Consumer Duty rules and expectations
FCA Consumer Duty – what is it and what do firms need to do?
With today being the deadline for firms to respond to the FCA’s consulation on Consumer Duty (CP 21/36), lets re-cap on what Consumer Duty is and what it means for firms.
What is “FCA Consumer Duty”?
The new proposed rules, principles and guidance present a significant step change in the FCAs expectations on the firms it regulates. By implementing new Consumer Duty rules, the FCA are seeking to drive consistently high consumer protection standards across the firms it regulates. This, the FCA believes will stop consumer harm and detriment before it happens – by putting customers financial well-being at the heart of a firm’s decision making.
The FCA proposes that Consumer Duty will have three key elements:
A Consumer Principle, which sets a clear tone and uses language that reflects the overall standards of behaviour we expect from firms.
‘Cross-cutting Rules’ which develop and clarify the Consumer Principle’s overarching expectations of firm conduct, and set out how it should apply in practice.
‘Four Outcomes’: a suite of rules and guidance that set more detailed expectations for firm conduct in relation to four specific outcomes for the key elements of the firm-customer relationship.
Who does it apply to?
Retail firms - banks, broker dealers, asset managers, payment institutions (“APIs”) and electronic money institutions (“EMIs”) are all in scope. Retail customers who aren’t classified as professional clients under COBS will be in scope (although the client categorisation process is being reviewed and therefore the scope may be extended). Additionally, the FCA has noted that some unregulated ancillary activities are likely to come into scope such as those carried out by EMIs and APIs.
Wholesale firms – firms who are closest to a customer in a customer journey such as structured products designed by investment banks for sale onto retail customers are likely to be in scope.
When is it coming into force?
The FCA’s second consultation paper on Consumer Duty (CP21/36), explains that the final rules are due to be published by the end of July 2022. It is expected that firms will have until April 2023 to fully implement the rules.
What do firms need to do?
This is an undertaking that is not to be underestimated by firms. With little over a year left until implementation, and despite final rules not being available - firms must act now.
Take stock of your governance framework - before firms start to think about how they will incorporate the new rules they need to take an honest look at their governance framework. If the framework doesn’t work now, it is not going to be able to cope with the increased burden consumer duty will bring.
Think about your culture – the Consumer Duty is going to require a sea-change in thinking for a lot of firms. Without having the right culture in place, firms will not successfully implement the new requirements. Rather than paying lip service to their customers needs the new rules will require firms to demonstrably support their customers to make good financial decisions.
Firms should ask themselves whether their customers’ needs are genuinely considered at all stages of the product Lifecyle and if they are not why is this – is the balance between profit and good customer outcomes in line with FCA thinking?
Ringfence budget to implement ahead of April 2023 – the consultation paper states that a one-off direct cost to comply will be around £688m - £2.4bn and that firms will incur on average annual on-going costs of £74m to £176m. Whilst these figures are an average, even for the smallest of firms, when scaled down, the initial and ongoing Compliance costs are going to significantly add to your Compliance spend. It is therefore crucial that firms plans for Compliance with Consumer Duty are realistic rather than optimistic and ringfence sufficient budget.
Assess resource need – achieving Compliance before April 2023 and on an ongoing basis is going to increase the workload of staff right across the business. When firms plan to implement the Consumer Duty, they should ensure that sufficient resource is in place not only to achieve Compliance but also build in capacity to handle unexpected Compliance and business challenges.
Make a plan and execute it on time
For even the smallest of firms the road to achieving Compliance with Consumer Duty is significant. Firms should appoint a dedicated project lead to execute a detailed plan, ensuring the right people are involved at the right time and that the project comes in on time and on budget.
Firms project plans should incorporate at a minimum the following steps:
Gap analysis - against the rules, principles, and guidance of all in scope products and services
Framework enhancement - implement changes to the Compliance framework where identified in the gap analysis
Process changes – implement changes to business processes to bring them in line with the Consumer Duty expectations
Systems changes – identify, test and implement changes to your systems to be complaint with Consumer Duty
Training on the Consumer Duty – staff will need to be trained on the new requirements
Remediation – before 23 April 2023, firms will need to assess whether its activities have led to customer detriment or harm in view of the new requirements and take action accordingly
Read our previous blog on Consumer Duty here: Consumer Duty – governance and culture are your foundations — Avyse Partners
