UK Consumer Duty: FCA gives more implementation feedback and some focus areas for closed books work

FCA publication: 'Implementation: good practice and areas for improvement'

The FCA has recently published 'Consumer Duty implementation: good practice and areas for improvement'. This builds on its review of firms’ implementation plans (see our Engage article) and their fair value frameworks (see our Engage article) and its previous communications. It:

• reminds firms of the consumer outcomes required by the Duty;
• sets out recent good practice to deliver these outcomes, including in response to the FCA’s supervisory work; and
• highlights areas for improvement.

Some of the FCA’s examples cite particular markets or products. It recognises that they may not apply to every scenario, but says that firms of all sizes across retail sectors will benefit from considering them.

A few examples of areas for improvement highlighted by the FCA include:

• Culture, governance and monitoring: Firms need to ensure that the focus on good customer outcomes is understood at all levels, in their strategies, leadership, and people policies. The FCA is concerned that some firms are waiting to see if the FCA will intervene to address an issue, rather than deal with it.
• Consumers in vulnerable circumstances: The FCA is concerned that firms are not thinking widely enough on vulnerability. It cites the investment market as a particular area of concern and reminds firms of its November 2023 Dear CEO letter to wealth and stockbroking firms which pointed out that 50% of people will be classed as vulnerable at some point.
• Products and services: Information needs to be shared more effectively across supply chains. Firms in a distribution chain should consider what information they need from each other, with the joint goal of delivering good customer outcomes.
• Price and value: The FCA is concerned that some firms fail to show that products offer fair value to retail customers. for example, the FCA has identified instances where firms aren’t able to justify what benefits they provide for the remuneration they receive or where firms charge customers for services they aren’t benefitting from.
• Consumer understanding: Firms that approve financial promotions, including those approving promotions for qualifying cryptoassets, need to ensure that they are considering the Duty and its requirements when approving financial promotions.
• Consumer support: Firms must ensure that staff are trained to an appropriate level so that, where necessary, they can have complex conversations with customers to support good outcomes for their customers. For example, the FCA is concerned that some firms don’t take time to understand customer circumstances where customers are in financial difficulty and so customers don’t receive appropriate forbearance. The FCA is also concerned about ‘gamification’ on online trading platforms.

Consumer Duty firm survey results – Autumn 2023

The FCA has also published 'Consumer Duty firm survey – Autumn 2023' which sets out the results of a second Ipsos survey of firms on Consumer Duty implementation.

The results of firms surveyed indicated improvements since the first survey was conducted in Spring 2023. In particular, the proportion of firms surveyed who reported that they had completed the required steps to implement the Consumer Duty had increased significantly.

While this is positive, firms will need to continue embedding the Duty into their processes and communications to ensure they are ready for, and can demonstrate their compliance by, the full implementation deadline on 31 July 2024.

The FCA has warned that where it sees shortcomings, it will take an ‘assertive and active approach’, including thematic work (followed up by sector specific interventions where appropriate), multi-firm work, and firm-specific interventions where it has concerns about the implementation of the Duty and the customer outcomes being delivered.

FCA speech: 'Consumer Duty - the art of the possible in a year'

Sheldon Mills, FCA Executive Director, Consumers and Competition, also delivered a related speech on price and value and on preparing for the Duty to apply to closed products on 31 July 2024. Some of the key points included: 

On price and value:

• Many of the fair value assessments that the FCA has seen are not based on solid data or other credible evidence to justify the products’ value to retail customers. It’s concerned that some firms are just relying on benchmarking against the market rather than the real value derived by customers.
• The FCA expects firms to consider all aspects of fair value at the product level and the impact on different consumers. The FCA will be scrutinising board reports as evidence of the steps firms are taking to drive good outcomes. 

On closed products:

• Where a firm can’t fill gaps in its records, it should take additional steps to mitigate the risk of harm to consumers – for example through enhanced outcomes testing for these customers.
• On fair value in closed products, firms can take into account the costs and benefits that were incurred before the Duty came into force and the FCA will not judge firms with the benefit of hindsight. However, while the FCA doesn’t expect firms to re-price products or to repeat underwriting in every case where conditions have changed, such as life expectancy or economic conditions have changed, it has said that if a firm could have reasonably known  its assumptions were significantly wrong at the time a product was sold, it will consider if the firm complied with rules in place at that time.
• On ‘gone-aways’, the FCA recognises that some customers may not want to be contacted or be engaged with a product. However, the FCA expects firms to do more to communicate effectively with customers in order to avoid customer detriment, such as customers paying for products they don’t need or want.
• The FCA has flagged closed book life-time mortgages as a product area where it expects more customers may develop characteristics of vulnerability over the life cycle of the product. Firms should consider what extra support they can offer to vulnerable customers particularly where products and services are more complicated.
• The FCA expects sectors that will be impacted more by the closed products and services deadline to include life insurance, funeral plans, consumer investments, consumer finance and retail banking. It noted that some firms are withdrawing closed products and migrating customers to alternative open products. Where this occurs, firms need to consider the impact this will have on consumer outcomes and make sure they are not causing foreseeable harm.

At all times, the FCA expects firms to take a risk-based approach to prioritisation and prioritise products or services which are likely to cause the greatest harm. The FCA considers that board reports will be key to this and will be used to assess and evidence how firms have provided good consumer outcomes under the Duty.

Next steps

Firms should consider the FCA’s latest findings on their Consumer Duty implementation and continue to make improvements in line with good practice, addressing any identified gaps. The FCA points out that its findings may be useful for firms when considering what changes they need to make to meet the 31 July 2024 implementation deadline for closed products and services (see our recent Engage article 'UK Consumer Duty: Closed products and board reports are key focus areas ahead of July 2024 deadline'). The FCA reminds firms that it will act where it identifies firms that are delivering poor customer outcomes.

In his speech, Sheldon Mills states that firms can expect further communication from the FCA in the weeks ahead targeting closed products.

Firms' first annual assessments on complying with the Duty are also due by 31 July 2024. ​

Our Consumer Duty hub provides a number of useful resources to help firms as the second major implementation milestone approaches.

If you would like to discuss any aspect of the Consumer Duty, including the upcoming closed books review and annual board report deadlines, please get in touch with one of the people listed above or your usual Hogan Lovells contact.

Authored by Stephen Timbrell and Virginia Montgomery.