defined for our products and services, throughout their lifecycles? Will the outputs of our testing, monitoring and controls really prove that we are doing this?’

The regulator expects firm to monitor good outcomes from day one, while recognising that available management information and processes to monitor good outcomes will evolve over the next two years. A repackaging of your existing management information (MI) suite is unlikely to be enough on its own.

Programmes post-31 July

Due to the amount of ground to cover, many firms prioritised their implementation activities on areas that affect the most customers, or are most likely to cause harm. While this is a reasonable approach, the rest of the activity needs to be completed in the relatively short term. Many firms have found the implementation project intensive and there is a real risk of programme fatigue, which could lead to reduction in the delivery and oversight of ‘phase 2’ of programmes. This should be looked at and mitigated where relevant.

Firms should also consider if their programme needs amending based on an honest response to the FCA’s 10 questions. While you might be able to respond to the questions, can you clearly articulate your answer and demonstrate how you have identified and mitigated the most significant or widespread risk to good customer outcomes? Would your executive team provide a consistent answer to these questions?

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Moving to Consumer Duty by design

For many firms the design phase is complete and some training has been carried out to communicate the change in systems, processes, and expectations. Therefore, implementation has started, however the process will not be embedded yet, and your teams will need more time to complete new activities and more deeply understand how the Duty affects their roles. Staff are therefore likely to ask for guidance at the beginning. Have you defined how you will move from design and programme management to full embeddedness? This is an important question as multiple aspects of the Duty might have led to or even necessitate changes to your business model and associated culture at variable levels of significance.

Regardless of their significance, embedding a culture orientated around good outcomes rather than simply fair treatment will take time. Firms need to consider what support they put in place to reach to compliance with the Duty by design. Before getting there, firms are likely to go through alterations. Firms should consider feedback loops, checkpoints and how their monitoring approach will support the development of their story toward providing good customer outcomes by design.

To support this, firms should consider the role of their three lines of defence and third parties in providing assurance. It is not too early to consider how you will carry out the Board’s annual self-assessment of the extent to which customers receive good outcomes from products and services throughout their lifecycles. You should not underestimate the level of work needed to meaningfully conduct this assessment, and to identify any areas of focus to address shortcomings.

Firms with closed books should factor in lessons learnt (from work carried out on open and existing products) into their wider approach and ensure that appropriate oversight remains robust to meet the 31 July 2024 deadline.

It is clear, from recent FCA publications and other output, that the regulator will consider the following focus areas as part of its initial supervision of firms’ interpretation and compliance with the Duty’s rules:

  • Price and value

The robustness and granularity of assessments.

  • Culture

Your culture is key in providing good customer outcomes – we know this is an area that firms can find more difficult to demonstrate.

  • Understanding and customer support

Helping people meet their financial objectives and communicating in an understandable manner with targeted audience.

We have seen the FCA calling out banks for not passing on benefits of Bank of England base rate rises to savings account holders; and strong messages from the ICO and the FCA to address firms’ questions on data protection concerns. Firms should question themselves on sludge practices by focusing on what it should be rather than if the status quo is acceptable.

  • Third-party management

What role do third parties play in the delivery of good customer outcomes? Are they clear on this? What interactions and information do you need from them to help you demonstrate that good outcomes are provided? Are you sure that your third parties are aligned with your expectations, and can you demonstrate that it is the case.

The 31 July 2023 represents a significant shift in the FCA’s expectations, from a world where it has arguably been enough to demonstrate that customers are treated fairly, and that they do not receive poor outcomes, to a world where the rules require firms to proactively demonstrate that customers consistently receive good outcomes through their relationship. A significant amount has been done, but there is still much more to do to write your story, ensuring that you know what good outcomes are for your customers, and can show that every aspect of your organisation is geared to consistently achieving them.

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