The Consumer Duty (the Duty) comes into force on 31 July 2023 for new and existing products and services. As firms complete their implementation and remediation work pre-31 July, the question remains – how will they operationalise the Duty on an ongoing basis to ensure they deliver good outcomes and avoid enforcement action down the line?
The key areas on which to focus when transitioning to BAU are:
- culture and governance;
- the distribution chain and managing the information flow between manufacturers and distributors;
- avoiding foreseeable harms; and
- the 31 July 2024 deadline for closed products and services.
Culture and governance
We envisage that it will take some time for the Duty to become fully embedded in firms’ day-to-day operations, especially as they transition from short-term tactical fixes used in the implementation phase to more permanent – and potentially automated – measures aimed at ensuring ongoing compliance with the Duty.
To this end, the provision of regular training to employees will accelerate that learning process and translate into a Duty-oriented culture, which is especially important for firms who do not interact directly with retail customers. This means encouraging a consumer first mindset across front- and second-line employees as firms shift their focus from regulatory change governance to BAU governance.
To facilitate that transition, firms need to ask themselves the following questions:
- Are appropriate committees in place to ensure compliance with each of the four outcomes and how is the Duty applied in these contexts?
- Do the Senior Management Functions’ Statements of Responsibilities accurately reflect how the Duty will impact the scope of those roles?
- Is “middle management” sufficiently engaged with the Duty to ensure a firmwide focus and are there reporting lines and escalation paths in place to promote positive retail customer outcomes and prevent foreseeable harms?
- Finally, is a (preferably non-executive) Board Champion critically challenging the firm’s decisions to ensure ongoing accountability?
The flow of management information (MI) between manufacturers and distributors is key to making the Duty work. This information flow feeds into the virtuous cycle and informs procedural change in helping firms to identify areas of non-compliance along the customer journey.
The financial services industry is still trying to determine what metrics should be shared between manufacturers and distributors along the distribution chain, and industry bodies are attempting to standardise that process. Best practice approaches are likely to evolve over the coming months, as firms revisit their interpretations of the Duty’s requirements and adapt their approach to data sharing, taking into account how peers are complying. Due to the diversity of approaches adopted across the industry pre-31 July 2023, firms should expect to be challenged on the nature and quality of data shared in the distribution chain once the Duty takes effect.
Firms therefore need to ask themselves:
- Is relevant MI being received from other firms in the distribution chain, which supports firms’ compliance with the Duty and feeds into adequate Board reporting?
- Are policies and procedures being consistently reviewed so that, if things go wrong, firms have processes in place for the purposes of remediation, communication with the FCA and amendment of policies and procedures (AKA “the virtuous cycle”)?
Firms will also need to help non-UK entities in their distribution chain understand the Duty requirements. This will likely require training and on-site visits, with the aim of improving non-UK firms’ understanding of the Duty and, in turn, the MI they provide to UK firms (which evidences their compliance).
Enforcement action and foreseeable harm
We recommend that firms assess ongoing compliance through an “enforcement” lens. In other words, five years from now, firms should imagine a worst-case scenario – a Duty-driven FCA intervention – and consider:
- how they will demonstrate the work they have undertaken, including product reviews, training and procedural change, to mitigate foreseeable harms that could eventuate from product sales;
- whether they have defined what a good outcome looks like and if products and services are meeting that definition and enabling target customers to pursue their financial objectives;
- whether they have gone further than what was required by the policies, training, MI and governance arrangements previously implemented to comply with Treating Customers Fairly;
- whether they have adopted a structured approach to better identify and map out the risks and processes throughout the product lifecycle; and
- whether they are complying with the cross-cutting rules as well as the four customer outcomes that support the new Principle 12.
Closed products and services – 31 July 2024
Firms will also need to review closed products and services under the Duty in advance of the 31 July 2024 deadline. This will involve:
- during the implementation period and then on an ongoing basis, reviewing products or services, especially those at higher risk of consumer harm, under the cross-cutting rules;
- ensuring products continue to offer fair value under the price and value outcome rules, while taking into account any accrued costs and/or benefits arising before the Duty came into force; and
- ensuring consumer understanding and support outcomes are met.