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What has happened?

In May 2023, with fewer than ninety days to go until the start of the Consumer Duty, the FCA has urged firms to ensure they are ready for the 31 July deadline.

What are the key points?

In a speech given on 10^th May 2023, Sheldon Mills, the FCA’s Executive Director of Consumers and Competition, emphasised a number of points, summarised below, that firms should be aware of.

The Consumer Duty’s purpose

• The Duty’s outcomes run with the grain of what good firms should seek to deliver. Firms that do the right thing and show leadership should welcome action to tackle poor practices by competitors that drive down standards. The common thread which the FCA is interested in above all else in its work, is reducing harm to consumers and ensuring firms deliver good outcomes for consumers. The Consumer Duty should deliver this, by fundamentally changing culture. The FCA will become ever more outcomes-and data-driven – which means focusing on results over processes – and ever more attuned to the needs of consumers.  
• As a regulator, the Duty will provide a lens through which the FCA can assess its rules so that in the future, the FCA does not duplicate regulations that are already implicit in the Duty. This should, over time, simplify some of the complexities in its rule book. 
• The Duty will help UK firms flourish and remain world-leading proponents of financial services, as it makes all firms think harder about innovating and competing to find better ways to serve customers.
• The FCA wants firms to understand what outcomes the FCA considers important, so they can stay agile when rolling out new products and services, or when using technology such as AI to deliver better outcomes. If applied correctly, the Duty should help firms retain and attract customers and will enhance the competitiveness of the financial services sector.
• The FCA wants consumers to buy insurance, take out mortgages, borrow sensibly, and invest in their future knowing that firms are providing them with the right products for their needs. Creating this foundation of trust, a key driver of productivity will be vital to attracting steady inward investment and efficient movement of money through the economy, driving medium- to longer-term economic growth. 
• Firms should be asking themselves the following questions:

• Does their purpose and culture align with their obligations under the Duty and support the delivery of good outcomes for customers?
• Is the Duty being considered in all relevant discussions such as strategy, remuneration, and risk?
• Have you made sure your remuneration and incentive structures drive good outcomes for customers?
• Are you prioritising delivering good outcomes for customers in a changing external environment?

The price and value outcome

• Price and value is one of the four key outcomes that firms need to assess under the Duty and the FCA regularly hears that it is the one that firms find the hardest.  So, the FCA has published some work to review firms' fair value frameworks. The findings of its review suggest that some firms may not be able to give adequate evidence for why their products or services provide fair value.

Some firms do not seem to be properly considering outcomes for different groups of consumers, relying instead on broad averages. This could hide cases where certain types of customers – such as those on low incomes or in vulnerable circumstances - are receiving poor value – perhaps because they are unable to benefit from important product features, or are more likely to pay charges such as late payment fees.

Some firms do not seem to be challenging themselves enough on uncomfortable questions – such as, are high-profit margins on a specific product a sign that those customers are not getting fair value? The FCA expects to see all firms taking an honest and critical approach to their fair value assessments.  

• Firms should use the time remaining in the run-up to 31 July to ensure that their fees are fair and transparent and that particular groups of consumers are not disproportionately disadvantaged. It is recognised by the FCA that the cost of doing business is also rising for firms, but it does not absolve firms of their duty to make sure that their customers are paying a fair price for their product or service in relation to the benefit they receive from it. 
• In recent Consumer Duty ‘Dear CEO’ letters, fees and charges are referenced across multiple sectors. For example, the FCA has made it clear to lenders that they should not charge unreasonably high fees or interest rates to some customer groups, such as those with persistent debt or poor credit history.
• Fair value is also about more than price: value should include consideration of the quality and benefits of the product or service.
• The FCA wants firms to look at their products and examine and challenge themselves about whether the cost of a product or service is reasonable relative to the overall benefits. This assessment is crucial, not only in terms of the upfront price and value but also throughout the lifetime of the product. The cost that a customer pays for a product is an amalgam of charges that are levied throughout the supply chain, so it is vital that manufacturers and distributors assess fair value across the whole value chain. Complex charging structures may carry a greater risk of poor outcomes especially if they are poorly understood. 
• The FCA has also seen customers pay broker commissions that can be unreasonable relative to the benefits of the products that they get. These are usually invisible to the end consumer but can greatly affect the price and suitability of the product they receive. The Consumer Duty is an opportunity for manufacturers and distributors to understand the impact that different commission models have on the value that consumers receive, and the FCA will be taking a close interest in this aspect of the Duty across sectors.
• When the Duty comes into force, firms will need to make sure, and be able to demonstrate, that they are acting to deliver good customer outcomes and protect consumers from harm. They will need to show they are equipping customers with communications they can understand, providing products and services that meet their needs and offer fair value, and offering the support their customers need. 
• The FCA’s supervisory and enforcement approach will be proportionate to the harm – or risk of harm - to consumers. The FCA will prioritise the most serious breaches and act swiftly and assertively where it finds evidence of harm or risk of harm to consumers. In some cases, firms can expect the FCA to take robust action, such as interventions or investigations, along with possible disciplinary sanctions.
• The Duty is outcomes-based, and a key part of it is that firms understand and evidence the outcomes their customers are receiving. This enables them to monitor their compliance and tackle potential breaches at an early stage.
• The FCA wants firms to harness the benefits of data and technology to improve their services and understand the outcomes they achieve for their customers. The FCA understands that some firms will need to continually improve in this area. It has undertaken to be pragmatic and open in working with them on the way they use data and analytics to demonstrate compliance.

How can we help you?

Thistle Initiatives has supported firms for over 10 years as a trusted compliance and regulatory advisor. In addition to assisting you as and when our team of specialists can serve as your right hand in a meeting and complying with regulations. We understand the importance of staying up-to-date and compliant and are dedicated to providing the guidance and support needed to do so.

Are you looking for help with your Consumer Duty governance, fair value assessments or more general regulatory questions? Contact our specialist team now to schedule a free consultation. Get in touch with us by calling 0207 436 0630 or sending an email to info@thistleinitiatives.co.uk.