Consumer Duty - FCA warns that some firms are “lagging behind”

The Consumer Duty and the FCA

The Consumer Duty is a flagship initiative for the Financial Conduct Authority (FCA). Introduced on 31 July 2023 and set out in Principle 12, the Consumer Duty requires firms to “act to deliver good outcomes for retail customers”.  The FCA has been clear that the Consumer Duty does not simply restate rules that existed before; the Consumer Duty sets higher standards than those which previously applied.  The FCA wants firms to up their game.

Consumer Duty implementation review

The FCA has also been clear that implementing the Consumer Duty is not a “once and done” exercise.  Rather the FCA will be keeping a close eye on the extent to which firms are complying with the Consumer Duty on an ongoing basis.  On 20 February 2024, the FCA published the results of its latest Consumer Duty implementation review.  Commenting on these results, the FCA said that it welcomed “the improvements made by many firms to deliver better outcomes for their customers”. The FCA also warned, however, that “some firms are lagging behind”.

In this article we set out a reminder of the Consumer Duty’s regulatory structure, together with a summary of the FCA’s recent post-review findings and some suggestions re next steps.

What is the Consumer Duty?

In summary, the Consumer Duty consists of the following:

• The new “Consumer Principle” (Principle 12) requiring firms to act to deliver good outcomes for retail customers. 
• Cross-cutting rules providing greater clarity regarding the FCA’s expectations in respect of the Consumer Principle.
• Rules relating to the four outcomes that the FCA wants to see under the Consumer Duty.  These outcomes relate to:
  • products and services;
  • price and value;
  • consumer understanding; and
  • consumer support.

The rules require firms to consider their customers’ needs, characteristics and objectives at every stage of the customer journey. Importantly, firms must not only act to deliver good customer outcomes; they must also be able to provide evidence to show that they are meeting the outcomes.

The FCA’s post-review findings

In publishing the findings of its recent review, the FCA has listed examples of good practice, as well as areas for improvement, in respect of the following topics: (1) Culture, governance and monitoring; (2) Consumers in vulnerable circumstances; (3) Products and services; (4) Price and value; (5) Consumer understanding; and (6) Consumer support.

Among the examples of good practice are:

• A focus on data: The FCA noted that some firms are reviewing “service level metrics for call abandonment rates”, conducting “root-cause analysis” in respect of complaints and tracking customers who may have bought a product or service despite falling outside of the target market.  Firms are also using surveys, experiments, and interviews to test customer understanding.
• Adapting bonus and target arrangements: The FCA observed that some firms have updated staff bonus structures to ensure that incentivisation is in line with the aims of the Consumer Duty. Similarly, some firms have removed productivity targets for customer service staff where a customer has been identified as vulnerable.

Among the areas for improvement are:

• Embedding responsibility for the Consumer Duty across firms and supply chains: The FCA noted that in some firms, Consumer Duty compliance is managed by risk and compliance colleagues and is not discussed at Board level.  The FCA also found that firms are not sharing sufficient information with others in the same distribution chain.  This is likely to mean that firms cannot properly assess value to the end customer.
• Providing evidence of Consumer Duty compliance: Some firms cannot show that their products offer fair value to retail customers, while other firms are unable to justify the benefits they provide in the context of the remuneration they receive.  The FCA also found that some firms cannot show that they have sufficiently robust systems to protect and help consumers in cases where investments, savings or personal data has been lost due to fraud or cyber-attacks.

Next steps

Firms would be well-advised to read the FCA’s recent findings carefully and to consider whether there are examples of good practice that they could adopt, and/or areas for improvement in which they could take action.  

Consumer Duty – next deadline

Firms should consider these findings when preparing for the 31 July 2024 implementation deadline in respect of closed products and services.

The FCA’s focus on the Consumer Duty shows no sign of relenting. Firms should ensure that they are completely up to speed.

For more information, please contact Richard Ellis or William Garner.