Consumer duty compliance takes centre stage in FCA authorisation process

Early consideration of the consumer duty and how a firm will satisfy the requirements are essential for firms now seeking authorisation or a variation of their existing permissions, according to legal experts.

The FCA has outlined important changes in the authorisation process under its new consumer duty rules. If a firm is in scope of the duty, its application must prove that it can comply with the duty. The regulator expects future applications to set out how applicants will act to consistently deliver good outcomes to retail customers.

Financial regulation expert Venetia Jackson of Pinsent Masons said: “In the changes to its authorisation requirements, we can see the FCA following through on its expectation that the consumer duty is at the heart of financial services businesses. To make the authorisation journey as smooth as possible, firms should give early and detailed consideration to the materials they will need to demonstrate readiness to comply with the consumer duty.”

The new consumer duty will not take effect until 31 July 2023, however, financial regulation expert Juan Jose Manchado of Pinsent Masons noted that a shift in approach from the FCA authorisations team has already been observed in practice with clients applying for authorisation and variations of permission. The changes in authorisation requirements are also expected to affect open applications prepared through the lens of the ‘treating customers fairly’ (TCF) initiative.

“The expectations set out by the FCA emphasise the need to be fully prepared before starting the authorisations process. If applicant firms still come across questions formulated in the terms of the TCF initiative, it is advisable to already answer those questions from the perspective of complying with consumer duty,” said Manchado.

“Firms with inflight applications can expect to be asked follow-up questions by their FCA case officer in relation to consumer duty, particularly if the application only referred to TCF. This ties with the FCA’s finding, in its review of implementation plans, that some firms are over-confident their existing policies and processes will be adequate. A good framework for TCF compliance, even if carefully developed by the applicant’s advisers over the years, is unlikely to be sufficient to meet all the new standards under the consumer duty. As the implementation deadline draws closer, we expect to see the FCA embedding the consumer duty into more of its processes, including a thorough update of their application forms and related guidance, and requiring firms to give thought to the consumer duty at more points in their interactions with the FCA,” he added.

For firms that are preparing to submit an authorisation application, the process will likely involve more time and effort at the beginning. Jackson explained that the consumer duty has a very broad scope, which applies across the distribution chain to any firm that has material influence on retail customer outcomes, and throughout the product lifecycle and consumer journey. This extensive scope means firms will be required to carry out significant product analysis up front before seeking authorisation. This is especially the case where the applicant is a firm that does not necessarily have direct contact with retail customers, such as an asset manager, a bulk annuity provider or a merchant acquirer.

Firms in this position are advised to ensure they have considered as far as they can pre-operations how the “material influence” concept applies to their planned activities and what this will then mean for their consumer duty compliance obligations.

The FCA has provided a list of materials applicants could rely on to support their compliance with the consumer duty. These include target market analysis and identification, a product and service governance framework, customer understanding assessment and testing framework, customer support monitoring policies and supporting management information (MI) suite, and customer outcome monitoring framework.

However, the regulator specifies that the list is not exhaustive, and applicants may be asked to review and amend any documents submitted or create new documents if they are deemed to be missing.

“The list of materials currently indicated by the FCA covers the four consumer duty outcomes and the monitoring obligation. However, the consumer duty also contains requirements around firms’ governance as well as expectations around interactions through the distribution chain,” said Jackson. 

“The FCA’s intention is to see the consumer duty embedded throughout a firm’s operations. Firms seeking authorisation should consider their business processes and model widely and whether through their governance and other policies they can demonstrate the expected cultural embedding of the consumer duty.  They should also consider how to demonstrate that where they have distribution partners or outsourcing arrangements, their consumer duty compliance has taken account of this,” she said.

Given the FCA’s emphasis on submissions being tailored to individual firms and their proposed activities, firms will need to give early consideration to what good outcomes for their proposed customers are and how they propose to achieve this. If firms have products suitable for narrow target markets, their tailored submission should include consideration of how they will ensure the products are distributed only in those target markets.

In addition, as indicated in the FCA’s recently published consumer duty implementation plans, firms seeking authorisation should consider at an early stage who their consumer duty champion should be.