Consumer Duty - One year on

Happy first birthday, Consumer Duty! One year old on July 31st, 2024. This time around, it is giving us a present – the deadline for the first formal report to the Board (or whatever senior management forum is appropriate for your own business structure). Of course, it’s not just the report that the regulator will be interested in. Whether it has been read, understood, analysed, challenged, acted on, and what additional steps and oversight are being taken will all be relevant to the regulator. It is these additional responses that truly show effective governance and engaged senior management, focused on embedding the consumer duty principles and outcomes into the culture of a firm’s operations.

That isn’t the only present we get. Let’s not forget that additional swathes of products and services come into scope from July 31, 2024. These are the ‘closed book’ of products and services no longer offered to new clients but for which we still have paying customers who can expect our continued attention and focus. In practice, this relates to clients who we might not have already brought into the realm of “acting to deliver good outcomes for retail customers.” This is now the base requirement for the firm (via the Principles for Businesses) and in all likelihood, all of our staff who are subject to the Conduct Rules, as part of the FCA handbook, Code of Conduct (COCON). These clients and their relationship with us must be subject to the same outcomes-focus as those with currently available or renewing products. All your clients can expect you to work to deliver good outcomes for them.

How does the regulator think we as an industry have coped? There have been a number of reports, some picked up on by the national media too, which indicate the direction of travel. Interestingly, these can also be seen as either a glass half-full or half-empty mindset to the success of the Duty in raising standards. We should all endeavour to focus on the benefits of these mandatory standards to our clients, our businesses, and our colleagues, and support better outcomes through our thoughts, words, and actions.

Sheldon Mills, Executive Director, Consumers and Competition, spoke in February 2024, in a review of the first 6 months of Consumer Duty. The highlights of his speech, reflecting the FCA view, were:

• Firms have made solid progress in many areas of the Consumer Duty, and the clock is now ticking for closed products and services to comply.
• We are ready to work with industry on meeting the closed product deadline and urge firms to prioritize areas where there is the greatest risk of consumer harm.

Solid progress sounds good. There is also clear messaging that the deadline for closed products is very much on their minds, though, so we all need to make sure that we know for certain whether we have exposure or not, and that the appropriate steps to support the outcomes enjoyed by those clients are fully aligned to the FCA requirements.

In terms of specifics, Mr. Mills advised the following:

• Perhaps the most challenging outcome of the Consumer Duty for firms to meet is that of fair price and value.
• We (the FCA) do not set prices: Our job is to make sure that markets can work well. They can’t if products and services fail to offer fair value, or if they offer features that lead to foreseeable harm.
• On a positive note, it has been reported that an impressive 37% of advice firms have reviewed or changed their fee structure since the Consumer Duty was introduced.

COLL 6.6.21R refers in more detail and is specific to authorized fund managers, but the assessment of value under this rule is expected to include the following and can be used as a reference point by many firms:

1. Quality of service

2. Performance

3. AFM costs – general

4. Economies of scale

5. Comparable market rates

6. Comparable services

Other areas where the regulator has suggested improvements include the need to focus on outcomes more than processes; to capture comprehensive data that is appropriately analyzed and explained for customer outcomes; and to demonstrate how monitoring of outcomes has led to proactive action being taken to improve outcomes. All easier said than done.

One financial services review site published (in July 2024) that their research showed 84% of customers have seen no difference in service following the implementation of the Duty. That may be a glass half-empty view. The other side of this is that 16% have seen an improvement, with little to no fanfare to consumers that the industry has higher standards for supporting them and their outcomes. Maybe that isn’t too bad. If we have momentum, and can accelerate positive client experience, the following years will see higher numbers reported. We should also be mindful that consumers’ reported satisfaction levels won’t always reflect the actual delivery of good outcomes. A good outcome includes products that perform in line with how they are explained and the customer understands, not just that the consumer is happy.

One other finding from the report was that ‘vulnerable customers want better access to human support.’ We know the Duty’s final guidance made much of the need to support vulnerable customers, and while this has been a concern for several years now, it is in even sharper focus as a result of the Duty. We must ensure, through both current and closed book products, that vulnerability is recognized and supported so there is no increased likelihood of negative outcomes.

The phrase “Not Once And Done” has been used for several months now in relation to our efforts around the Consumer Duty. This is a hugely important mindset that should be embodied and advanced through the “tone from the top” within all firms. Consumer Duty may not, in fact, ever be “done.” As consumers and the FCA better understand what we do, they’ll be expecting us to check and rebalance as part of our ongoing support and commitment.

Firms are also expected to meet additional challenges in respect of data and record keeping. All the things we do when we aren’t client-facing or providing advice need to be done well AND evidenced that they are done well. Annual reviews, understanding objectives, aligning available solutions to better suit developing client needs – not just at an individual but at a firm-wide level – all need to be considered.

Finally, a deeper look at closed book products, where the regulator has identified four key areas which represent the main challenges for firms.

1. Gaps in Monitoring Data

One of the challenges firms face is out-of-date or incomplete client records for closed products. You may not have on file the consumers’ characteristics and needs, sales records, or historic performance of the product, which makes it harder to serve consumers appropriately. Where you can’t fill gaps in your records, you should take additional steps to mitigate the risk of harm to consumers – for example, through enhanced outcomes testing for these customers.

2. Fair Value in Closed Products

While the FCA has committed not to judge firms with the benefit of hindsight and is not expecting firms to automatically re-price products or repeat underwriting, we do need to look at where we are now and what else is available to establish fair value from the closed product. We must not exploit any lack of knowledge with the consumer or their unwillingness to shop around.

3. Engaging with Customers on a Closed Book

Sometimes we lose contact with a customer because the customer does not want to be contacted or does not engage with the product. This lack of engagement may lead to problems such as:

• Customers paying for products they no longer need or want.
• Customers paying for products they are no longer eligible for.
• Customers not being aware of key changes to products over time – this may mean they are not able to use it as expected.

The FCA expects us to go further to drive good outcomes for these customers, which might include communicating more effectively; providing consumers with the information they need, at the right time, presented in a way they understand.

4. Vested Rights

Vested rights could include annual fees that are due or exit charges. Sometimes these terms enshrined in vested rights may lead to poor outcomes for consumers with closed products – for instance, if a fee is significant and undermines the benefits of the product. Where a problem is identified in a closed product, we are expected to take appropriate action to mitigate harm. Some firms may take the view that giving up their ‘vested right’ and reconsidering fees or charges, for example, is the most appropriate way of delivering a good outcome to their customers.

Maybe we can best support our customers through clearer communications on what other deals are available and support on how to switch. We should be particularly mindful of certain closed book products with a long shelf-life where we may see more customers develop characteristics of vulnerability over the life cycle of the product. Those customers need to be supported.

Summary

Much good has been done and much more good remains to be done. We should never see this as “Once and Done.” Checking and rebalancing our approach is the new normal. We must maintain a focus on good outcomes, taking into account evolving consumer behavior and developing vulnerability. All of our clients can expect this from us now.

Source: Article “Consumer Duty – One year on” was written by The ZISHI experts, and published in the Advice Matters Magazine | October 2024 |

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