The Financial Conduct Authority (FCA)’s Consumer Duty rules went live on 31 July 2023. Firms are required to be materially compliant for their open products on that day, with an additional year to address their closed book products. The introduction of the new rules has already caused a stir. Large financial institutions have started to make major changes to their business models, with the UK Government and FCA positioning the Mortgage Charter and savings action plan behind the Consumer Duty to further reinforce the higher expectation on firms.
We have been fortunate to support a number of firms in the industry with their journey towards providing better outcomes for their customers and demonstrating compliance with the new requirements.
As the dust settles, our team has discussed some of the key points firms should consider in the next 12 months.
- Closed book planning
- BAU embedding
- Evidence-based decision-making
- MI and reporting evolution
- Responding to market conditions
For many firms we know the journey is not over, and indeed the essence of the Duty itself is to be a living and breathing commitment to your customers for years to come.
In the same way that firms have been working towards delivering better outcomes for their customers and demonstrating compliance for open book products in 2023, the same must be done for closed products in 2024.
We expect many firms will be able to utilise much of the “heavy lifting” performed as part of the open book work and apply this to their closed book products. There are however additional considerations for firms:
- Identifying the closed book scope will likely be a challenge where business units have been acquired, are underpinned by legacy infrastructure or lack information such as terms and conditions.
- Fair value assessments with limited data and no “new business” element, relying on proxy information, may pose challenges when compared to the open book process.
- Communications and outreach to customers, some of whom may have signed up to products some years ago, may pose issues regarding outdated contact information.
Firms may also wish to consider whether performing product migrations and closures would simplify the product set and reduce the operational burden of performing closed book reviews. This would of course have to be actioned with the customer’s best interests at the heart of it.
For many firms demonstrating compliance by July 2023 meant making tactical changes to operating models which were not optimised to maximise performance. As a result, they may now want to revisit those key areas within their operating model to consider strategic and longer-term solutions, such as:
- Resourcing: Are teams equipped to provide the higher level of customer outcomes demanded by the Duty on an ongoing basis?
- Governance: How are governance changes introduced as part of the initial implementation being embedded?
- Oversight: Has the oversight of internal and third parties, outsourcing and contractual terms been updated?
- Culture: Do teams across the organisation understand the requirement to proactively provide good outcomes, as put forward by the Duty?
- Systems and technology: How are technology changes that have been scoped, or partially completed, being embedded and procedures updated?
Operating model refinement will be one of the most important “day 2” activities to ensure that the essence of the Consumer Duty is sustainable within the organisation.
Since July, there have been several high-profile instances of large financial institutions making significant changes to their products and services in response to the new rules.
For example, a large wealth manager has introduced a new product charge cap to improve the value of the service they provide, and several banks are making changes to improve their savings interest rates following the introduction of the FCA’s savings action plan.
The FCA highlighted this in their 10 key questions, released ahead of the July deadline - “What action have you taken as a result of your fair value assessments, and how are you ensuring this action is effective in improving consumer outcomes?” We have however seen a number of firms discharging responsibility to non-decision-making forums. This poses key questions:
- How will firms be able to demonstrate the changes they have made?
- How will firms be able to evidence that the changes they have made have led to improvement in customer outcomes?
- How can firms evidence that their ongoing monitoring is leading to a positive change in customer outcomes?
- How can firms evidence that their continuous assessments of business processes have considered the Consumer Duty outcomes?
Robust internal governance and decision-making processes will be central to the ongoing assessments of products and services that firms will have to undertake. It is critical that firms evaluate forums to ensure that decision-making rationales have clear traceability to the outcomes of the Consumer Duty.
One of the biggest operational burdens of the 2023 activity was the evidencing of customer outcomes. The FCA’s focus on evidence, across the board not just Consumer Duty, signals a shift in qualitative supervision to quantitative supervision. Most recently this can be seen in the form of the detailed information request to banks in the face of the “de-banking” investigation.
For many firms there was an acceptance that metrics for 2023 would be on a best endeavours basis with further work required to either improve the quality and reliability of the metrics or to build the capability to deliver new ones. In addition, work is required to ensure commentary around metrics is customer outcomes focused, as opposed to operationally focused.
This is one of the biggest areas where firms will want to explore technological solutions to assist with the generation of MI and reporting. The FCA references “intelligence” in their 10 questions so firms will want to evaluate their existing metrics, challenging themselves on whether they are doing enough to really understand whether customers are getting good outcomes or whether further investment is required to deliver these insights.
Around the deadline for the 2023 Consumer Duty and beyond, there have been several FCA-led initiatives which are closely linked to the requirements to deliver good outcomes to customers, especially amid the ongoing cost of living crisis:
- The improvement of savings rates in line with Bank of England (BoE) interest rate rises as outlined in the FCA’s 14-point action plan
- The Mortgage Charter, aimed at providing customers with greater forbearance options as a result of rapidly increasing interest rates
- The release of a 2023 update to the financial lives survey which highlighted that 77% of UK adults in the 6 months to January 2023 were reporting an increase in the burden of bills
What these initiatives serve to highlight is that even though the Consumer Duty can be considered a “baselining” “industry resetting” initiative, there are still areas in which the FCA will intervene with specific measures if they identify a risk of customers receiving poor outcomes.
The FCA have always signalled that any and all supervisory and enforcement action taken against firms will be considered through the Consumer Duty lens. This highlights how integral the FCA see the Duty as a supervisory and enforcement mechanism and how firms should give it the same continued level of focus.
Firms should therefore not look at the work they have done under the Duty as a retrospective assessment of outcomes but a forward-looking and preventative mechanism for ensuring that customers do not experience poor outcomes in the future.
How we can help
We have a number of bespoke and templated solutions aimed at supporting firms to deliver good customer outcomes including but not limited to assurance, outcomes testing, data and analytics, operating models and regulatory traceability.
Why the Consumer Duty will empower firms to combat greenwashing
What are the regulator’s intended outcomes from SDR and how are they linked to the Consumer Duty?Read more
Essentials for Consumer Duty implementation
Struggling with Consumer Duty requirements? Meet FCA standards for better consumer care with Baringa's expert guidance.Read more
Turning compliance into competitive advantage: how to move up the Consumer Duty maturity curve
Discover how to transform the Consumer Duty into a market differentiator. Explore maturity stages, benefits, and steps for maximizing your business potential today.Read more
The first big test: get set for the board submissions in October
How can you make sure you and your Board are ready ahead of the consumer duty board submissions? Find out with Baringa's comprehensive guide.Read more