Blog

We’ve seen, in recent years, our industry becoming more focused on adhering to the abundance of complex rules, regulations, and guidance issued by the FCA and making firms’ senior managers personally accountable for non-compliance with these. The real threat of regulatory censure and closer supervision may have limited entrepreneurism, as business leaders have been focused on perfect compliance rather than exploring new ways to deliver better services to clients. That’s a shame and is not what I signed up for when I joined the industry in 1987! 

But something happened. Something good. 

In the Consumer Duty regulation, the FCA now talks about ‘outcomes’, proportionality and reasonability. In this piece of regulation, business leaders and compliance staff are actively encouraged to explore, learn and improve their firms ‘services, to meet different client’s needs, identify risks of harm, and to deliver better value.  

But with an industry as complex as financial services, introducing a much tougher set of consumer principle-based protection won’t be simple. The change of emphasis away from fixed rules and stipulations has in itself required a mental shift based on the fundamental requirements within the Duty to gather evidence, work out what it means, test new approaches, and learn and improve. 

To help with this process, the FCA has released additional information to clarify certain points in its Policy Statement, although how much actually required clarification is debatable.

The key points in the FCA’s update are:

Monitoring
Monitoring is only required after the implementation deadline, but the FCA counsels firms to start early to ensure they are ready in time and also to start now to apply principles. To find examples of data that you could use to monitor your performance, refer to the FCA’s Finalised Guidance 

The role of a Consumer Duty Champion
The FCA is looking for firms to have a Consumer Duty Champion with the necessary access and influence at senior level, and preferably to have a Non-Executive Director in this role. This isn’t a prescribed responsibility under SMCR but is clearly still important. The FCA will expect this person not only to be an advocate of the Duty, to ensure that this is embedded across the organisation, but also to challenge business leaders on how they are responding to customer data. 

Reasonability & proportionality
The FCA has assured the industry that it will not investigate past practices through the lens of the Consumer Duty. However, the FCA expects firms to take action before the deadline to correct current practices which are inconsistent with the Duty and to already have the right mindset.  

There’s also been some concern expressed concerning what is ‘reasonable’. To answer this question, the FCA has said that business leaders need to consider a range of factors; these include the nature of the product/service being offered; the characteristics of customers (especially for any vulnerability); whether harm is reasonably foreseeable, and the size of the firm. 

Authorisation 
No surprise. From February 2023, firms seeking authorisation will have to prove they can comply with the Consumer Duty regulation. This means the FCA will need to see: 
●    firms’ framework for assessing fair value,
●    firms’ plans to monitor outcomes for retail customers, 
●    the arrangements they will have with other firms in the distribution chain to meet the requirements that apply to them.

How the Duty applies through the distribution chain.
Firms that sit within a distribution chain may be involved in designing and pricing a product or service, issuing communications to clients, or providing customer support. It’s worth remembering that the FCA made it clear, in its Policy Statement, that firms could not limit their responsibility along contractual lines, but instead their responsibility will depend on the extent to which they may influence customer outcomes.   

Sharing information with distributors 
Manufacturers that create products and/or services will need to actively share information with distributors, such as target market information. Equally, distributors will need to seek information to have a good understanding of the manufacturer’s target market for the products or services they offer. Manufacturers will also need to gather relevant information from their distributors.

Within a distribution chain, the FCA made it clear that firms are not responsible for the actions of others, although they should alert firms where they have concerns of foreseeable harm and they are also required to inform firms and the FCA where customers have experienced harm as a result of a product or service. 

Non-UK customers
The Regulator has confirmed that UK-based firms dealing with non-UK based customers, must still comply with the Duty. Where a distribution chain includes non-UK based firms, the regulator expects the UK firms to take reasonable steps to obtain information from these firms to help them to comply with the Duty.   

Scope
The FCA is consulting on other areas the Consumer Duty regulation may have influence over. This includes approvers of financial promotions, the temporary permissions regime, defined benefit pension schemes, closed occupational pensions, and exemptions contained in the FCA Sourcebooks.    

How can we help you?

If you’d like to know more about how we can help you with your Consumer Duty regulation preparations, or any other regulatory compliance issues, our specialist team is here to help. 

Contact us today on 020 7436 0630 – or email info@thistleinitiatives.co.uk.