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On 9^th October 2024, the FCA released a crucial update for payments firms across the UK – a set of their key observations drawn from payment firms’ implementation of Consumer Duty. The UK regulator took the opportunity to emphasise the ‘fundamental’ nature of Consumer Duty, in how it has set a higher bar for firms to meet. With just under half of the firms reviewed having only partially implemented and complied with Consumer Duty, there is significant work outstanding, presenting a risk of poor consumer outcomes.

In this article, Rohan Chakraborty, Senior Associate in our Payment Services team, explores some of the most crucial takeaways of best and poor Consumer Duty practice identified by the FCA.

1. Knowing Your Target Market

While broad target markets may be suitable for low-risk products catering to a wide range of consumers, the FCA raised their concern that setting overly wide target markets for higher-risk products can lead to poor outcomes. For medium- and high-risk products, firms should define narrower target markets to minimize risks and ensure products align with customers' needs and risk preferences.

The consequent prevention of harm to consumers show the significant difference firms can make by considering the ‘characteristics, risk profile, complexity and nature’ of their products and services.

2. Taking Accountability For Agents

A question we are often asked – are payments firms responsible for overseeing the compliance of their agents and distributors with Consumer Duty? The FCA reiterates that this is indeed the case, and that while they were encouraged by many firms providing onboarding and training to their agents, concerns arose surrounding ongoing monitoring of compliance. Areas of best practice that were identified included ongoing testing to ensure agent firms were delivering on prescribed disclosures and other vital customer support communications. At Board level, the FCA underlined the importance of receiving regular summary Management Information (MI) on intermediary oversight, accompanied by RAG-rated measures clearly setting out shortcomings and mitigating actions to be taken.

3. Assessing Products and Services for Fair Value

A cornerstone of Consumer Duty is the requirement for firms to provide reasonable price in relation to benefits received to retail customers. The FCA explored that despite the importance placed on fair value assessments, it saw some firms lacking a clear conclusion on whether their products and services were providing fair value. They were also concerned that firms were fixated on price comparisons, and did not comprehend fair value through a non-financial lens, such as measuring consumer support. The most successful firms were those that applied a multitude of financial and non-financial factors in their fair value assessment, considering all possible groups who would engage with their product/service and how benefits (or costs) would impact each group specifically.

4. Keeping Consumers Informed

Payment firms are expected to help retail customers make informed decisions by ensuring communications meet their needs under the Consumer Duty. However, many payment firms in the review had made insufficient change to their communication approval processes since its implementation, with limited pre-testing and inadequate post-communication monitoring. Good practices from payment firms involved tailoring communications to the customer, product complexity, and channel, especially amongst those firms testing clarity (through such methods as A/B testing) and monitoring impact of communications (e.g. evidencing comprehensive MI comprised of data from regular reviews of customer understanding).

5. Supporting Customers The Right Way

Following the review, some payment firms were found to have unclear signposting for support services, and high complaint volumes suggested issues in meeting customer needs. They had fallen short of a key expectation, in which firms are expected to offer accessible and effective support channels and clearly signpost them to customers. When such support issues arise, firms should act quickly to resolve them (a response which can be defined through clear internal service level agreements, or SLAs, on delivering support). Another issue specific to e-money firms was poor communication around account freezing, though some firms have improved this where not restricted by financial crime regulation.

6. Tone From The Top

As discussed earlier, the FCA’s ‘fundamental’ regard of the Consumer Duty is something that they expect to be mirrored across all firms, embedded in governance, strategies, relevant policies, and the overall incentive within the firm to ensure positive customer outcomes. For the senior management and the Board, decision-making should be driven by a serious consideration of Consumer Duty and related matters, but Board minutes of the reviewed payment firms did not evidence this – there was little evidence of active challenge or discussion of Consumer Duty, despite most Boards in the review receiving documented updates. The role of the Consumer Duty champion on the Board needs to demonstrate purpose, including taking the initiative to question remuneration and incentive policies from a customer protection perspective.

7. Effectively Utilising Management Information (MI)

A key aspect of the Consumer Duty is for firms to assess, test, understand, and provide evidence of customer outcomes, with good MI being essential. For example, this includes the need for a comprehensive MI suite to monitor customer outcomes and act when good outcomes are at risk. However, many firms struggled to create sustainable MI suites, facing challenges such as identifying relevant metrics, managing too many metrics, or failing to use collected data effectively. More successful firms were the ones that effectively identified client outcomes used metrics directly aligned with Consumer Duty outcomes, with triggers for investigation and clear ownership of issues.

Payments Firms: What Are The Next Steps?

One of the essential next steps highlighted by the FCA is an urgent one: payment firms need to evaluate themselves against the feedback that has been provided, and proactively use this evaluation to address any harmful areas of Consumer Duty malpractice.

With the release of this report, the FCA are now even more transparent in how important Consumer Duty is in their assessment and supervision of payment firms. However, making changes is not always the easiest discussion to have internally, and with our experience in supporting firms in exploring how Consumer Duty applies to them, we have often seen it as a discussion that benefits from external insight.

At Thistle Initiatives, the Consumer Duty strand of our regulatory compliance support extends not only to helping firms in drafting policy and procedure, but to assess the effectiveness of the implementation of the Consumer Duty through such policy and procedure. For enquiries, please contact us at 0207 436 0630 or via email at info@thistleinitiatives.co.uk.