The FCA’s Consumer Duty: is your firm prepared?

The FCA’s Consumer Duty represents a shift from rules-based to outcome-based regulation, with firms now required to prioritise customer needs at every stage of the product lifecycle. Nearly eight months on from the implementation of the Duty, firms should now be well versed in its implications and focused on the upcoming annual board report due by July.

Since its introduction in July 2023, each new FCA publication has provided further insights on how the Duty applies to specific products and services, as well as how firms are implementing it. 

The regulator’s latest publication outlines examples of good and poor practices across the Duty's four outcomes: product design, price and value, consumer understanding and consumer support. The FCA found that while many firms have made strides in delivering better outcomes for their customers, some firms continue to lag in their implementation. The regulator continues to stress the need for proactive engagement by firms in fostering beneficial outcomes for consumers. This should be underpinned by a customer-centric culture and a governance structure that supports these goals.

Key factors to ensure your firm's compliance with the FCA’s Consumer Duty 

Understanding your distribution chain

The Duty obligates firms to reassess their role within the distribution chains they operate and take measures to ensure good outcomes for customers, even where they are not interacting directly with them. Where two firms collaborate to manufacture a product, they must have a written agreement in place outlining their mutual responsibilities as co-manufacturers, including their respective roles in the product approval and value assessment processes. Defining a clear target market is critical, and the FCA highlights positive examples of firms producing granular target markets for their products and services, as well as clearly highlighting the ‘wrong’ consumers or the ‘negative target market.’ Firms were also praised for ensuring that their distribution strategies were consistent with the target market – such as redesigning sales journeys to be clearer on the types of customers and needs the products are appropriate for.

A key area of concern involves ineffective information sharing across distribution chains. The FCA wants firms in the same distribution chain to share relevant information with each other so that each firm can meet their duty obligations and address potential issues quickly to prevent consumer harm. Although each entity is only responsible for their own actions in the chain, firms do need to consider the approaches and actions by other parties. Product manufacturers need to inform distributors of the characteristics of a product or service, including its target market and demonstrate the value it provides to customers. Equally, distributors should consider what information they can provide to manufacturers, with the joint goal of delivering good outcomes for the customer.

Annual board reports

One of the Consumer Duty’s key requirements is the need for governing bodies to undertake a regular review of whether they are delivering good customer outcomes. This assessment must include:

• The results of monitoring that the firm has undertaken to assess whether products and services are delivering expected outcomes, including any evidence of poor outcomes, whether any group of customers is receiving worse outcomes compared to another, and an evaluation of the impact and the root cause of any poor outcomes
• An overview of the actions taken to address any risks or issues, and any further remedial action that the firm needs to take
• How the firm’s future business strategy is consistent in seeking to deliver good outcomes under the Duty

Management information

Agreeing, collecting, and reviewing the right Management Information (MI) is critical to this exercise. Firms should ensure that they have MI that will enable it to evaluate how their products are performing against the Consumer Duty outcomes. Consideration should also be given to the frequency of MI collection, review processes, and action being taken because of what MI is telling the firm. If there are any gaps in the data needed to do this, firms need to have a strategy in place to fill key gaps.

The FCA expects firms to provide the Annual Report and supporting MI, upon request.

Closed products deadline

Firms with closed products or services should have a clear roadmap for how they will implement the Duty by the 31 July 2024 deadline. At this point, all products will be inside the scope of the Consumer Duty.

Firms’ treatment of customers in vulnerable circumstances

The regulator has also announced a separate review into how firms are acting to ensure good outcomes are being delivered for those with characteristics of vulnerability, with findings to be shared by the end of 2024. The review will examine how firms understand consumer needs, the skills and capability of firms’ staff, the design of product and services, and communications and customer service provided to vulnerable customers.

How can Ocorian help?

Newgate Compliance is Ocorian’s subsidiary compliance consultancy service. Newgate has developed a comprehensive Consumer Duty Tool Kit designed by our specialist team to assist your firm with meeting the Duty requirements. This includes a Consumer Duty board report template and MI matrix focusing on the four outcomes of the Duty, a product approval checklist covering the assessment of vulnerability in the target market and a fair value assessment framework. The toolkit also includes a vulnerable customers training package delivered to client-facing staff to ensure they are equipped to interact with consumers who may have characteristics of vulnerability. Do reach out to the team for more information.