Consumer Duty View - June 2024

We hope you've had a chance to take advantage of the sunshine whilst you perfect those annual board reports and finalise implementation of closed products ahead of 31 July.

In this edition of Consumer Duty View, we delve into the preparation of board reports -- a main area of focus ahead of the end of July - explore how a change in government may impact the Duty and other key developments.

1) First Annual Board Report

Flash Alert - On Thursday the FCA updated its Consumer Duty page in respect of the annual board report. The FCA confirms that there is no prescribed format and that firms with different size and capabilities should apply the requirements in a reasonable way. The FCA does also make it clear that it will be reviewing reports post the July deadline and firms must be prepared to provide their report to the FCA.

We have been supporting a large number of you across the market on board reporting (either reviewing bespoke reports or we have a useful starting point for firms on key regulatory issues to bear in mind to support your compliance), the transition to BAU post July, running a series of workshops and deep dives into certain business MI and other governance aspects including SMF and champion briefings - please do reach out to us if helpful to discuss further in the final few weeks.

The FCA's update is a helpful reminder that it expects the board report to include:

• the results of the monitoring you have undertaken to assess whether products and services are delivering expected outcomes in line with the Duty

• any evidence of poor outcomes, including whether any group of customers is receiving worse outcomes compared to another group, and an evaluation of the impact and the root cause

• an overview of the actions taken to address any risks or issues

• how the firm's future business strategy is consistent with acting to deliver good outcomes under the Duty

Some of the overarching themes and market feedback on board reporting which we are seeing include:

• greater emphasis on positive metrics: historically, firms have focused on measuring negative factors (e.g. low/no complaints, sales outside target market, early product cancellations or exits, defaults etc). Firms need to continue to shift focus to good outcomes. The FCA recently cautioned firms on over-reliance of negative factors to evidence good outcomes for customers.  We are seeing this a lot and would advise an objective review with this "lens".

• qualitative overlay: numbers alone don't tell the full story. It is important to build a narrative alongside the numbers. This helps build a holistic view to present the overall picture to senior management and the Board of the key changes which have been implemented since July 2023 to improve retail customer outcomes. It is important that all senior stakeholders can articulate examples of positive change as a result of the Duty.

• moving CD monitoring into BAU: the drive to deliver good outcomes for retail customers is not new for most firms, however there is work to do to ensure there is no disconnect between BAU MI and Consumer Duty MI. Having separate reporting runs the risk of missing useful data which informs the current view of the risks for a business.

When speaking at an industry event earlier this month, the FCA shared its expectations in terms of embedding and readiness for the board report. Key takeaways include:

• As part of BAU embedding, post 31 July 2024, the FCA will continue to conduct thematic reviews, with focus on complaints data and customer support. The FCA will also review a sample of Consumer Duty board reports from firms and will publish its findings later this year. Firms preparing their reports should therefore be prepared to share the report (and the underlying data/MI) with the FCA.

• Whilst there is no prescribed format for the board report (firms need to do what is right for them) this should be seen as a key piece of internal governance which needs to show assessment of good outcomes and actions to address risks and foreseeable harms.

• From a business strategy perspective, the board report should tell the story of the pre-implementation state, the implementation work and where the firm is now on its journey.  

• It was acknowledged that it would take time to plug gaps in data, but firms should have a clear plan in place to fill any gaps on how to measure good outcomes.

2) Closed products implementation deadline

The implementation for closed products deadline is just around the corner. Whilst many firms may be able to efficiently leverage off their learnings from implementation for open products there are some challenges which closed products present, e.g. "gone-away" customers and gaps in data with older products. Firms should be able to demonstrate proportionate steps for those products with the greatest impact and may, for example, look to re-engage with closed product customers, reminding them of the features of the products that they have.

The FCA has emphasised the need for boards to challenge the business on non-compliance with the Duty and to ensure that their firms have appropriately prepared for implementation in a recent series of Dear DEO Letters (see our Consumer Duty View Newsflash for more detail) but in short the letters focussed on 5 priority areas:

• The need to close gaps in firms' customer data;

• Appropriate treatment of vulnerable customers;

• Identification of disengaged customers and taking action in relation to them;

• Providing fair value; and

• Delivering good outcomes for consumers where firms have vested contractual rights.

The FCA also provided "action prompts" for each priority area which it expects firms to take.

3) Looking towards the General Election - what would a change in government mean for the Duty and FCA's approach to supervision?

The upcoming General Election brings with it the possibility of further regulatory change. The Labour Party have committed to streamlining financial regulations, including by removing rules which are now superseded by the Consumer Duty. This may reduce compliance costs and avoid duplicated efforts by firms subject to the Duty, although it remains to be seen if it will make the Duty any more powerful than it already it is. Consumer protection more generally would be a strong focus of a Labour government, alongside financial inclusion. This is evident in Labour's Financing Growth publication, which sets out the party's plan for financial services.

Labour's plans are complementary to existing FCA plans for regulatory simplification. Labour's proposed streamlining process is in line with the FCA's goal of consolidating the FCA handbook post-Brexit to incorporate on-shored retained EU law, reduce complexity and minimise differences in standards. This is part of a move towards more outcomes-focussed regulation. Findings on the review are expected in late 2024 and may inform the approach of any new government in place post-election. 

Consequently, regardless of the outcome of the election, we expect the Duty to remain high on the agenda in 2024 and 2025. We are likely to see more active supervision of the Duty in the coming months, particularly after the board reports, due 31 July 2024, are submitted. From an enforcement perspective, firms may be reassured that, for now, the FCA will aim to focus enforcement on the "most egregious harms" and will take a "proportionate approach" rather than looking to enforce every technical breach of the Duty.

4) FCA focuses in on domestic financial abuse

The FCA has encouraged firms to be aware of how domestic financial control and coercion links into their requirement to implement the Consumer Duty. Financial abuse is worryingly frequent in the UK, with over 9 million people experiencing it, including an average of 1 in 6 women. It consists of any form of control, sabotage and exploitation of finances by a partner, and can affect people of all incomes, sexes and age groups. For example, it may involve the takeover of bank accounts or loans being taken out in the victim's name. Given that this abuse can be effected through financial products and services, the FCA wants to ensure financial services providers are cognizant of the risks and can act to reduce foreseeable harm to their consumers. This is key to the FCA's role in protecting consumers, especially where financial difficulties can increase consumers' vulnerability and endanger their financial futures.

The need for firms to take action on financial abuse is even more apparent in light of the Consumer Duty. Customers' needs have to be prioritised under the Duty, with high standards of consumer protection required. This involves minimising avoidable harm, for example by handling debt repayments appropriately in response to a victim's report of abuse and considering how the victim's record reflects this debt.

The FCA has therefore been working with firms, trade associations and the government to combat such abuse. Several initiatives have been implemented, including banks providing safe spaces for victims to ask for assistance, working with specialist organisations to help victims regain power over their accounts, and offering 'flee funds', as well as industry bodies such as UK Finance working to heighten understanding of the issues. This is especially important given that victims are less likely to speak to the police about their experiences, instead sharing information with their bank or family and friends.

However, the FCA is keen for firms to do more and outlines further suggestions in their Guidance for Treatment of Customers in Vulnerable Circumstances. Similar points were also put forward by the FCA in their letter to consumer lenders in March of this year.

As many of you are aware Penny Miller, our global head of FS regulatory, is a trustee of Surviving Economic Abuse, a charity which works with many financial services firms to support implementation of the Consumer Duty and wider support in this space.

5) FCA Consumer Duty Multi Firm Data Collection - Consumer Support survey

Following the vulnerability survey flagged in our May edition (for which responses were due on 14 May and the FCA will share findings by the end of 2024) - the FCA have issued another survey to firms as part of a cross-sector review, this time focusing on levels of customer support provided. Again, the FCA has cast a wide net this time, issuing the survey to a range of firms with limited direct contact with retail customers. Responses to this survey were due back on 5 June 2024.

The FCA's review will take place in two stages. In Stage 1, the FCA has asked for quantitative data on firms' Consumer Support channels, such as telephony, email, web chat and AI chat bot. Stage 2 will follow later in 2024.

In its survey, firms are reminded that consumer harm can arise due to failings in support firms provide such as:

• Consistently poor or excessively slow services

• Channels of support that do not meet the needs of retail customers, including those dealing with non-standard issues and vulnerable customers

• Under resourced helplines

• Systems that are difficult to navigate

• Badly designed websites that make it difficult for customers to find information, and

• Uncertainty around how or where to access support or poor hand-off processes, including where third parties are involved in the provision of services.

6) FCA research on trading apps

Other services the FCA have been considering in relation to the practical implementation of the Consumer Duty include trading apps. Trading app platforms had already been warned to review their game-like designs pre-implementation of the Duty. More recently, the regulator conducted an online experiment with 9,000 consumers to ascertain the impact trading app engagement practices have on consumer behaviour. Practices such as prize draws, push notifications and other game-like features were found to increase risks taken and the frequency of trades made.

This raises concerns regarding whether consumers needs are truly being met by such apps. Whilst the apps can increase access for retail investors, the increased risk taking is not necessarily in line with consumers' goals. 2.47 million trading app accounts have been created in the past 3 years, across only 4 firms - meaning their potential impact on consumers is great. It is also concerning that larger effects of the engagement practices were found in more vulnerable subgroups, such as consumers with low financial literacy, as well as other subgroups including young people aged 18-34 years and women. The FCA's research in this area of digital engagement practices builds on their recent crackdown on 'finfluencing', recognising the risk posed to consumers through social media-based financial promotions.