Consumer Duty in Focus: FCA Targets Payment Firms
The payments sector has seen rapid growth and innovation in recent years, with firms striving to provide better, faster and more accessible services for customers. Whilst this is exciting, it also presents a degree of risk in the eyes of the FCA. This means that the sector was ripe for a Consumer Duty implementation assessment.
At the start of the year, the FCA asked 23 payment firms a series of questions on their approach to the Consumer Duty and for certain documents evidencing their approach. This was followed by focussed visits to firms that couldn’t evidence adherence to the Duty. Yesterday, the FCA published the results of its work
Results of the FCA’s work
Overall, the FCA rated:
just over half of the sampled payments firms as being satisfactory (which is defined as not presenting a risk of delivering poor customer outcomes).
just under half of the sampled payments firms as being unsatisfactory, which meant that they had only partially implemented the Duty, needed to undertake a significant amount of work to meet the Duty and/or presented a moderate or high risk of delivering poor customer outcomes.
The FCA is concerned that, if these results are extrapolated upwards, a sizeable number of payment firms have not properly implemented or embedded the Duty. The FCA’s report also quoted examples of the good and bad practices that it had sighted. Essentially, this was a repetition of many of the examples of good and practices that it has quoted before across its various Consumer Duty related speeches and publications.
FCA’s Findings on Firms’ Perceptions and Efforts
Several sampled firms didn’t believe that their products or services presented any real risk of harm to customers. Given this, these firms did not feel that the Consume Duty applied or warranted any material changes to their governance, oversight and control arrangements or conduct.
The Consumer Duty requires some thought as it is much more subjective and contains some newish concepts. These starting assumptions have perhaps influenced how much thought firms have put into the key components of their Consumer Duty framework and the time/effort put into implementing and embedding these.
What were the issues identified?
Defining good outcomes: Firms had not taken the time to define what delivering good outcomes meant in the context of their products/services, distribution channels, servicing mechanisms and target customer demographic.
Linked to this, the Management Information being used to test and demonstrate the delivery of the Consumer Duty was not sufficiently outcome focussed and tended to recycle the previously used measures at a number of the sampled firms.
Balancing target market identification and assessment: There is usually a balance to be struck in terms of target market identification and assessment. A broader approach is entirely reasonable for simple and low risk products that are targeted at the mass market, or where products share very similar features and characteristics and can be grouped together. A more detailed exercise is required for more complicated or higher risks products. Across its review, the FCA felt that payment firms did not get this balance quite right.
Simplistic approach to product value assessments: The FCA found that many firms undertook an overly simplistic approach to product value assessments, which included a focus on price benchmarking, ignoring applicable fees and charges, failing to assess how the total cost payable represented value vis a vis the features, benefits and limitations of the product and not recording the analysis undertaken, key conclusions drawn and the rationale for those conclusions at a sufficiently granular level.
Assessing customer understanding: Similarly, the FCA was not convinced about how much effort had gone into assessing the impact of the customer understanding outcome, enhancing the arrangements in place to research, design, test and approve communications prior to their issuance into the public domain and post issuance measurement/monitoring. Key concerns focussed on how firms were helping customers to understand the differences between payment firms and banks and the explanation of the safeguarding arrangements in place (i.e. so that customers know that their money is not afforded the same protections as monies in other sectors). .
The FCA was nervous that some payment firms did not have adequate support channels or arrangements in place for customers displaying characteristics of vulnerability, or for customers who had their accounts frozen. FCA had concerns about firms that relied on a single, digital, channel for customer contact and whether this met the support needs of all customers within the target market. .
Agents and distributors: The FCA also found that the due diligence, onboarding, management and ongoing oversight arrangements in respect of agents and distributers was not commensurate to:
The level of reliance that the payment firms placed on these third parties for the fulfilment of their own regulatory obligations (including compliance with the Consumer Duty); and
The risks that the activities undertaken by these third parties posed to the outcomes being received by customers.
Board Consideration and Challenge: Given the above, it is inevitable that there were also concerns regarding the nature and extent to which the Consumer Duty was considered at Board and the degree of challenge around what their firms had done and why.
What action do payments firms need to take?
The FCA’s report concludes by suggesting that many firms need to take additional action to fully embed the Consumer Duty and that this should be done without delay.
As per usual, there is:
The recommendation that firms assess their approaches to the Consumer Duty against the findings and examples of good/bad practice set out within the report.
A warning that the FCA will monitor the in-scope firms and the wider payments market to assess the nature/extent to which the feedback has been addressed and will use its wide range of supervisory and enforcement tools if the circumstances warrant it (and we are already seeing evidence of this).
Reflecting on Consumer Duty Implementation
We usually end blogs like this with a series of questions that firms can ask themselves, to start the conversations about the adequacy of the target market identification, product value assessment, customer understanding or third-party oversight arrangements that they have in place.
All of these questions have been asked before across the various Consumer Duty blogs and articles, as the implementation deadlines have approached and then passed.
Perhaps it is more appropriate to rewind the clock a little further and recycle some of the questions that were first posed as firms were mobilising their consumer duty projects?
What do we think you should do?
As a minimum make sure this gets the right level of attention.
Flag with Consumer Duty champion
Make sure it goes to the key decision makers
Make sure they understand the risks and consequences.
All payment firms will need to undertake a critical and honest assessment about the robustness of their interpretation of the Consumer Duty and the gap analysis work and remedial actions that stemmed from this as a prelude to a more detailed look at the adequacy and appropriateness of the key components that they have in place.
