Response to FCA Letters – Retail Banks and Building Societies

The FCA portfolio letter on Consumer Duty implementation for firms in the Retail Banks and Building Societies sector is split in two main parts:

• Annex 1 focuses on the application of the Duty to different businesses in the retail banking and building societies sector.
• Annex 2 provides more detailed feedback on aspects of certain products and services – i.e. current accounts, ancillary banking services, treatments of small businesses, cash savings accounts and retail mortgage lending. There are three headline points:

1. The need for firms to deliver good outcomes for customers in financial difficulty.
2. The need for firms to provide fair value to retail customers.
3. The need for firms to deliver good outcomes to SMEs.

Further review

The FCA has set several check points when it plans to engage (on the products and services listed in Annex 2) with a sample of firms on:

• From April 2023 – frameworks used for their gap analysis and how they have ensured that the higher requirements of the Duty have been met.
• From September 2023 – specific changes met (or deemed not required) under the gap analysis and the data being used to monitor outcomes.
• From January 2024 – what outcomes are being achieved under the Duty.

Annex 1 - How the Duty applies to firms

Whilst this information is a helpful summary, it does not impose new requirements.

The FCA has also provided examples of common distribution chains in the sector to reiterate that the Duty applies widely to products and services which will reach a retail client.

Annex 2 - Key things for Retail banks and Building Societies to consider

To assist firms, the FCA have listed the areas retails banks and business societies should focus on. For each section, the FCA also lists the specific outcomes under the Duty or business areas more generally, where it has sought to give additional guidance to firms.

Section A – General Banking Services – focus on specific aspects of customer support and understanding

• Providing Support – the current economic conditions have drastically increased the importance of the cross-cutting rules, the consumer support and understanding outcomes. The FCA has reiterated that the there is a close relationship between those elements of the Duty and it will expect firms to have sufficient capacity to provide good outcomes given the increased number of customers which will be seeking more support.

In order to achieve Good Outcomes firms should avoid the following:

• inadequate support through face-to-face channels, telephony, or inability to speak to a person,
• inadequate resourcing of different channels, in terms of capacity or relevant experience,
• poorly designed or prematurely launched digital channels, which suffer capacity and reliability issues or are complex and slow to navigate or transact through,
• inadequate resourcing of online chat functions, and
• excessive reliance on chat bots - especially if these are not adequate in practice for many of the questions that customers have and do not convert to an actual operator when needed.

• Changing channels – the closure of physical branches may affect customers in a range of ways. In order to achieve Good Outcomes, firms should be prepared to communicate clearly, monitor the outcomes after the changes and avoid causing foreseeable harm to customers impacted by the changes to, or withdrawal of, a service or product.

• Digital channel and support – feedback relates to firms which provide support mainly or only thought one channel. In order to achieve Good Outcomes, firms should be prepared to ensure such channels are effective even where there are non-standard issues.

• Firms are urged to consider a simplified process for dealing with the accounts of deceased or incapacitated family or friends.

• Account freezing and fraud reports – the FCA has warned firms that in practice, firms do not tend to achieve good outcomes in their account freezing procedures. Processes should be reconsidered and steps to achieve Good Outcomes might include the following: the account freezing is less frequent, paired with better execution, communication and support. The FCA has highlighted that firms need to improve their handling of alleged cases of fraud, especially Authorised Push Payment fraud, and of complaints about such.

• Monitoring banking customer support outcomes - firms should think carefully about the metrics they use to assess relevant customer outcomes, including (but not limited to), for example, queue times in branches, wait times and abandon rates in telephony, and abandon rates in digital channels. The FCA will look more closely at the metrics of support going forward.

Section B – Evolving Bank Accounts – focus on the products and services outcome

• Innovation - The FCA stresses the need to look at innovation thought the lenses of the Duty – firms are urged to ensure that innovation in the features or pricing of bank accounts would be offered only to the extent it allows the firm to achieve Good Outcomes, designing the account to be suitable for target market, promotions and other communications about the account are understandable, the account is distributed in a way which explains it in a balanced way, reaches consumers in the target market only (avoiding potentially unsuitable sales outside it), and reduces the risk of selling within the target market to those whose needs it does not meet. The FCA also stresses the importance of supporting customers post-sale in a way that is adequately resourced and appropriate.
• The FCA recognises such account services are often offered with non-regulated services (eg will writing) and/or non- financial (‘lifestyle’) products (eg gadget discount schemes). Firms are expected to enable customers to understand the account and its conditions.

Section C – Overdraft borrowers and repeat use – focus on measuring outcomes

• The FCA has stressed the importance of monitoring difficult financial situations and borrowers outcomes. Post pandemic, the Duty raises the bar even higher and requires firm to have appropriately designed system to ensure that they identify repeat users who are showing signs of actual or potential financial difficult, that they have implemented strategies which deliver Good Outcomes for such customers, an is not that subsequent improvements have been made and can be evidenced.

Section D – Treatment of business customers – focus on the price and value outcome and consumer support outcome

• Business Current Accounts (BCAs) are not in scope of FCA’s existing rules on PCA overdraft pricing (CONC 5C) and repeat use (CONC 5D) and the Covid-19 overdraft guidance on PCAs does not extend to BCAs. However, the FCA in this section notes that those provisions about PCAs may provide useful pointers for firms to BCAs as they consider how to comply with the Duty.
• BCAs - support for businesses in financial difficulty - The FCA has provided examples for firms to ensure they are achieving Good Outcomes for businesses in difficult economic conditions – focus for firms should be on providing more flexibility on overdrafts, early identification of financial difficulties and early alerts and warnings to make effective interventions.
• BCAs – design and value - The FCA has further noted, in relation to Business Accounts that the market is complex with low engagement and unwillingness to switch accounts due to the perceived difficulty. Firms should consider whether their BCA customers have access to an appropriately priced account which provides relevant benefits.
• BCAs – access - The FCA has urged firms to also consider the process for closure of accounts. In order to achieve a Good Outcome, firms should avoid withdrawing or removing a BCA abruptly or without considering the effect on the customer as this could result in foreseeable harm which the firm should take steps to mitigate. This could include giving time and support for customers to transition to a suitable alternative, with any changes communicated in a timely, clear, and sensitive manner.
• BCAs - Lending to businesses and treatment of borrowers - firms should carefully consider the potential need for improvements to their business loans to ensure fairer, simpler, and more consistent designs, conditions and pricing, and more helpful communications. The FCA noted the treatment of business in financial difficulty is a mixed picture and firms could significantly improve the fairness and consistency with which they support those businesses and pursue constructive solutions and communications with them.

Section E – Treatment of business customers – focus on the product, value outcome, and understanding outcome

• In order to achieve Good Outcomes, firms should to consider the following: moving rates following base rate moves, explanation of such moves and the extent to which its rationales are subject to internal scrutiny that is consumer focused.
• Firms needs to consider how they treat different groups of savers and whether the differential pricing practices are in line with the Duty – i.e. they may be used, provided they do not cause some groups of savers to receive poor value.
• The FCA has provided a list of actions firms might want to take to help achieve Good Outcomes: consumer engagement, communication and support, fees and penalties and support for savers to move or exit their accounts.

Section F – Retail mortgage lending

The FCA has included a specific section on retail mortgage lending in retail bank and building societies, setting out its expectations on each of the outcomes.

• Consumer understanding – the FCA has flagged examples which are of increased importance given the current economic situation: (i) Where customers are experiencing or anticipating mortgage payment difficulties (ii) Where customers are coming towards the end of an incentivised rate (eg a fixed rate) and (iii) Where customers are considering consolidating other debt into a mortgage.
• Consumer support - the FCA has reiterated that they expect firms to provide support that meets their customers’ needs at the point of sale and throughout the mortgage lifecycle. Firms also need to be aware of the segments of the mortgage market where customers are more likely to be vulnerable, have additional needs and be at great risk of harm.
• Products and services - Firms should ensure that their relationships with other firms in the distribution chain do not serve the needs of the firms over customers and lead to poor customer outcomes, such as product recommendations or sales that are driven by commercial arrangements eg commission levels. Firms should also consider how fee structures might incentivise poor conduct or poor customer outcomes
• Price and value – Lenders must be able to demonstrate that their mortgage products and pricing, including any associated fees and charges, provide fair value to customers in the identified target market. Lenders should ensure that products don't have features which exploit customers by, for example, charging unjustifiably or unreasonably high fees or interest rates to groups such as those with a poor credit history, or older customers. enders should be able to form a view of the value impact of distributor fees from information they already collect (eg for the purpose of calculating the APRC in the mortgage illustration). the current rate environment should be taken into account by firms and the FCA would expect firms to be active in the lifetime mortgage market.
• Monitoring outcomes – the FCA has flagged that possible sources of data include customer switching and retention records, customer complaints and root cause analysis, customer feedback and survey data, feedback from other firms in the distribution chain regarding the value of the product, the cost of providing the product or service including credit risk, and staff feedback.

Other considerations

The FCA has provided helpful observations on the following aspects of the sector:

• Data analytics – firms should be mindful of the use of AI, advanced analytics and big data – the use of such tools should be compatible with the crosscutting rules and the outcomes under the Duty.
• Considerations around fair value – firms should consider a number of factors specific to this sector to ensure they align with the requirements under the Duty – profits must not be disproportionately generated, cross-selling should be examined along with the impact of any cross-subsidies and the use of advanced analytics to achieve personal pricing.
• Products with special characteristics - products/services (eg current accounts, cash savings accounts, retail mortgages) which purport to be ‘ethical’, ‘socially responsible’, ‘green’ etc, or ‘Sharia compliant’ (or equivalent) must be genuinely designed and run as such and match the claims made in promotions and distribution.