Consumer Duty View - October 2024

Welcome to the October edition of Consumer Duty View!

In our September edition, we reported on the key findings from the Thematic Review TR24/2 on Product Oversight and Governance in the insurance sector which the FCA released in August 2024.

See our Insights article on this publication here.

In summary, the FCA is clearly unhappy with what they consider to be a lack of progress in embedding appropriate product oversight and governance within insurers and intermediaries.

While this TR is only directly applicable to the insurance sector, the FCA were clear in their 31 July 2024 webinar, that the findings of the TR should be considered by all those subject to the Consumer Duty as the insurance product governance rules (PROD 4) are closely aligned to the price and value and product and services outcomes. One of the key findings from the TR was that firms were not appropriately ensuring and evidencing that their products provide fair value, in particular that they were not getting actual data on distribution fees from distributors. You may remember the FCA’s January 2023 podcast on price and value, where the FCA stated that a manufacturer must be able to demonstrate that their product, plus any associated charges, be it commissions or fees that advisors might levy, ultimately provides fair value for the target market. This point was much debated between the FCA and various industry groups at the time, with many questioning how feasible it is for manufacturers to actually gather this information and take account of it in their value assessments.

We would suggest that, in light of the reiteration of this point in the TR, firms look at their value assessments and MI and the due diligence done on distributors and consider their approach.

1. Price and Value Outcome: Good and Poor Practice Update

On 18 September 2024, a little over a year since the Consumer Duty came into force, the FCA released its insights, specifically in relation to the price and value outcome. We have prepared a detailed publication you can read or listen to here. In this latest feedback, a clear message emerges: fair value extends beyond just price.

The FCA emphasizes the importance of firms applying judgement to ensure their products and services offer fair value to customers. This involves a holistic consideration of Consumer Duty outcomes, with an expectation that fair value assessments (FVAs) will evolve and improve over time.

Key takeaways from the FCA include the significance of identifying specific target markets to better assess value alignment, the caution against grouping products with varying fee structures and features for FVAs, and the utility of examining cross-subsidies to identify potential risks of consumers not receiving fair value.

The FCA advocates for evidence-based FVAs, urging a balanced approach in gathering evidence about a product's costs and benefits. Should an FVA reveal a risk of consumers not obtaining fair value, firms are expected to promptly identify, undertake, and monitor corrective actions. These assessments must be detailed and evidence-based, enabling senior-level challenge within firms.

Monitoring will be crucial to understand the differences in the ways customers use a product.

The FCA's insights are drawn from supervisory activities across cash savings, Guaranteed Asset Protection (GAP) Insurance, and platform cash.

While small firms can take a reasonable approach, the FCA is clear that they will take action where firms are outliers on price and value or where they have failed to take into account FCA’s feedback.

Firms are encouraged to review their FVAs against the FCA's examples of good and poor practices and assess the need for improvements in their FVAs. Documenting this review is equally important.

The S&S FVA template will be updated to reflect this guidance – get in touch with us if you have any questions or need help to carry out this review.

2. FCA publishes update on cash savings market and fair value

In their latest update on the cash savings market, published in September 2024, the FCA acknowledges improvements in the rates offered to savers and in the frequency and timing of communications from firms to their customers.

However, the challenge of assessing value remains, with larger firms typically offering below-average rates for easy access savings products. The FCA identifies practices posing risks to delivering good customer outcomes, including the creation of multiple product tranches offering higher rates where new customers get a higher interest rate than existing customers, the use of annually renewable bonus rates on savings products without effective communication, regressive interest rate tiering, and the limited effectiveness of generic customer communications.

Read our publication here for further information on FCA’s findings.

3. UK Financial Ombudsman Service (FOS) speech on firms’ approach to responding to complaints

The Chief Executive of UK FOS covered, in a recent speech on 20 September 2024, the key steps that firms could be taking to improve how they respond to complaints, particularly in light of the Consumer Duty. Referring to the recent quarterly complaints data on financial products and services for Q1 2024/2025, the FOS noted that it continues to see cases where customer experience has fallen far short of what it should have been, and where firms should have done more to support their customer and tailored their approach to understand why a problem arose in the first place.

In particular, the following key steps that firms could be taking to improve how they respond to complaints were highlighted:

• Ensure that customer-facing staff are able to identify circumstances and characteristics of vulnerability in customers, and follow best practice to support these customers;
• Provide sufficient training to staff, and allow staff sufficient time to listen, empathise and ask consumers what support they need;
• Design policies and practices focusing on finding solutions to help customers, rather than focusing on what the firm is unable to do for them;
• Offer greater forbearance to consumers in financial difficulty and signpost them towards relevant sources of support; and
• Putting customers’ needs first when developing and designing each stage of the firm’s digital transformation.

4. Call for Input

On 29 July 2024, the FCA published a call for input (CFI) seeking to identify rules in the FCA handbook that, due to overlap with the Consumer Duty, can be removed or simplified.

The scope of this call for input is broad; it invites feedback not just on areas of overlap, but also on the FCA’s wider retail conduct rules. However, the FCA also note that it is not an invitation to provide comments on the Consumer Duty itself.

We have been engaging with clients on the CFI and the initiative has received mixed feedback from the industry. While the move towards regulatory simplification is welcomed, some stakeholders feel the timing is premature, given the recent implementation of the Consumer Duty. Opinions on the approach vary, with some advocating for a comprehensive overhaul of the FCA handbook and specific sourcebooks, while others favour a more high-level response.

Some areas which have come up as common themes where firms may make the case for simplification or removal are:

• COBS 4 - fair, clear and not misleading requirements;
• COBS 6 - costs and charges disclosures;
• COBS 3 - client categorisation – in particular the elective professional opt up and international alignment with EU and Switzerland;
• COLL - price and value requirements.

Firms, experts, industry advisers and other bodies are able to provide responses before the deadline this week on 31 October.

5. A second read-across review - Payments Consumer Duty multi-firm review

Following the thematic review of good and poor outcomes monitoring under the Consumer Duty in the insurance sector included in the September Consumer Duty View, the FCA has also published their findings from a review of the implementation of Consumer Duty in payments firms.

The FCA expect all relevant firms to consider their position against both good and poor practices identified in the review and make the necessary changes. See our Insight Article or if you’d like to discuss then please get in touch with Oliver Irons (Partner) and Matt Handfield (Consultant).

6. FCA sets out steps to improve access to bank accounts

The FCA has published a new report regarding payment account access and closures, a follow-up from their previous 2023 report on the same topic.

Payment account providers have been asked to review their methods and approach to account denials and closures, particularly with regard to vulnerable customers who may struggle to gain access to a bank account. Additionally, where accounts are closed or denied, the FCA has noted that payment account providers must act in accordance with the Consumer Duty, meaning they must communicate in a way that is clear and helpful for customers.

The FCA’s Consumer Panel has released a call for action calling on the FCA to take action to ensure firms improve visibility, and promote the benefits of, Basic Bank Accounts (BBAs) in order to deliver good outcomes under the Consumer Duty: Press Release here. It has published a Summary Report with its research conclusions but essentially it has found that consumers need more information about BBAs and firms need to test consumers’ understanding of non-traditional payment methods. It also recommends that the FCA carried out a mystery shopping exercise to test firms’ information on this point.

7. Reforms to financial services retail-disclosure requirements

The Government and the FCA announced in a recent statement their plans to reform the UK retail disclosure rules. This will involve replacing the Packaged Retail and Insurance-based Investment Products Regulation (PRIIPS) with a new framework for Consumer Composite Investments (CCIs).

The new CCI regime will deliver more tailored and flexible rules which will address concerns across industry with current disclosure requirements, including for costs.

Investment trusts will be exempt from the current PRIIPS Regulation as an interim measure as they are intended to be included in the future UK retail disclosure framework.

The CCI regime is designed to adapt to a broad spectrum of products and investment vehicles, including investment trusts, ensuring that consumers are provided with relevant information to make educated choices among different composite consumer investment options. The CCI reforms thus ensure alignment with FCA’s Consumer Duty in ensuring that retail customers receive good outcomes.

8. FCA Portfolio letter – supervisory strategy for financial advisers and investment intermediaries

Recent weeks have brought a surge in portfolio and executive communications, notably one letter that underscores the significance of diligent monitoring and the enactment of the Consumer Duty.

Addressed to CEOs and Directors, this correspondence reaffirms the regulator's pledge to improve industry standards, with a strong emphasis on the necessity of thorough oversight and the application of the Consumer Duty.

Senior Managers will want to ensure that they are apprised of their contents and that they are taking reasonable steps to address all the relevant points.

To discover more about this letter and three additional recent communications, consider subscribing to SMCR+ View.

As always, please do get in touch if you would like to discuss.

For further details on how we can assist with your Consumer Duty implementation please view our ready to go menu of templates, services and training programmes or speak to a member of the team.