FCA reminds firms to be proactive in Consumer Duty implementation

In a speech, FCA executive director Sheldon Mills said that firms had made solid progress in many aspects of Consumer Duty compliance, but “the clock is now ticking” for those with closed products and services – those no longer marketed, distributed or open for renewal - to comply. He notes that the FCA gave firms an extra year to implement the Duty for closed products.  The FCA expects firms to use their remaining time to address gaps in data, tackle the challenge of assessing value and resolving poor value findings, and in ensuring they can engage with customers in these products.

The speech highlights the upcoming deadline of 31 July for implementation of closed books and for preparation of the first annual board report, with firms to expect board reports detailing compliance with the duty to be scrutinised by the FCA.

Jonathan Cavill, financial services expert at Pinsent Masons, said the update shows that “there are firms and even some sectors which will need to do more thinking, and that the FCA is well aware of this. It is not surprising, but for some firms who are hit hardest there may be concern about what this means for future FCA action against them.”

Two key themes of poor practice examples were identified within the sector: a lack of end-to-end focus on the customer journey and a lack of the correct data on which the make decisions. Failure to address these areas may make it much more difficult for a firm to demonstrate to the FCA that it has considered and is acting to deliver good outcomes.

“Firms should be particularly mindful of the requirements in the duty and be proactive around tackling risk of harm before they result in complaints. Firms should be having conversations with relevant board members and their champions now,” Cavill said.

Andrew Barber, financial regulation expert, further noted that there is a continued emphasis from the FCA on the price and value outcome. Additionally, attention is being given to methods firms should use to obtain the appropriate data to evidence work towards these customer focused outcomes. He said: “Clarification of FCA expectations is welcome and all firms, especially those in sectors for whom value assessments are new, such as credit and payments, should pay particular note to the FCA’s expectations of the data underpinning their value assessments and ensure that their assessments meet these standards”. These standards include protection of customers and the integrity of the financial services market overall.

Some recognition was given to the unique challenges posed by closed book products. However, Chris Riach, financial regulation expert said that the FCA is showing “little forbearance” in terms of the upcoming deadline. Where firms are being truly hampered by legacy systems and data gaps, Sheldon Mills called upon firms to ask themselves what can be done to reduce harm to customers. For example, they may consider additional testing measures or further communications for relevant customers to demonstrate a proactive approach.

This may be particularly important regarding vulnerable customers. Previously, this has been a significant challenge for firms in sectors where there may be more vulnerabilities, such as lending and the debt purchase or collection sectors. Barber said: “Achieving good outcomes for these customers is a key benefit for the FCA of the duty. From the FCA’s feedback it is clear that the approach to identifying and addressing vulnerabilities should be broad, as opposed to a one-size fits all process”. For example, simply regarding every customer over the age of 70 as vulnerable may not be appropriate and instead processes may require further refinement.”

The FCA director said that ensuring products and services deliver good consumer outcomes is also essential for firms with vested rights – such as rights over products and services where payments have been made in advance. These rights can risk poor outcomes for consumers with closed products – for example, if a fee is significant and undermines the benefit of the product.

Venetia Jackson, financial services regulation expert at Pinsent Masons, said: “Vested rights are not an area where the FCA can compel action due to the risks of imposing requirements retrospectively. However, the comments by Sheldon Mills around vested rights indicate that the FCA will not be afraid to ask firms how they have considered vested rights and what their thinking has been on actions to take. This is likely to include noting whether firms have considered voluntarily giving the rights up in determining how to address any issues of poor value with a product”.