Consumer Duty: act NOW for biggest regulatory change in a generation
Today the FCA has published both its Policy Statement on the new Consumer Duty (PS 22/9) and the final version of its non-handbook guidance (FG 22/5) both of which will become key reading for firms.
Extended implementation
The FCA has also confirmed that it will be extending the implementation period for the new regime as a result of consultation responses. Implementation will be via a two phased implementation approach as follows:
Phase 1
All new and existing products and services that are currently open for sale or renewal will be subject to the new Consumer Duty by the extended date of July 2023. To drive the implementation forwards the FCA has also introduced the following milestones:
October 2022 – All Boards should have signed off Consumer Duty project plans on the proposed implementation approach.
April 2023 – Manufacturers within the distribution chain, to have finished their reviews.
The FCA has said that for firms with dedicated supervision teams they will request and regularly review their Consumer Duty implementation plans. In other areas they will be carrying out multi-firm work focused on high priority portfolios, so all firms whatever their size should be ready for regulatory scrutiny. The Policy Statement notes that the FCA will “monitor firms’ readiness” during the implementation period. It goes on to say that “Once the Duty is in force, we will use a range of tools to assess firms’ compliance”. We expect to see the use of attestations to confirm compliance with the Duty, and likely Skilled Person reviews utilised as a diagnostic tool. There will also be a post implementation review.
It is clear that how firms are implementing / have implemented the required organisational change to comply with the Duty will be the No. 1 question that supervisory teams will be asking firms in the coming years. It is the FCA’s top priority.
Phase 2
All closed/back book products will be subject to the new Consumer Duty by the extended date of July 2024. This extra 12 months is aimed at helping those firms who have large numbers of closed products and the potentially difficulties in applying the requirements to those products.
Non-handbook guidance
The FCA has updated its non-handbook guidance and included more practical examples to help firms understand what good practice looks like. Even if firms cannot find examples which are specific to their particular business model it is always helpful to look for the read across from other sectors.
Whilst guidance is not binding firms should ignore it at their own peril. The guidance provides helpful insight into the regulator’s views and as such Senior Manager’s should use and adapt these ideas and examples when implementing the Consumer Duty.
What next?
Firms can no longer delay, the Policy Statement and Finalised Guidance have now been published so it is now time to start implementation projects. It is going to take time and resource to consider the implications for your business and put in place a plan, so now is the time to start taking action. We have a suggested good practice pathway which sets out the initial steps firms should take:
Step one: education and understanding
With culture in mind, we think it essential that senior leadership teams take the time and put in the effort to understand what the Consumer Duty is asking them to do. This is the time for firms to test their moral compass and ask some potentially difficult questions about their business model and the way they operate, and to do this successfully senior leaders need to understand what the Consumer Duty is seeking to achieve.
It is also likely that the firm will need to take strategic decisions along the way, so education should be regarded as an ongoing goal. Without a detailed understanding Board members and Non-Executive Directors will fail in their responsibilities to provide effective oversight and make the right decisions.
Step two: application
When thinking through the implications firms will need to consider the application – what is in scope and how will it apply. There are lots of different strands to think about here, for example:
What is your role in the chain? Are you a manufacturer, distributor, or both? Do you have a direct relationship with the customer?
Do you have existing products and services which fall within scope? Will you also apply the requirements to products which are technically out of scope?
What sort of customers do you have? Are they retail or non-retail? How are you going to identify and differentiate, or do you want to differentiate?
How does this impact on any current projects you have running? Are you in the middle of a remediation exercise and if so, should you change your approach?
Step three: governance
Once firms start to think about the potential implications and scope of Consumer Duty, they will start to see the complexity of this sort of wide-ranging project. This then leads us onto our third step – good governance.
Senior management need to be engaged with the potential changes. This means they need to understand the breadth and depth of the changes required and ensure there is appropriate resource in place to deliver this. As a minimum we suggest that responsibility for the project is allocated to an individual of sufficient seniority. Ideally this would be someone at Board level, but this will depend on the size and complexity of the organisation.
Firms will need a good project manager. This should be someone who has the right access to key decision makers and can provide a proficient level of independent oversight and challenge. There will be lots of stakeholders to manage with potentially conflicting drivers so ensuring you have someone who is an effective communicator is also key. This is something firms should be putting in place now.
This is something which is going to affect all regulated firms and whilst it can seem overwhelming, sometimes the best place to start is with the first step. So, we hope this helps kick start your thinking and if you would like Avyse to come along and take the first steps with you please get in touch.
