FCA warns ‘over-confident’ and ‘superficial’ firms on Consumer Duty plans

Some firms are struggling to apply the Consumer Duty, according to the Financial Conduct Authority (FCA).

It also warned firms not to be “over-confident” that their existing processes would be adequate to implement the new regime.

The revelations follow the regulator’s analysis of a number of firms’ Consumer Duty implementation plans and has led the FCA to provide a list of focus areas for firms implementing the rules ahead of their rollout in six months’ time.

These include:

• prioritising effectively, with a focus on the areas that will make the biggest impact on outcomes for consumers. The regulator revealed it had seen some plans where it was not clear what the basis was for prioritising some implementation work ahead of other aspects. It added firms should make sure they are prioritising appropriately, focusing on reducing the risk of poor consumer outcomes and assessing where they are likely to be furthest away from the requirements of the duty.
• Making the changes needed: The FCA has urged firms to ensure they are making the changes needed so consumers receive communications they can understand, products and services that meet their needs and offer fair value, and they get the customer support they need, when they need it. The regulator added that while it recognised plans were likely to be high level given the early stage at which it reviewed them, it  saw some plans that suggested firms may have considered the requirements superficially or were over-confident that their existing policies and processes will be adequate. The regulator urged firms to carefully consider the substantive requirements of the Duty, as set out in our final rules and guidance, adding firms should ensure that, when they are reviewing their products and services, communications and customer journeys, they identify and make the changes needed to meet the new standards.
• Working with other firms: Firms need to share information and work closely with their commercial partners to make sure they are all delivering good customer outcomes. According to the regulator, to implement the Duty on time, many firms need to work and share information with other firms in the distribution chain but it found some plans which gave little focus to this area  – suggesting some firms may need to accelerate their work on this important aspect of implementation.

The regulator highlighted areas of improvement for firms including governance and oversight, deliverability, third parties, the duty’s four outcomes and data strategies.

Governance and oversight

With regard to the expectation that firms appoint a Consumer Duty champion at board or equivalent level, the regulator revealed it had identified plans that gave little detail on who is leading the overall implementation programme and is responsible for it, or who is leading the various workstreams within the programme.

In some cases, there was more limited evidence that firms’ boards and committees had properly scrutinised and challenged plans. And in one example, there was no evidence of engagement with the firm’s chairperson or other non-executive directors, and the board only asked one question before approving the plan. In another example, board minutes showed that the plan was approved without discussion.

Some plans gave no timings, even tentatively, for when progress updates on the implementation programme would be provided to key governance bodies, including the board.

The regulator also revealed that some firms have been slow to appoint a Consumer Duty board champion. In one example, a champion was proposed who did not appear sufficiently senior to provide confidence they would be able to effectively challenge the firm’s approach to implementing the duty.

A small number of firms did not propose an individual champion or champions but suggested that the role be shared across the entire board or executive. “This is not what we intended and our view is this will not be an effective approach given the extent it is likely to dilute the role,” the FCA said.

Some firms did not include a summary opinion from risk and compliance or internal audit teams on their implementation plan and its risks or chances of meeting the deadline.

Some plans suggested firms need to further develop their approach on how they will engage with the board and executive post-implementation to provide ongoing assurance that they are meeting expectations under the duty.

Deliverability

The regulator found some firms’ implementation work for the duty appeared to be less progressed than others with gap analyses at an earlier stage and project requirements yet to be fully scoped. It identified examples where timelines seemed unclear, or sequencing confused. Some did not give any indication of the number or proportion of products, services, communications and customer journeys covered by their work plan, or of their respective assessment of risks or priorities.

The analysis found some firms’ approach to prioritising implementation work seemed less clearly based on an assessment of the potential for poor consumer outcomes. In one example, a firm said it intended to focus on ‘signature actions’ but it was unclear what these were or how they were decided. Another plan noted that the firm would only be able to address material findings by the deadline but gave no account of what it would regard or define as material in that context.

In some cases, risks and internal and external dependencies were not clearly set out, with apparently little thought given to mitigation strategies. Some firms may need to give further consideration to their resource planning, as they provided limited information in this area. In one example, a firm noted resource is stretched but did not provide clear ways of managing this. In another example, most implementation work appeared to be allocated to staff on top of their existing roles with limited dedicated resource. Other plans noted a shortfall in budget or technology resource but without setting out plans for addressing this.

Third parties

With regards to the requirement that firms consider where and how they work with third parties to deliver products and services to customers, and make sure these arrangements will meet expectations under the duty, the regulator revealed some firms’ work appeared “less developed” in this area. Some recognised that they do work with third parties – and that they would need to consider this – but did not specifically identify key third party relationships or the nature of any dependency. In some cases, it was also unclear what, if any, engagement had taken place or was planned with relevant third parties. Some firms showed limited consideration in their plan timetable of the need to engage and, where appropriate, exchange information with third parties in a timely way.

Four outcomes

On the duty’s four outcomes covering the key elements of the firm-consumer relationship, the regulator found there was more limited evidence in some plans of how firms have engaged with the substantive requirements of the duty. For example, plans included high-level actions such as ‘review customer-focused policies and procedures to ensure they capture and reference the requirements of the duty’ and ‘assess whether existing products deliver fair value’. It found his type of task-based description gave no indication of how firms have interpreted the duty’s requirements and considered the challenges of how they will apply them to their businesses, or the consumer outcomes they are aiming to deliver.

Other plans seemed rather complacent about past improvements, initiatives or current frameworks, and their adequacy for meeting the duty or for putting the firm in a good position to do so.

In several cases, it was unclear exactly what methodology or approach the firm will use in its reviews or gap analyses of products, services, communications and customer journeys against the duty outcomes. Similarly, it was unclear how some firms will amend and uplift existing assessment frameworks to meet the duty standard. The regulator warned if firms are behind in their thinking about how exactly to conduct these reviews and gap exercises effectively, they risked being behind in their planning of how long such exercises will likely take.

Data strategies

And on data strategies ensuring firms assess, test, understand and evidence the outcomes their customers are receiving, the regulator found not all plans clearly explained the data required to monitor compliance with the duty. Some plans offered more limited detail of firms’ in-depth consideration of their data requirements under the duty and how they will source, package, monitor, govern, and act upon these.

In some cases, firms’ data strategies seemed to be largely based on repackaging existing data, with limited consideration of gaps or the outcomes it is intended to monitor.

“If firms assume they can ‘get by’ largely with repackaging or supplementing existing data, then they risk not thinking deeply or afresh about the types and granularity of data that they will actually need to monitor and evidence outcomes under the duty effectively,” the FCA said.

In some plans there appeared to be more limited consideration of how firms will monitor outcomes for different groups of customers, including those in vulnerable circumstances.

Sheldon Mills, executive director of consumers and competition at the FCA, (pictured) said: “The Consumer Duty will bring about a step change in the way financial services firms treat their customers and we welcome the work firms are doing to implement it.

”Given the scale of the reform, we recognise that some firms need to make significant changes.

”For firms which are further behind in making the necessary changes, there is time to put that right and for them to show they are acting in the spirit of the new duty.

“Firms will also see the benefits of the duty, with increased trust in the sector, more flexibility to innovate and in time fewer rule changes.”