Consumer Duty

Consumer Duty Annual Board Report: What the FCA expects 

This report, a key pillar of the FCA's new regulations, requires firms to demonstrate how they are delivering good customer outcomes.  Firms must go beyond traditional metrics and evidence that their products and services meet customer needs, avoid harm, and offer fair value. The board (or equivalent governing body) is required to review and approve this assessment at least annually.

Before signing off the assessment, the board (or equivalent governing body) should agree the action(s) required to address any identified risks, or any action(s) required to address poor outcomes experienced by customers and agree whether any changes to the firm’s future business strategy are required.

This report is a chance for firms to showcase their commitment to putting consumers first and navigate the evolving regulatory landscape.

Ongoing requirements for closed book products

Complying with the Consumer Duty rules for closed products may be an even greater challenge than for open products.

The FCA has made clear that it expects firms to pursue readiness for the application of the rules to closed books with just as much focus and rigour as for open products. It is critical that firms invest the time and resources to get this right.

Here's what firms should be thinking about doing now in respect of closed book products: 

Impact analysis 

An essential starting point is to have a clear and complete list of all products and services that meet the FCA’s definition of closed, and to formalise with rationale which rules apply to them. The FCA expects firms to prioritise their focus, when planning and making enhancements to their operations, on the biggest potential causes of possible harm, affecting the most customers.

Gap analysis and implementation plan 

Just as they did for open products and services, firms should conduct an analysis of the extent to which they can meet all the applicable Consumer Duty rules, recording their rationale in respect of those rules with which they are compliant, and the nature and extent of any gaps. 

Programme management 

To the extent proportionate and appropriate for an individual firm, firms should set up and operate a programme to facilitate and oversee the activities in the implementation plan for the closed book deadline. The goal should be to extend or amend the infrastructure – including policies, procedures, and risk management and oversight arrangements – created for the open products deadline, to closed products, as appropriate.

Product governance and reviews 

Although the products are already held by customers and closed to new business, the Consumer Duty rules nevertheless require firms to measure whether they continue to perform as intended and consistently generate good customer outcomes. This is likely to entail the extension of enhancements to product review arrangements made for open products to closed products, with suitable adjustments to consider issues specific to closed products. 

FVAs 

The FCA is already supervising assertively regarding the Consumer Duty rules for open products and has focused on firms’ responses to the price and value rules. This is not surprising, given that the requirement to conduct FVAs was new for much of the financial services industry, and the FCA’s concern that those firms – general insurers and some asset managers – to whom similar requirements (in the PROD and COLL sourcebooks) already applied were not necessarily meeting the regulator’s expectations. (Firms that meet the value rules in PROD 4 for non‑investment insurance or COLL 6.6, COLL 8.5 or COLL 15.7 for asset management will meet the price and value outcome).

What about ongoing requirements for open-book products?

Beyond the initial deadlines of 31 July 2024, the Consumer Duty establishes ongoing requirements for firms. The FCA expects ongoing focus and continuous improvement – the work will never truly be finished.

Here's what firms should be thinking about throughout 2024:

Continuous outcome testing

Firms must establish a framework for regularly testing the actual outcomes customers experience throughout their customer journeys. This includes using data and customer feedback to assess if products and services deliver fair value, prevent harm, and meet customer needs.

Governance, people, and culture

The Consumer Duty isn't a siloed exercise. Firms must integrate its principles into all aspects of their business, from product design and sales practices to customer service and complaint handling. This requires ongoing training and cultural change to ensure all staff understand and act in accordance with the Duty. The rules require firms to ensure their strategies, governance, leadership, and people policies (including incentives at all levels) lead to good outcomes for customers. The rules also make clear that customer outcomes should be a key lens for areas such as Risk and Internal Audit.

Embedding the Duty throughout the organisation, and regular reporting and monitoring

The ability to identify the extent to which good outcomes are being achieved is arguably the most significant challenge posed by the Consumer Duty. MI in this respect both drives and demonstrates the embedding of the Duty. The FCA expects that firms’ approaches will mature and evolve over time and we should expect ongoing reporting requirements to the FCA. Firms will need to demonstrate how they're embedding the Duty, addressing identified issues, and utilising outcome testing results to improve customer experiences.

The Consumer Duty is a significant shift towards a more outcome-oriented approach to regulation. Firms that embrace continuous monitoring, data-driven decision making and a customer-centric culture will be well-positioned to succeed under these ongoing requirements.