The FCA has sent its ‘Dear CEO’ letters to 8 sectors in the financial services industry, providing guidance on how to effectively implement and embed the Duty. The letter outlines four key components:
- A reminder of the implementation timeline and key elements of the Duty.
- Expectations for firms to embed the Duty, with examples of good and poor practice.
- Feedback from a recent review of firms’ implementation plans.
- The FCA’s approach to supervising the Duty and next steps.
Implementation timeline and key elements of the Duty
The timeline for implementation includes: firms’ boards or management bodies agreeing on their plans by Oct 2022; manufacturers completing reviews and sharing information with distributors by Apr 2023; the Duty coming into force for new and existing products or services open to sale or renewal on July 31, 2023; and the Duty coming into force for closed products or services on July 31, 2024.
The regulator noted that the importance of the Duty has increased due to the cost of living crisis, as consumers face increasing financial pressures and need to make informed decisions in a complex economic environment.
Consumer Duty applies to products and services offered to retail customers and to firms who determine or have significant influence over customer outcomes, including some commercial customers where sectoral rules already apply. The regulation does not apply to reinsurance, large risk contracts sold to commercial customers or those outside the UK, or the distribution of group insurance policies.
The FCA’s expectations
The letter outlines the areas of focus for firms to ensure compliance with the Duty by July 31, 2023 for both new and existing products/services. The initial focus areas are: effectiveness of product governance arrangements to ensure fair value for consumers; effectiveness of communication with consumers to support informed decision making; and claims processes and outcomes to ensure fair settlements and customer-centred claims processing. The regulator urged firms to pay special attention to these issues and take necessary steps to be compliant with the regulatory requirements.
Feedback from the FCA’s review of implementation plans
The FCA published feedback for firms on their implementation plans of the Duty and included examples of good and bad practices. They noted that many plans showed that firms understand the focus on consumer outcomes and have established programs to implement it. However, some firms lag in their planning and may struggle to meet the July 2023 deadline.
They highlighted key areas that firms should focus on in the remaining implementation period:
Effective prioritisation: Some plans reviewed lack clarity on the basis for prioritising implementation plans. Firms should ensure that they are prioritising effectively, with a focus on reducing the risk of poor consumer outcomes and monitoring any areas with compliance gaps.
Embedding the substantive requirements: Carefully reviewing existing policies, products and services, processes and customer journeys, making changes where necessary to meet the new standards.
Working with other firms: Firms should think about the ways in which they collaborate with other companies to provide goods and services to customers, and ensure these partnerships align with the expectations outlined in the Duty.
The FCA’s supervisory approach and next steps
The Consumer Duty is a crucial aspect of the FCA’s three-year strategy and efforts to improve standards by 2025. The regulator pointed out that they are fully committed to prioritising the Consumer Duty at all levels and using it to guide their supervision and prioritisation strategies. The FCA is also developing strategies for these sectors to incorporate the Consumer Duty and address key issues, as well as metrics to gauge its impact.
They may ask firms to evidence how they are complying with the regulations. The FCA wrote in the letter, “You should expect to see us acting much faster and more assertively where we find firms not meeting the requirements of the Duty.”
This letter underlines the need for firms to significantly step up their efforts towards compliance and ensure their plans are robust. Relying solely on current processes or making minor modifications will not suffice. With the Consumer Duty deadline looming, it’s time to get on board with AI technology. One such technology, Natural Language Processing, is transforming risk functions – allowing firms to monitor all customer interactions like phone and video calls in order to quickly identify any risks or vulnerabilities that may exist and make sure they are compliant.
The inadequacies in current compliance plans demonstrate the need for a more effective strategy. Companies must recognise the critical importance of Consumer Duty compliance and invest in strategies and resources necessary to meet the requirements. Achieving good consumer outcomes means everybody wins – regulator, business and customers alike!
