The implementation date of Consumer Duty is quickly approaching. Firms will need to be ready by 31st July 2023, but are firms going to be ready?
A report from Moneyhub in late 2022 inferred many firms could find them short of the deadline. It found that 38% of firms have limited knowledge of the regulation, and only 22% of companies had projects in place to meet the deadline. Encouragingly, the report also noted that 28% of companies were working on plans to meet compliance. However, this still leaves a large percentage of companies that could fail to hit the deadline.
This is likely to be the case. AI-powered transaction analytics platform Fuse recently took a deep-dive into the lending market to uncover how prepared they were. Worryingly, its report found that 55% of lenders are unprepared for the regulation. The majority of respondents focused their grievances at the UK’s Financial Conduct Authority, with 67% saying they feel unsupported by the regulator.
From the point of view of Kristian R. Andersen – co-founder of data-driven ESG software developer Position Green – firms are working on achieving compliance, but there is still work to do. Andersen said, “The Consumer Duty is still regarded as a rather tall order by many firms, and they still ponder on what the Duty really means. I’ll try to be diplomatic, yet positive: The largest firms have made the most progress, but all firms are working on it.”
So, what does the regulation require firms to do? Consumer Duty aims to ensure consumers get the communications they understand; products and services that meet their needs and offer fair value; and that they get the support they need, when they need it.
In the leadup to the implementation date, the FCA published a review on the market implementation. The regulator was happy that many firms had shown they understood and embraced the shift to delivering good outcomes for customers, as well as implemented programmes to achieve compliance. However, it was not all positive. The FCA found some firms that are behind in their planning and are at risk of meeting the deadline.
The report also found that firms need to be working with others for the distribution chain and sharing information to assist one another with the regulation. It also indicated a sense of overconfidence among firms regarding their existing processes being sufficient to show compliance with Consumer Duty. In response to this, the FCA urged firms to review the requirements of the regulation to ensure changes have been made.
Freeths financial services regulatory lawyer Daniel Seely added, “There is a risk that firms may be taking too much of a “high level” approach to the Duty and are inadvertently failing to really dig into the details and familiarise themselves with the intricacies of the new rules. Firms should, therefore, use the final three months before implementation to ensure they are familiar with the substantive content of the rules and are taking active steps to review their existing processes and products.”
Misconceptions and advice
One of the biggest misconceptions firms have had with Consumer Duty is that this regulation is just another variation of the Treating Customers Fairly (TCF) mandate. This is a regulation that ensures firms acknowledge the interests of clients and treat them fairly. Seely said, “Firms may risk forming a view that, provided their existing systems and processes are suitably consistent with TCF, then these will also suffice for the Consumer Duty without the need for further review.”
Consumer Duty goes beyond the TCF mandate in a number of ways and has its own set of specific rules, requirements, and expectations that need to be complied with. RegTech startup Aveni recently outlined four ways that Consumer Duty differs from TCF. These are: purpose, responsibility, supervision and the question asked by regulators. In terms of purpose, Aveni states that TCF was created to ensure firms have infrastructure, culture and framework to enable fair treatment of customers, whereas Consumer Duty is focused on ensuring that framework delivers on giving fair treatment.
Moving away from TCF, another misconception that firms have, is they think the regulation is about reporting and it is business as usual but with additional disclosure requirements, Andersen said. “The challenge is, if the firm has not considered how its strategies and products truly affect “good consumer outcomes” as required by the regulation, it is on the path of failing – not only when it comes to communicating properly with consumers, but also in terms of understanding the impact of its operations.”
Finally, David Withnell – Chief Risk Officer at AXA Global Healthcare – also offered a couple of misconceptions firms have with the Consumer Duty regulation. The first is that the 31st July deadline means everything is finished and it no longer requires any attention. “No, that is the date from which you must be compliant, and all firms must ensure they meet the Duty going forward. In a sense the 31st is just the start – you must live the Duty from then on.”
The second misconception Withnell has seen is a sense Consumer Duty is only important to customer facing staff. This is not the case and for the implementation to be successful, it needs to be used by teams across this business, this will ensure the customer is at the centre of all decision-making.
With the misconceptions out of the way, Withnell offered some advice to those in the process of complying. “This is something that you must engage with to meet those regulatory deadlines, but also because it is best for the consumer. Yes, there is work to do and there will be a cost, but the benefits are immense – outside pure regulatory compliance. And the best place to start? Reviewing, understanding and clearly mapping the journeys taken by your customers using members of your team who see this on a day-to-day basis. They can identify where action is required to meet the Duty because they see first-hand the problems encountered by customers.”
In a similar vein, Andersen urged firms to engage with the regulation and not just try to meet compliance and forget about the regulation. Firms should do their best to meet the requirements. “Do not treat compliance with this regulation as a box-ticking exercise. To respond to this regulation, approach your communication with the market as if you were talking to your neighbour or primary school teacher: Unless they understand your strategy, product or offering – you are not fulfilling your duty to assist your consumers in making informed decisions.”
In terms of current implementation plans, Seely urged companies to remain active and ready to change them. These plans should be under regular review and updated when needed to reflect updates and changes that are presented during their subsequent preparation work.
Seely said, “The FCA is approaching firms and asking for copies of implementation plans, and so firms need to be able to show that they are continuing to monitor these and keep them as “living” documents. This will serve to not only assist firms with keeping their attention focused on the Consumer Duty and how this impacts their business on a daily basis, but will also – critically – ensure that firms can demonstrate to the FCA their efforts to comply with the Duty, and therefore serve to reduce the risk of any adverse regulatory action being taken.”
The importance of Consumer Duty in ESG
ESG is becoming a major priority for many customers across the UK. A recent study from BNP Paribas found that the UK is home to the highest percentage of investors incorporating ESG across their whole portfolio, sitting at 30%. As consumers become more engaged with climate change, there will be an increased need for firms to be clear with consumers about their products and their impact. The Consumer Duty regulation will help ensure that firms are acknowledging their customers preferences.
Andersen stated, “Let’s concentrate on the link between the SDR (Sustainability Disclosure Requirements) and Consumer Duty. Sustainability topics such as climate change and the loss of biodiversity are likely to be affected by, and in the longer term also affect, most companies, investment firms, and ultimately “good consumer outcomes”. It is vital to get the facts on the table, in order for us all to make informed decisions when investing or buying: Our choices do influence the pace of greening our economy, which is a prerequisite for long term good consumer outcomes.”
Another area of ESG that Consumer Duty supports is helping vulnerable customers have better access to financial support. Rather than being ignored, the regulation ensures that the specific needs of these consumers are taken into account, as well as making certain the customers are fully aware of the products and the benefits or risks of a product.
Neil Taylor – the founder of language consultancy Schwa – said, “The ’consumer understanding’ outcome talks about vulnerable customers, but at any one point you could class half of us as vulnerable. There are more obvious types of vulnerability, like disability, but in our research, being stressed, or grieving – even just having kids! – all made it less likely that people understood comms from financial firms. And the stuff you do to help vulnerable customers understand things helps everyone understand them.”
He highlighted that 24% of those with disabilities believe their bank does not clearly communicate with them. Further to this, Schwa’s research found that those with disabilities are twice as likely to make a mistake with their finances because they didn’t understand the wording. On top of this, financial jargon also presents problems for vulnerable customers, with 55% of parents to children with disabilities having opted into a financial service they did not need because they misunderstood the terms. This figure is three-times higher than parents to children without disabilities.
Seely concluded, “Whilst the Consumer Duty is a relatively fluid regime which firms need to monitor on a regular basis, it is important for firms to note that the FCA expects them to be “ready to go” come the implementation date. As this date grows closer, firms should ensure they are consulting with their legal advisers to review and advise on the current shape of their implementation plans, as well as their overall preparations for the Consumer Duty, to try and ensure that any final operational “gaps” are identified and addressed in good time before the new rules go live.”
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