On 31 July last year, new FCA rules came into force for financial services firms, designed to improve consumers’ understanding of communications, to ensure products and services meet consumers’ needs and offer fair value, and to make sure customers get the support they need, when they need it. 

In June, the FCA acknowledged that many firms believed they were on track to implement the Consumer Duty and to meet the higher standards of consumer protection. Progress has undoubtedly been made but challenges to meeting Consumer Duty requirements have emerged.

Challenge 1: Fair value assessments

Across financial services, the biggest change for most firms was to perform fair value assessments that demonstrate a reasonable relationship between price and value. The assessment must consider the overall costs and both the financial and non-financial benefits of products and services offered, including subjective factors such as ‘peace of mind’.

The price across comparable products offered by peers is relevant but the rules do not require firms to charge all customers the same amount. When benchmarking, it’s worth bearing in mind that all firms across the market will be assessing the value of their products and that this may result in pricing changes. Regular reviews will help keep benchmarking accurate.

Measurement of some financial benefits and subjective factors, such as ease of access, brand and the global reach of services, is not easy. Firms need to consider value in the round and evidence their rationale.

Firms must also assess how different customer cohorts use their products and services and how this impacts the overall value the customers receive. The performance and value of individual products is important, and data must be granular enough to assess differences that may affect value, such as distribution arrangements. 

The link between pricing and profit needs to be considered alongside other factors. There may be instances where firms are not running at a profit and yet are still not providing fair value to customers. 

Challenge 2: Review of communications

The communications review process is an opportunity to create a consistent tone and develop a single view of all communications. However, the sheer volume of individual communications has made it a significant undertaking for many firms. The breadth of communication types has also highlighted inconsistencies in the way that communications are stored, quality checked and reviewed.

An effective review of communications starts with a clearly defined target market. Firms must look at the characteristics of intended customers, including those with vulnerabilities. Characteristics such as literacy and numeracy are also relevant. 

Figures from the National Literacy Trust indicate that one in seven adults have literacy skills at or below those expected of an 11‑year‑old. Meanwhile, the FCA’s Financial Lives Survey identified that over a third of adults in the UK have poor or low levels of numeracy relative to financial concepts. 

Challenge 3: Setting outcomes, MI and dashboards

The FCA expects firms to identify risks to good customer outcomes and understand the root causes of poor outcomes. In preparation for the Duty, most firms completed customer journey mapping to help them identify customer experience risks and potential areas of ‘friction’. 

Typical metrics used to gauge consumer outcomes could include sales data, customer ‘use’ data specific to the product type, including default rates and application of fees and charges, complaints data, and customer and staff feedback.

Certainly, the identification of appropriate data sources, particularly for firms using multiple platforms and distribution channels, has been a challenge; ongoing technology investment to enable management information (MI) development will be key. Similarly, determining what kind of MI should be used, the level of detail required, and how it should filter up or down through the business have all been key considerations.

Board engagement

The board (or equivalent body) of a firm needs to make sure the interests of customers are embedded within the culture of the organisation, and should hold senior management to account where inadequacies are identified.

The internal compliance, risk and internal audit functions provide crucial advice and assurance, which should feed into the board’s oversight of customer outcomes. The Consumer Duty champion plays a key role in ensuring the Duty is being discussed regularly. The roles and expectations of each of these will continue to evolve, and training and insight sharing will remain key.

The way ahead: 2024 priorities

Despite the pressure to comply by 31 July 2023, an FCA survey of firms published a month before the deadline found that 23% of firms would still have work to do after it had passed. Even for those on top of the changes, there is further work on the horizon. 

Activity in 2024 should focus on several areas. Firstly, firms should complete residual ‘day 2’ activity for open products including final reviews of lower-priority products and the implementation of identified uplifts. 

Secondly, closed book products need to be compliant with the Duty by July 2024. Product profiling and prioritisation will need to be updated to be appropriate for closed book, and treatment strategies adjusted to consider forward-looking repair and backward-looking rectification.

The board’s annual assessment, also due in July, will need to draw on relevant MI to determine whether expected outcomes are being delivered, whether there are risks to those outcomes being delivered and whether additional action is required, and an assessment will need to be made of whether future business strategy is consistent with delivering good outcomes.

Finally, firms should ensure that they have properly embedded ‘day 1’ activity, bearing in mind the substantial changes to firms’ MI and data reporting, outcomes testing procedures and target operating models. 

More generally, it’s important that the focus on the consumer is embedded into the culture of the organisation. The FCA has made it clear that the Consumer Duty is based on continuing improvements. In practical terms, that means senior managers should be able to prove that they are leading the cultural change by engaging with staff through internal communications and training. A firm’s purpose, values and strategy should all reflect the firm’s obligations under the Duty.

Looking ahead

The approach to compliance with the Consumer Duty is likely to evolve as new processes are embedded. No doubt the first internal audits of Consumer Duty, post implementation reviews or quality assurance work, will feed back into product governance committees and Board strategies. These activities will help to identify any areas requiring improvement. 

Success hinges on a long-term Consumer Duty strategy, identifying and assessing the strategic implications of the Consumer Duty and turning compliance with the Duty into a competitive advantage. 

A longer version of this article appeared on the ICAEW Financial Services Faculty hub. Visit the hub to find out more about ICAEW’s Financial Services Faculty and to become a member.