Consumer Duty Q&A
Now deep into the implementation stage of the FCA Consumer duty timeline, many firms have an understanding of the requirements and are starting to take steps to create the relevant reviews and processes. We thought it would be useful to set out some of the questions we have been asked in relation to the Consumer duty.
This Q&A article explores various topics such as:
What key changes businesses should make to be compliant with the consumer duty.
What content should be included in the product approval process.
Details about the role of the consumer champion.
Changes to senior managers statements of responsibilities.
What are the key changes a financial services business should make for the consumer duty?
The consumer duty sets a new standard of care that FCA Authorised financial services businesses must apply to their customers when designing and distributing products and services. The FCA consumer duty is far reaching and requires analysis of the systems, controls and processes within firm. The FCA requires firms to take steps to comply with the cross-cutting rules including acting in good faith, taking steps to identify and avoid harm which could be caused by products or services and ensure they are designed in a way which allows customers to pursue their financial objectives, such as switching if the customer’s circumstances change.
The method by which firms can ensure compliance with the cross-cutting rules can be found in the four outcomes where firms are required to improve product governance through a formal approval process and product reviews as well as value assessments. Each of these reviews are an opportunity to evaluate the firm’s compliance with each cross-cutting rule as well as ensuring communication is understandable and the customer service provision is to an acceptable standard.
This can be best summarised by the following statement from the FCA: “Our rules require firms to consider the needs, characteristics and objectives of their customers – including those with characteristics of vulnerability – and how they behave, at every stage of the customer journey. As well as acting to deliver good customer outcomes, firms will need to understand and evidence whether those outcomes are being met.” [FCA PS 22/9] https://www.fca.org.uk/publication/policy/ps22-9.pdf
Product Approval Process: What should the content be?
The FCA has been fairly prescriptive in PRIN 2A, setting out some of the content which must be reviewed as part of product approvals. These include the characteristics of the target market, risks inherent within the target market and explanation as to how the product or sales process seeks to avoid such risks and benefits the target customer. Equally, vulnerabilities within the target market must be reviewed and mitigated in the same way. A full list of areas to be assessed can be found in PRIN 2A, found in https://www.fca.org.uk/publication/policy/ps22-9.pdf.
Product Approval Process: When do we use it?
The Product Approval Process should be used whenever your firm intends to bring a new financial services product or service to the market or where a significant change to a current product or service is proposed.
You keep referencing PRIN 2A but I can’t find it
This is because the rules have not been brought into the FCA Handbook yet, currently PRIN 2 sets out the 11 principles for businesses [soon to be 12] and a new PRIN 2A will be inserted beneath. However, you can see the content in the final pages of the FCA’s policy statement. https://www.fca.org.uk/publication/policy/ps22-9.pdf or use the FCA Handbook Timeline feature.
What is the role of the consumer champion?
A member of the governing body needs to be designated the consumer champion, ideally this will be a NED. Think of the consumer champion as similar to any other role a NED would take, as someone not motivated by profitability, they should oversee the outcomes of the FCA consumer duty has on the culture of the firm, ensuring decisions are made with the customer and consumer duty in mind. Their role is largely to ensure the business is measuring the impact the consumer duty has had on customer service levels, encouraging action to be taken where the firm falls short of expectations.
What changes to senior managers statements of responsibilities or our responsibilities map are needed?
Certainly the senior manager designated as the consumer champion in larger businesses will need to have the role added to their statement of responsibilities. Please be aware that this is not a new senior manager function and therefore a simple change to the statement and responsibilities map will be sufficient. We would expect there to be a significant impact on the firm’s governance framework, as firms tighten their product governance. As such product governance arrangements must be reflected in the governance section of the responsibilities map.
In SMEs and large firms, the senior leadership team are expected to review the firm’s performance in respect of the consumer duty, these are set out in PRIN 2A.8 and should be added to the responsibilities map as well as a senior manager’s statement of responsibilities. A different senior manager to the consumer champion may also be given responsibility for implementation and/or maintaining the consumer duty.
SMCR changes; any we should be aware of?
There will be a change to the Conduct Rules. A new individual conduct rule 6 will be added requiring all conduct rules staff to ‘act to deliver good outcomes for retail customers’ where the activities of the firm fall within the scope of the consumer duty.
This individual conduct rule applies to the extent that it is reasonable and proportionate: the scope of a person’s job and their seniority may affect the scope of their obligations under the rule. This simply means that the more senior a person is and the more relevant their role is to the consumer duty, the more the regulator is likely to expect their input and oversight where they are responsible for delivering good outcomes for customers.
Product Review: What is the content?
This is set out in PRIN 2A.3. Or see https://www.fca.org.uk/publication/policy/ps22-9.pdf
Are debt collection agencies manufacturers or distributors?
Debt collection agencies are manufacturers under the FCA’s definition. Which is:
Manufacturer “a firm which creates, develops, designs, issues, operates or underwrites a product” (or did so historically for a closed product or an existing product)”
Product “any specified investment, or the provision of a service in the course of carrying on a regulated activity, or an ancillary activity, distributed or to be distributed to retail customers and which, unless the context requires otherwise, is not intended to relate to an individual contract”
We can see that a manufacturer under the consumer duty is a firm that [amongst other things] operates a product. Then we consult the definition of a product, which presents an interesting point when it states, ‘the provision of a service in the course of carrying on a regulated activity.’ It is not a push to identify debt collection as the provision of a service or, actually, an ancillary activity for that matter. Additionally, it is also one which is ‘in the course of carrying on a regulated activity.’ Therefore, joining the two definitions together, debt collection meets the definition of a product which therefore means debt collection agencies and buyers meet the definition of a manufacturer.
What communications changes are needed?
The new consumer duty places a higher burden on firms to ensure communications are understandable rather than ‘clear, fair and not misleading’ as was the previous standard set out in the seventh principle. Therefore you need to apply some subjectivity to your communications, opposed to them simply being objectively clear, etc. The mechanism which can be used to achieve this is the product review. This is where you will identify the characteristics of your target market and identify ways to adapt your product or service to that target market, including communications which should be written so they are understandable for that specific target market. Testing may also be used to evidence compliance in this regard.
What about training?
A key requirement is that firms improve their customer service provision. Training should be focused on areas of weakness within individual firms as well as key risks such as vulnerable customers, financial difficulties and of course, the consumer duty itself.