The UK’s Financial Conduct Authority (FCA) has unveiled the final rules and associated guidance for a new “Consumer Duty”, which it says will set higher and clearer standards of consumer protection for financial services firms.
Baringa’s financial services practice sees this an opportunity for an industry that has made great strides in customer service, but still has further improvements to make.
To illustrate the challenge that Consumer Duty will help solve, Baringa recently surveyed 2000 consumers and found that almost three quarters (72%) do not fully read or understand the terms and conditions of a new financial product before purchasing it, and almost a third (31%) are not satisfied that providers clearly explain the expected value or outcomes to them.
Our key takeaways from the publication of the final rules are:
- Onus on the Board – The updated Policy Statement strengthens the onus placed on the Board. It introduces expectations that the Board will have reviewed and agreed an implementation plan by October 2022, and that there should be a nominated Board member responsible for championing the Consumer Duty. If Boards are not already engaging with Consumer Duty project teams and aware of their role, firms must act on this immediately.
- More supervision, less consultation – In the consultation papers there was a strong emphasis on consultation and close collaboration with firms throughout the implementation period. Whilst this is still referenced, there is now a visible message of stronger and quicker supervision in the Policy Statement. This includes reference to substantial engagement and interaction throughout the implementation period, including with regards to explicit project milestones as set out in the Policy Statement. This is unprecedented for the FCA, and signals a much stronger tone than we have seen before.
- Extensive Guidance – The policy statement is accompanied by the most substantial set of guidance (Finalised Guidance) we have seen for a policy of this nature. This may be in response to the significant amount of feedback on the consultation relating to ambiguous or subjective topics: reasonableness, foreseeable harm, responsibilities in the distribution chain, applicability and scope. Whilst the guidance isn’t prescriptive in nature, it does go a long way to providing firms with the tools to make their own interpretations more consistently.
- Applicability to legacy products – The Policy Statement re-affirms that the Consumer Duty applies on a forward-looking basis, to legacy products (closed to new business and renewals) and that the enhanced requirements do not apply on a retrospective basis. This is consistent with the Consultation Paper and does not help firms who are concerned about the feasibility of applying such an approach in practice. The Policy Statement has also clarified a related point, which is that firms who have purchased books of business from other firms will be considered “manufacturers” under their definition even though they did not originally “manufacture” the product.
- A revised timeline – The most obvious change in the policy statement is the revised timeline. Firms now have an additional 3 months (now to July 2023) to implement the rules for products open to new business and renewals, as well as a further 15 months (now until July 2024) for legacy products. This is a positive outcome for firms and the FCA have helpfully provided explicit expectations for milestones within the implementation period ensuring that firms use this additional time to deliver their programmes, and not to delay activity.
For firms who have not yet started their response (and our feedback from around the industry suggests this is the majority) the Policy Statement delivers a compelling business case for immediate mobilisation, despite a welcome extension to timeframes. For firms that have mobilised their programmes, and begun to engage their Board and Senior Leadership in defining their compliance strategy, this Policy Statement is a helpful framework to inform the planned change activity.
What it doesn’t do, however, is provide any easy answers to the most daunting questions posed by the Consumer Duty, and our recent consumer survey suggests that for the majority of firms there is still a fair way to go to meet the regulator’s expectations. Firms still need to find a consistent approach to their own definition of good outcomes and still face a significant data challenge in routinely evidencing those outcomes. We’ve previously published some thoughts on how a cohesive good outcomes framework might set firms up for success in addressing these challenges, but now the final rulebook has been published, stay tuned for further updates.
Read what else Baringa has to say on Consumer Duty here.
For more information call Damian Kerr
+44 203 327 4299
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