Now, post-implementation, we revisit the expectations of firms, their progress in compliance, the challenges faced, and the work still to be done.
Current status
- What has been done to date?
In June 2023, the FCA acknowledged that many firms believed they were on track to implement the Consumer Duty and to meet the higher standards of consumer protection. The regulator’s review on fair value frameworks, also published last year , identified some good practices by firms to prepare for the Duty, such as anticipating the impact of market changes on value, considering behavioural biases and having clear remediation processes.
Some firms may have confidence in the actions they have already taken, such as to product governance or customer-facing documentation. Knowing how to evidence fair value, combined with the ability to define what good value looks like for an individual firm, has been a more difficult task. Challenges are also frequently seen in the generation, breadth, measurement and use of Management Information (MI), as well as in the application of the Consumer Duty to distribution chains.
- What is still to do?
Many firms were under pressure to comply by the 31 July 2023 deadline. An FCA survey undertaken between March and May 2023 found that 23% of firms would still have work to do after the deadline.
There was a small minority of firms who did not initially appreciate the wide scope, beyond the typical definition of a retail consumer, and this left them with limited time to implement the rules.
Now that the deadline has passed for the work on existing products and services, there is yet further work on the horizon. Most notable is that closed book products need to be compliant with the Duty by July 2024. The next significant milestone is the board’s (or equivalent body’s) annual assessment of whether their firm is delivering good outcomes for customers. The first assessment is to be completed before 31 July 2024.
Whilst there is additional work to do, firms must also embed the work they have already done into the culture of their organisation. The FCA has made it clear that the Consumer Duty is not “once and done” and is based on continuing improvements. Senior managers should be able to evidence that they are leading the cultural change by engaging with staff through internal communications and training. A firm’s purpose, its values and strategy should all reflect the firm’s obligations under the Duty.
We set out below considerations for firms relating to some of the key challenges in implementing the Consumer Duty requirements.
Approach to fair value assessments
Across financial services, the biggest change for most firms was the need to perform fair value assessments, and to demonstrate a reasonable relationship between price and value.
The assessment must consider the overall costs and both the financial and non-financial benefits of products and services offered by the firm. The types of benefits to consider will vary between firms and can include subjective factors, like ‘peace of mind’.
| What have we seen in firms | Challenges and considerations |
| Detailed frameworks outline how value will be determined across products and services. Price and associated costs are benchmarked against peers. There has been a trend towards convergence in terms of pricing as a consequence of perceived ‘safety within the pack’. Complex assessments that apply internal weighting formulae to determine overall value. This may not necessarily deliver objective results. Focus on the outcomes delivered to different customer segments or cohorts. Price and value of products and services are assessed by reference to profit margins. However, there has been limited evidence of firms linking their pricing to profits. Information sharing and the delivery of fair value across different distribution channels, considering additional charges in intermediated services compared to those provided directly. Different approaches across sectors when clarifying roles and responsibilities between distributors and manufacturers, and to information sharing |
The price across comparable products offered by peers is relevant but the rules do not require firms to charge all customers the same amount (or only take action if they are an outlier). When benchmarking, firms should consider that all firms across the market will be assessing the value of their products and that this may result in pricing changes. Regular reviews will help keep benchmarking accurate. The quantification of subjective factors, such as ease of access, brand and the global reach of services, and also of some financial benefits, is not easy. Firms need to consider value in the round and evidence their rationale. Firms must identify the various customer cohorts relative to their products and services to assess the ways in which different cohorts (e.g., longstanding customers) use them and how this impacts the overall value they receive. The grouping of products or services should not weaken the understanding of performance and value at an individual product level. The data needs to be analysed granularly enough for the firm to assess differences that may affect value, such as distribution arrangements. There are complexities when applying the Duty to previously agreed contract terms to assess value on a forward-looking basis. The link between pricing and profit needs to be considered alongside other factors. There may be instances where firms are not running at a profit and yet are still not providing fair value to customers. There may have been initial discussions on next steps (eg, should some product lines be re-priced or stopped altogether), but there has been limited |
Approach to review of communications
Communication reviews have been a significant undertaking for many firms. The sheer volume of individual communications has meant that firms have had to prioritise effectively. The communications review process offers an opportunity to elevate existing standards, create a consistent tone, and develop a single view of all communications.
| What we have seen in firms | Challenges and considerations |
|
Customer journey mapping that identifies points where communications can be optimised to drive good outcomes. Use of technology to support the review and improvements as well as a focus on continual maintenance. |
The breadth of communication types has highlighted inconsistencies with how communications are stored, quality checked, and reviewed. Broad characteristics such as literacy and numeracy are relevant. For example, the FCA referred to figures from the Literacy Trust that indicated one in seven adults have literacy skills at or below those expected of an 11‑year‑old. From a numeracy perspective the FCA’s Financial Lives Survey identified that over a third of adults in the UK have poor or low levels of numeracy relative to financial concepts. |
Approach to setting outcomes, MI and dashboards
The FCA expects firms to identify any risks to good customer outcomes and understand the root causes of any poor outcomes.
Most firms completed customer journey mapping in preparation for the Duty to help them identify risks to consumers to monitor. These risks capture poor customer experience and areas of ‘friction’. Typical metrics used to gauge consumer outcomes relative to a product or service could include:
- Sales data, such as total products sold, cancellation numbers and reasons, and switching/retention rates.
- Customer ‘use’ data specific to the product type, for example, default rates, application of fees and charges, product changes requested, claim acceptance and declinatures.
- Complaints data, root cause analysis and Financial Ombudsman Service (FOS) outcomes.
- Customer and staff feedback.
| What have we seen in firms | Challenges and considerations |
| Clearly defined “good” outcomes that firms seek to achieve as well as risks of “poor” outcomes. Detailed customer lifecycle mapping for each product or service and each identified customer cohort. Dashboards divided into the four outcome areas, by stage of the customer journey or by product type, amongst others. MI that provides a view on the outcomes being achieved from sales data, through the product lifecycle to post-sale support and complaints. Segmented views of MI for different areas of the business with a range of granularity. |
The identification of appropriate data sources, particularly for firms using multiple platforms and distribution channels, has been a challenge. Similarly, determining what kind of outcomes focused MI should be used, the level of detail required, who it should go to and how it should filter up or down through the business have all been key considerations. There may be further tech costs incurred as firms work to refine and interpret the data captured or potentially redefine parameters where required. The correlation of outcomes to a particular third party, channel or product feature will help determine value. Commentary on the metrics, such as the reasons for cancellations, complaints and emerging themes can provide further context to help inform any actions required. |
Ongoing monitoring
Looking forwards, senior managers will be reliant on the processes and controls developed within the business to provide assurance over the ongoing compliance with the Duty. Outcomes should be defined with thresholds to indicate where there might be issues.
Appropriate MI should monitor whether:
- customers are sold products or services designed to meet their needs, characteristics, and financial objectives.
- products or services provide fair value with appropriate actions taken otherwise.
- customers are provided with information to make effective, timely and informed decisions.
- there is sufficient support to meet customers’ needs, including those who are vulnerable, in a timely and appropriate manner.
- outcomes experienced relative to each specific product or service are consistent with the requirements of the Duty.
- customers or groups of customers (such as repeat customers or those from a particular distribution channel) are experiencing different outcomes.
Board engagement
The Board (or equivalent body) needs to make sure the interests of customers are central and embedded within the culture of the organisation. The Duty needs to be considered in all relevant contexts for strategy and decision-making, through a ‘customer lens’. The board has a responsibility to get the right information to satisfy itself of adherence to the Duty and it should hold senior management to account where there are inadequacies identified.
The Compliance, Risk and Internal Audit functions within the firm provide crucial advice and assurance, which should feed into the board’s oversight of customer outcomes. The Consumer Duty champion will continue to play a key role in ensuring the Duty is being discussed regularly. The focus of the role may need to evolve to continue to raise relevant questions, and make sure any issues are addressed. Firms and their Consumer Duty champions should consider how they keep up-to-date with developments across the market. There were many seminars and industry knowledge sharing events in the run up to implementation, which may continue to be useful.
Annual assessments
There is a requirement for the board to review, on an annual basis, an assessment of whether the firm is delivering good outcomes for its customers. This means that the board needs to be engaged with the Consumer Duty to be ready to sign-off the assessment. The content and format of the annual assessment is not prescribed but it should include:
- the results of the monitoring undertaken to assess whether products and services are delivering expected outcomes (in line with the Duty)
- details of any risks to good customer outcomes, including whether any groups of customers are achieving worse outcomes.
- where relevant, an overview of actions taken to address any risks or issues.
- whether the future business strategy is consistent with acting to deliver good outcomes under the Duty.
The board’s review should involve discussion and agreement over the action required to address any issues impacting good outcomes, including any changes to the strategy going forward. The FCA provides key questions in its Finalised Guidance (FG22/5), which can be used to guide the discussions.
Thoughts on what happens next
Activity into 2024 should focus on three key areas;
- Completing the residual “day 2” activity for open products – much of the industry prioritised activity based on the level of customer impact, however it is important that firms complete final reviews of lower-priority products and complete the implementation of identified uplifts.
- Closed book reviews – whilst the volume of products may be lower, the complexity of these products will be much higher, and it is likely there will be less available information to complete the reviews. Product profiling and prioritisation will need to be updated to be appropriate for closed book, and treatment strategies will need to be adjusted to consider forward looking repair and backward-looking rectification.
- Ensuring the embedding of “day 1” activity – there were substantial changes to firms MI and data reporting, outcomes testing procedures, and target operating models. Ensuring these are embedded appropriately, and that the culture internally adopts the changes is imperative.
The final consideration should be long-term strategy; identifying and assessing the strategic implications of the Consumer Duty and how firms can turn compliance with the Duty into a competitive advantage.
Firms will also need to keep an eye on any FCA interventions to understand how the regulator applies these new rules. Additionally, firms will have to navigate the Consumer Duty alongside other regulatory focus areas, such as the oversight of appointed representatives, developments in social media, ESG, the cost-of-living crisis, or the emerging use of AI to name a few.
The approach to compliance with the Consumer Duty is likely to evolve as new processes are embedded. No doubt the first internal audits of Consumer Duty, post implementation reviews or quality assurance work will feed back into product governance committees and Board strategies. These activities will provide insightful indications of compliance with the Duty and will help to identify any areas requiring improvement.
