The UK Financial Conduct Authority's (FCA's) latest strategy document sets out its overarching strategy for the next three years, with the new Consumer Duty being the ‘cornerstone', says Harriet Christie, COO MirrorWeb. 

The long-awaited overhaul signifies a pivotal moment in UK financial services, as the regulator attempts to modernise the framework through which the sector is governed. This article will delve into how and why it has come into practice, the changes that have been made, who that affects, and how firms can remain compliant ahead of the imminent deadline and beyond.

What's a Consumer?

Before we go any further, it's worth sharing the FCA's clarification on the definition of some key terms, namely what a ‘consumer' constitutes in their eyes. It's probably worthwhile given that it's what they've named the Duty after.

The FCA generally uses the term ‘consumer' when talking about the wider group of those who use financial services, and ‘customer' when talking about an individual firm's customers or potential customers. However, ‘both mean retail customers who are within the scope of the Duty'. The term ‘product' is used to refer to both products and services.

Why Now?

It's important to understand that the Consumer Duty is an entirely new set of standards, as opposed to a rehash of existing principles. The requirements are built on the foundation that financial services firms should be consumer-centric. This means that they should be focused on providing good outcomes for retail customers, particularly in the unforgiving (and increasingly digital) retail climate of 2022.

As the policy statement explains,  ‘We want to see a higher level of consumer protection in retail financial markets, where firms compete vigorously in consumers' interests…this is particularly important as consumers face increasing pressures, including those relating to the cost of living'.

The rise of e-commerce is another key consideration, and the Duty will have a clear impact on how firms manage their digital distribution channels, whether online or through an app. These channels include detailed real-time data on customers, while the digital architecture (the way in which choices and options are presented) is highly influential in affecting the customer's decision-making process. Thankfully, digital platforms also allow the ability to quickly alter said architecture, should the outcome be unsatisfactory.

Who Does it Apply to?

Essentially the regime applies to:
•    all UK regulated firms that offer products and services to retail customers, including where there is a distribution chain which involves a retail customer
•    existing as well as closed products
•    payment services and the issue of electronic money
•    potential as well as actual customers of firms
•    those with retail customers located in the United Kingdom (bar some rare exceptions)

What's Changed?
The FCA has implemented four key factors for firms to focus on, which will lead to compliance with the overarching Consumer Principle; to provide good outcomes for retail clients. They are as follows:

i.    Products and services -The FCA wants all products and services that are sold to consumers to be designed to meet their needs, and to target those consumers correctly.
 
ii.    Price and value - The FCA wants to ensure that products and services represent fair value, while meeting consumers' needs and objectives.
 
iii.    Consumer understanding - The FCA wants firms' communications to consistently support consumers by enabling them to make informed decisions about financial products and services. It wants consumers to be given the information they need, at the right time, and presented in a way that is ‘clear, fair and not misleading.'

iv.    Consumer support - Does the firm have systems in place to provide adequate support to customers? The FCA wants firms to provide a level of support that meets consumers' needs throughout their relationship with the firm.
 
How Urgent is it?
While adherence won't be required before 31st July 23 (see notable dates below), firms can be asked to share their implementation plans from 31st October 2022.

•    31st October 2022 - deadline for firm's boards to agree implementation plans
•    30th April 2023 - deadline for manufacturers to share key information with distributors to fulfil their obligations under the Duty
•    31 July 2023 - implementation deadline for all new products and services, and all existing products and services that remain on sale or open for renewal. 
•    31 July 2024 - implementation deadline for closed products and services. The intention is to give firms more time to bring these older products, that are no longer on sale, up to the new standards. 
•    31 July 2024 -  also the deadline for firms' first annual report on complying with the consumer duty. This relates to the new requirement under the regime for a firm to conduct an internal assessment at least annually.

While it may feel like there is still plenty of time to address these concerns before the Duty comes into action, the reality is that the process should be well underway.

The FCA's most recent update explains, on the October 22 implementation plans, ‘Firms must be able to show they have scrutinised and challenged these plans to ensure they are deliverable and robust to meet the new standards.

‘Firms should also consider any work needed with other parties to prepare for the Duty and ensure their plan allows enough time for this.'

If the Consumer Duty plan has not yet been mapped out by your organisation, you have some catching up to do.
 
Embedding it in the Culture?

As detailed in the above update, the FCA ‘wants firms' Boards and senior management to ensure that good outcomes for consumers are central to their firm's culture, strategy and business objectives.' 

Rather than simply ticking a new set of boxes, the FCA wants to transform the ethos of firms in the UK financial sector, so that good consumer outcomes occur more naturally, rather than through simply shoehorning regulations into the existing setup. 

Having taken the regulator more than 4 years to reach this point, the Consumer Duty is the FCA's ‘flagship reform' and accounts for a serious investment of time and resource during the testing times of Brexit and Covid-19. The FCA should expect the initiative to find itself under intense scrutiny from the press and politicians. It would signify a catastrophic failure if things went awry.

Resultantly, firms should be under no illusions as to the importance placed by the FCA on this initiative, and should ensure they put sufficient resource and board-level attention into their regulatory change projects. Otherwise, they leave themselves open to trouble.

Sheldon Mills, FCA Executive Director, Consumers and Competition, announced in December 2021, ‘The new duty will drive a change in culture at firms. We expect firms to step up and put consumers at the heart of what they do, and we'll be holding senior managers accountable if they do not.'

It's not, however, a one-way appraisal. Sheldon has acknowledged that such extensive upheaval will require evolution on the FCA's part too, as it gradually streamlines its own standards and processes.
 
Broad Obligations

The FCA demands that firms notify them… 
•    of any serious breaches to the Duty 
•    if they are unable to meet the established deadlines 
•    if firms decide to withdraw or restrict access to products and services as part of their plan to implement the Duty. 

There is also a whistleblowing element. Firms will be required to notify the FCA if they become aware of other firms in the distribution chain that are noncompliant. This obligation also extends to other firms in the chain, who must also be informed if the (whistleblowing) party thinks that the noncompliant firm has caused harm to retail customers. It won't just be the regulator holding businesses accountable, but their entire distribution network.
 
Monitoring and Reporting Requirements

In the FCA's Feedback and Final Rules Document, it addresses multiple concerns that arose from extensive engagement ‘with a wide range of stakeholders'. Amongst them was a request for further clarity on monitoring outcomes and what information should be gathered, while some respondents argued that monitoring outcomes is complex, and that ‘it will take time to develop the necessary capability and get the systems in place.'

The FCA response is certainly interesting. ‘We do not intend to exhaustively prescribe the information that firms should use to monitor (customer) outcomes.

‘During the implementation period, firms should expect us to ask them to share their approach to monitoring the Duty with us. This is so we can understand what information… they are planning to gather and what change programmes they have in place to deliver these insights. We will feedback any useful insights to the industry as a whole, to enable them to learn from others, improve their own approach and build best practice.'

Essentially, the FCA has accepted that this is a learning curve for everybody (including themselves), and admitted that they will analyse a variety of approaches before deciding on best practices, which they will then share for the greater good.

Almost the exact same can be said for reporting requirements. There are currently no regular reporting obligations in respect of the Duty. However, this lack of explicit instruction should not be seen as free rein to overlook it. Indeed, the FCA has stated that the information gathered ‘may evolve into a regulatory reporting requirement in the future'. 

Most importantly, the onus is on financial firms to find solutions that prove their adherence to the Duty. It's them that will be held accountable if they don't.

The Role of Data Archiving

UK financial firms may well be concerned by the lack of definitive guidance accompanying this new wave of regulation.

Fortunately, technology already exists that will aid compliance. 

Through communications archiving, firms can capture all customer-facing interactions, enabling firms to measure, assess and, when necessary, tweak elements (whether linguistically or through digital architecture) to improve consumer outcomes. As a reminder, the four key factors identified by the FCA are Products and Services, Price and Value, Consumer Understanding, and Consumer Support, all of which can be effectively managed through archiving.

It's worth noting that firms have been encouraged to tailor their output based on the nature of product, target market and information needs, and so the ability to capture a multitude of channels is certainly a valuable one. Communications can be monitored and captured across a variety of channels (websites, email, social media, Whatsapp) on an ongoing basis, enabling firms to show the regulator that consumers are at the top of their agenda.

Investment Advisers should familiarize themselves with the technology at their disposal. Above all else, it's imperative that businesses ensure they have a process in place as soon as possible. The deadline has passed, and at any given point, firms may be invited to share their ‘scrutinised and challenged' implementation plans.

By Harriet Christie, COO MirrorWeb.