The Consumer Duty, brought in by the FCA in July 2023, is designed to shift the focus of financial services firms towards delivering better outcomes for consumers and to ensure products and services meet the needs and expectations of customers while minimising foreseeable harms.
By focusing on an outcomes-based approach rather than detailed prescriptive ‘rules’, the Duty represents a departure from previous ways of regulating the payment sector. An FCA review published this month is therefore a welcome step in helping payment firms understand what constitutes good practice.
Key findings from the review
The FCA’s review evaluated the practices of 23 firms across the payments landscape, including e-money issuers, merchant acquirers, money remitters and open banking firms.
It found that significant progress is still needed; just under half of the firms reviewed had only partially implemented the Duty and required significant work to comply, presenting a moderate or higher risk of delivering poor consumer outcomes.
Below, we’ve highlighted some of the issues and best practices that emerged.
Aligning interests with the Consumer Duty
Firms that successfully embrace the Duty recognise that delivering better customer outcomes aligns with their long-term interests. They clearly define their customer-centric purpose and identify what constitutes good outcomes, including foreseeable harms. Strong governance frameworks enable them to monitor and challenge their implementation efforts effectively.
The best-performing firms adopt a systematic approach to implementation. This includes identifying target markets for their products, defining desirable outcomes, and establishing clear metrics for assessing price, value, consumer understanding and support. Governance structures oversee these processes, ensuring timely action to address any identified shortcomings. Regular management information (MI) reports – often using Red, Amber, and Green (RAG) ratings – provide clarity on performance against the Duty.
In contrast, firms that fail to recognise the heightened standards required by the Duty often rely on existing processes without making necessary adjustments, mistakenly believing their products pose lower risks than those in other FCA-regulated sectors. This lack of proactive adaptation can lead to significant risks of poor consumer outcomes.
Defining target markets
The Duty calls for clear definition of target markets. Firms are expected to specify these markets in detail, taking into account the characteristics and complexity of their products. While broad target markets may be appropriate for low-risk products, high-risk offerings require well-defined parameters to minimise consumer harm.
Wider target markets can obscure the actual risks associated with a product, making it difficult for firms to identify potential consumer harm. Therefore, narrower definitions are essential for high and medium-risk products.
Agent oversight and monitoring
Firms in the payments sector are accountable for the actions of their agents and distributors. The review found that many firms have not adapted their monitoring processes to ensure compliance with the Duty. While some firms provide onboarding and training for agents, ongoing oversight is often inadequate.
Best practices include clear governance structures for monitoring intermediaries, regular compliance checks, and effective MI that identifies shortfalls in real time. Conversely, poor practices often result in consumers being confused about who to contact for support, undermining consumer trust.
Fair value assessments
The Duty mandates that firms ensure their products offer fair value, requiring thorough assessments to compare the price consumers pay with the expected benefits. Many firms, however, fall short in this regard. Some merely benchmark their prices against competitors without considering the broader cost-benefit picture. While benchmarking is helpful, it does not identify where the whole market is out of line with fair value. Others fail to adequately assess how varying charges affected different consumer groups.
Effective firms clearly articulate whether they deliver fair value, supported by a comprehensive rationale. They also consider the implications of their pricing structures on diverse customer segments, proactively addressing any identified shortcomings.
Enhancing consumer understanding
Supporting customer understanding is another critical aspect of the Duty. The review found that some firms had made minimal changes to their consumer communication strategies since the Duty was implemented. Limited pre-testing and post-testing of communications hindered firms’ abilities to ascertain whether their messaging effectively supported consumer understanding.
Best practices involve robust testing procedures including A/B testing and post-communication surveys to gauge consumer comprehension. Firms that excel in this area provide clear MI on the effectiveness of their communications.
Providing adequate consumer support
Firms must also ensure that their customer support aligns with consumer needs. Effective firms demonstrate a keen awareness of how to assist consumers, including the vulnerable, a key focus area for the FCA. Poor practices include unclear signposting of support services, which can lead to consumers being unable to access necessary help.
Firms should actively monitor customer support issues, using complaints data to identify areas needing improvement. Prompt action to address these shortfalls is crucial for maintaining consumer trust.
Governance and management information
Effective governance structures are vital for embedding the Consumer Duty within a firm. The review indicates that while boards generally receive information on Duty implementation, there was often a lack of critical challenge and discussion regarding these matters. Stronger engagement from boards is necessary to ensure the Duty is thoroughly integrated into corporate strategies and practices.
Best practices include detailed MI that allows boards to track performance against the Duty and remediate identified issues. Some firms had not sufficiently updated their MI to reflect the new requirements, making it difficult to identify shortfalls in consumer outcomes.
Next steps for firms
The FCA’s review serves as a helpful guide for firms looking to improve their implementation of the Duty. It emphasises the importance of taking proactive measures to ensure compliance and to prioritise consumer welfare.
While the FCA is cognisant of proportional implementation, firms are encouraged to assess their current practices against the review’s findings and address any gaps or shortcomings promptly.
Firms must ensure their boards regularly review and approve assessments of consumer outcomes in line with the Duty. The FCA will monitor compliance and expects firms to demonstrate their commitment to delivering good consumer outcomes.
The FCA’s review highlights the importance of a robust, systematic approach to implementing the Duty. But, as with all new principles-based regulation, refining what constitutes good practice will be an iterative process for both the industry and the regulator. At the same time, an outcomes-based approach has the benefit of allowing firms to find innovative ways to deliver outcomes for consumers that may be both more effective and less costly.
Polly Tsang, ICAEW Senior Financial Services Regulatory Manager
Further reading: The Consumer Duty – what next?
Watch a recent ICAEW webinar on the Consumer Duty featuring keynotes from the FCA, expert-led presentations, and an insightful panel discussion to help you navigate the new rules.
