Wider Consumer Duty lessons from the FCA's CFD value work

The FCA has made a push on contracts for difference (CFDs) recently with a warning not to push professional or redirection promotions to their retail clients followed by the findings of a multi-firm review of CFD providers' price and value.

There are wider Consumer Duty lessons here for you, even if you don't provide CFDs - and especially if you provide products that are complex or meet a more specific need.

• Get governance right.  The FCA looked specifically at Board-level oversight.  Board reports much include analysis of whether you've met the Consumer Duty requirements, rather than just a restatement of them.
• Show you've taken action.  The FCA wants to see evidence that you've made changes in response to the Duty - particularly if you have reviewed a product area or business line in order to assess compliance with the Duty. This helps make the case that you've fully considered your obligations.  Appropriate tests are specifically called out here.
• Consider value holistically.  On price and value, holistically consider all the Consumer Duty outcomes and the cross-cutting rules.
  • Changes in any area may significantly impact the value assessment.
  • This works positively as well as negatively: improvements to product design, customer support or even customer understanding may materially improve the value you deliver. 
  • Consumer complaints and satisfaction metrics are legitimate and important inputs into your Fair Value Assessment (FVA). Whilst this makes sense as far as it goes, the Consumer Duty rules are clear that a product is not to be considered fair value simply because a customer considers this to be the case. It's an objective test. Complaints and satisfaction scores can, however, indicate concerns about value, which firms should investigate.
• Do separate FVAs where necessary.  Critically consider whether different products are similar enough to be addressed in a single fair value assessment (FVA); alternatively, whether the FVA should consider the unique features of each; or whether separate FVAs are needed. The concept of ‘grouping’ for the purposes of assessments and monitoring has been a tricky one from the start. It's important to think critically about whether the products you are grouping together really do operate in a sufficiently similar way, and document your reasons for concluding this.
• Peer comparisons.  In an FVA, when conducting peer comparisons, critically consider whether it is appropriate to compare against ex-UK firms.
• Identify vulnerabilities.  Ensure you have proactive, not just reactive, ways to identify and respond to customer vulnerabilities.
  • Consider intra-day monitoring of customer activity and assessment of this against the customer's past disclosures e.g. as to wealth.
  • Sense check the proportion of your customer base you've identified as vulnerable: if abnormally low, you may need to improve your vulnerability detection. This is a common theme in FCA reveiws of Consumer Duty implementation in the investments space.
• Consider all costs paid by consumers, not just e.g. costs/spread paid at sale or purchase.
  • Are there any more "hidden" costs e.g. counterparty hedge pricing?  What about carry costs?
  • For specific charges with a material impact on value, consider peer comparisons specific to those charges.
  • Keep working on improvements to your disclosure of charges.  Where charges are complex, make sure they're clearly explained to customers, ideally also along with their impact on overall value.  Where there is a significant risk of harm if a customer misinterprets disclosures about charges, test these so you can build a string evidence based for the proposition that these are capable of being understood.  Clear costs disclosures mitigate foreseeable harm by helping customers understand the most optimal behaviour patterns in relation to a product (e.g. are there charging disincentives for holding it for longer - or shorter - periods?)
  • Re-consider simplifying your fee structure - this can really help customer understanding.
  • If your product or platform charges customers interest on borrowing, carefully consider whether you should also pay customers interest on positive balances, so as to provide fair value.
• Target market
  • The FCA also uses the review to comment on the systems firms' have in place for ensuring that CFD's are being sold appropriately. As high-risk products, screening of prospective customers has increased significance.
  • The FCA praises firms that have strengthened their tests, including by introducing more robust and extensive question sets; ensuring retail clients retaking appropriateness tests got different question sets; setting more demanding pass rates; introducing/extending cooling-off periods; and limiting the maximum number of times an applicant can retake a test.
  • Firms should pay specific attention to mitigating harm for ‘persistent customers’ who may fail tests one or more times before being accepted. Demonstrating understanding in this context is key, particularly if elements of the process are likely to be automated. Some firms are automatically flagging such customers as ‘vulnerable’ at onboarding and subjecting them to enhanced monitoring.