Consumer Duty View - May 2024

As May unfolds with its promise of warmer days, we’re pleased to bring you to the latest edition of Consumer Duty View.

Firms now have under 3 months to meet the 31 July 2024 deadline by which (1) firms need to have completed implementation of the Duty for closed products, and (2) Boards need to have reviewed and approved the first annual report setting out the results of Consumer Duty monitoring and compliance. The annual board report is a hot topic and the FCA has made it clear that it expects Boards (and their champions) to engage with their firms as part of the annual report process and proactively challenge its contents. We are working with a number of firms on their report, and also have our own template available for a fixed fee. Please do reach out if you would like to discuss further.

We are seeing a lot of focus on reporting governance and monitoring data. When evaluating whether there is sufficient monitoring of good consumer outcomes, firms should consider relevant mapping for end-to-end customer/product journeys, understand the key risks at each stage, and be looking at data that assures Boards that the risks are understood and customers are receiving good outcomes throughout the journey. We have been advising a number of firms across the market on this process, including running a series of workshops and deep dives into certain business MI – please do reach out to us if you would be interested to hear more on this.

We are planning on hosting a series of roundtables to support Consumer Duty Champions, operating in certain sectors (e.g. asset management, banking, wealth management, payments, insurers). Roundtables will focus on consumer duty governance and board reporting, data and MI, information exchange across the distribution chain and other sector specific challenges. If this is of interest please do get in touch.

We bring you below the latest regulatory updates including: the FCA’s review of firms’ treatment of vulnerable customers, information exchange across the distribution chain, the FCA’s updated AI strategy and Business Plan showing its supervisory focus and more sector specific updates…

1. FCA vulnerability survey and review of firm’s treatment of customers in vulnerable circumstances

Following the FCA’s announcement on 15 March 2024, the FCA has started to reach out to a number of different types of firms with a survey requesting information regarding the actions firms have taken to treat customers in vulnerable circumstances fairly. Responses to this survey are due by 14 May 2024.

The FCA appears to be casting a wide net focusing on all firms across the distribution chain (and not just those who deal directly with retail customers). The FCA states in the survey that it recognises the action firms take can differ depending on the firm’s size, the market in which the firm operates, the products offered by the firm and the characteristics and needs of the firm’s target market and customers.

Topics in the survey include:

• number of customers identified as vulnerable

• whether firms understand the nature and scale of vulnerability in its target market and how this impacts on customers’ needs

• how well equipped staff to recognise and respond to a range of vulnerability characteristics

• Whether firms ensure communications are understandable and consideration of channels used

• whether vulnerability is factored into product and services design

• whether firms can respond flexibly to consumers’ needs and systems and processes support deliver of good customer service

• whether firms are producing management information on outcomes for vulnerable customers

• challenges firms have experienced in taking action to treat customers in vulnerable circumstances fairly.

Please do reach out to us if we can assist with your responses to this survey. The FCA will aim to share the findings of this review by the end of 2024.

2. Distributor Feedback

To minimise bespoke data requests and bring a level of consistency to the data being shared, the joint trade association working group in the UK developed a Distributor Feedback Template (“DFT”) in September 2023 setting out an agreed approach to distributor-to-manufacturer information sharing for information purposes.

For manufacturers using the DFT, we note that it is anticipated that the first tranche of distributor reporting under the Duty will cover data for the 8-month period to the end of March 2024, with reports being provided to manufacturers within 6 weeks, i.e. by mid-May 2024.

The data requested by the DFT is both quantitative and qualitative:

• Quantitative data: (1) Sales, by distribution strategy (2) Sales outside the target market set for the product, by distribution strategy (3) Holdings data, by distribution strategy; and (4) Redemptions by holding period (subject to future specification by the joint trade associations)

• Quantitative data: (1) Distribution Issues - arising from review of distribution arrangements (target market, distribution strategy, product information, value assessment) (2) Complaints (e.g. about the product or manufacturer) (3) Poor outcomes - identified for groups of customers with common characteristics (including, but not limited to, characteristics of vulnerability)

The requirement to provide information to support manufacturer reviews applies to all distributor firms in the distribution chain. The FCA makes it clear that it expects all firms in a distribution chain to co-operate. For example, if they do not have relevant information to provide to the manufacturer, intermediate firms might need to pass on information or provide details of firms later in the chain to allow flow of information. If you are a distributor and need help in responding to feedback requests, or you are a manufacturer and need help obtaining or reviewing feedback as part of your product review please do get in touch.

3. FCA speech: “Investing in outcomes, a regulatory approach to deliver for consumers, markets and competitiveness”

In this speech, Nikhil Rathi, FCA Chief Executive, states that the FCA will be “pragmatic” when looking at enforcement of the Consumer Duty, tackling breaches that pose the greatest risk of harm concerns. The FCA is not setting out to “trip firms up by going after technical breaches”, instead they will look favourably on firms that have made reasonable efforts to identify and proactively address concerns, even if mistakes are made.

The FCA will be focused on their identified areas of “greatest harms” – for example, the cash savings market, both in the largest banks and on platforms, insurance products such as premium finance and GAP insurance. Whilst the FCA do not want to regulate pricing or restrain profits, they will step in and act where they have concerns. With cash savings, the FCA are giving firms time to act before intervening – a lack of responsiveness will lead to firmer intervention.

The FCA also believes the Duty will mean fewer detailed or reactive rules. If firms “get it right”, less time will be spent on provisions for redressing issues of the past. Over time, the FCA believes this will reduce the Financial Services Compensation Scheme (FSCS) levy.

4. FCA: AI Update

The FCA published a paper outlining its approach to AI following the Government’s publication of its pro-innovation strategy on AI. The paper points to some considerations firms should take into account in the context of the Duty, including:

• where preparing their Consumer Duty annual report (due by 31 July 2024), this additional layer of reporting and oversight by a firm’s board might also include consideration of current or future use of AI technologies where it might impact retail consumer outcomes or assist in monitoring and evaluating those outcomes.

• deployed effectively, AI chatbots have the ability to help customers understand products or services.

• AI can also raise risks for consumers. For example, if firms look to make use of AI in risk assessments, some customers will do better than others and some, depending on their individual circumstances or risk factors, might even be excluded from the market.

• the FCA does not want to see firms using AI in a way that embeds or amplifies bias, leading to worse outcomes for some groups of consumers, might not be acting in good faith for their consumers, unless differences in outcome can be justified objectively.

5. FCA: Finalised guidance on financial promotions on social media (FG 24/1)

The FCA have issued finalised guidance clarifying their expectations on how financial promotions should be communicated on social media. The FCA acknowledges that social media has become a central part of firm’s marketing strategies but is concerned that poor quality financial promotions on social media can lead to significant consumer harm due to the complex nature of financial products and services.

The Duty requires firms to identify a target market and tailor communications to account for the characteristics of their target market and the characteristics of the marketing channel used. The FCA has seen consumers on social media be repeatedly bombarded by financial promotions from the same service or firm. Consumers with characteristics of vulnerability may be more susceptible on social media to the type of behavioural biases that excessive contact with an individual tries to exploit. The FCA states this type of behaviour would not be acting in good faith, as required by the Duty.

Firms should consider if social media is appropriate for these types of promotions, if there is ability to control who sees the promotion, and if their distribution strategy might result in consumer harm.

6. FCA confirms anti-greenwashing guidance and proposes extending sustainability framework

The FCA published its finalised anti-greenwashing rules and guidance (“AGW”), which comes into force in only a month’s time on 31 May. All FCA regulated firms are in-scope, in respect of all products and services.

The AGW rule applies to all FCA regulated firms, when they refer to the environmental or social characteristics of products or services, in any client communication to UK clients or financial promotion to UK persons. The AGW rule requires firms to ensure that their sustainability claims are fair, clear and not misleading. The headline AGW rule is fleshed-out with detailed guidance on how to ensure that these claims are correct, clear and complete, and that comparisons are fair and meaningful. The AGW rule applies to both retail and professional communications, including business-to-business as well as business-to-consumer communications.

The FCA considers the AGW to be consistent with the Duty when firms are communicating with retail customers. In particular, in ensuring that retail customers are given the information they need and it is presented in a way they are likely to understand, and that equips them to make effective, timely and properly informed decisions.

You can access the final AGW guidance here. We Simmons hosted a 30-minute client webinar which you can access here and a dedicated site here setting out how we can help with compliance.

7. FCA Business Plan 2024/25

The FCA published its business plan detailing its priorities over the next 12 months to help deliver on its strategic commitments. The Consumer Duty remains a high priority for the FCA, with one of its three commitments being to “Putting consumers’ needs first”.

The FCA outlines the following activities it will undertake over the next year to achieve this:

• Multi-firm work and market studies across different sectors to drive up standards - examples of areas of focus (1) value assessments in unit-linked pensions and long-term savings products and (2) the swiftness of the insurance industry in responding to claims.

• a review of firms’ treatment of customers in vulnerable circumstances

• supervisory work to test firms’ implementation of the Consumer Duty and to improve firms’ delivery of good consumer outcomes, including complaints-handling and root cause analysis, consumer support journeys, consumer understanding, fair value and closed products and services

• ensuring people with savings receive a fair deal and are kept informed of better rates

• finalising changes to mortgage, consumer credit, and overdraft rules to improve outcomes for consumers in financial difficulty

• implementing new rules to ensure consumers and businesses have reasonable access to the cash they need and continued supervision of branch closures

• combine insights on consumers’ needs through research and partnerships to inform supervisory and enforcement action.

• ongoing work exploring the role of technological solutions in enabling financial inclusion, including through a Financial Inclusion including through a Financial Inclusion TechSprint

• consulting on changes to debt advice rules to improve outcomes for vulnerable consumers;

• undertaking an impact evaluation of the effect of FCA interventions for persistent debt following the FCA’s Credit Card Market Study;

• working with the Government and other partners to support consumer access to products and services and tackle financial exclusion. Ensure a cross-sector response to sustained cost of living pressures via the UK Regulators' Network, including for customers in financial difficulty with multiple forms of debt.

8. FCA joins other regulators to warn firms on debt collection (18/03/2024)

Together with Ofcom, Ofwat and Ofgem, the FCA has published a joint letter setting out expectations across the markets as consumers face the strain of cost of living pressures to call on firms to improve debt collection practices.

In the letter, the FCA reminds firms that its expectations are based on the higher standard of consumer protection set by the Consumer Duty, and also the guidance on how firms should support vulnerable customers and borrowers in financial difficulty. This is relevant for firms when assessing whether their collections processes (including the tone and frequency of debt communications) are delivering fair outcomes for their customers.

The letter also notes that there is a foreseeable risk of harm if debt collection communications sent to customers are perceived to be intimidating or unsupportive. Additionally, firms are expected to test communications (e.g. debt collection communications) where appropriate, taking into account the purpose, context, timing and frequency – as well as the scope for harm if the information being conveyed is misunderstood or overlooked by customers. The scope for harm is high if debt communications are missed or not driving intended behaviour, so testing is likely to be appropriate.

In the letter, firms (especially large ones) are encourages to enable ‘warm’ handovers between frontline and specialist teams internally, and to external customer support organisations. For example, firms may consider making ‘warm’ handovers to debt advice organisations to help customers receive timely debt advice and/or money guidance.

The letter urges firms to:

• make sure customers in debt do not receive excessive communication

• use supportive language

• clearly signpost free debt advice

• make it easy for debt advisers to contact them on behalf of clients

9. FCA asks financial advisers to review their processes in retirement income support (20/03/2024)

This Dear CEO letter follows a thematic review of retirement income advice, and asks that firms review their processes when providing this advice. The thematic review identified examples of good practice in the market with some firms showing they had considered their customers’ needs and designed their advice model in a way likely to lead to good outcomes. The review does not consider files against the requirements of the Duty, given it was not in force at the time. However, it does note that most firms would not comply with the requirements of the Duty without taking action to address the FCA’s concerns. The report contains a section on the key considerations to help firms comply with the Duty and deliver good customer outcomes.