Importance of Diligence and Preparation in Consumer Duty

Two recent ‘Dear CEO’ letters from the Financial Conduct Authority (FCA), one targeted at wealth management & stockbroking firms and the other focused on payment firms, appear to be geared at ensuring firms have already adequately implemented and embedded the Consumer Duty (the Duty) within, but also that firms are sufficiently preparing for the annual report to the Board, due no later than 31 July 2024.

Read together, the ‘Dear CEO’ letters strongly emphasise firms’ need to review and monitor their compliance with the Duty, especially the cross-cutting rules and the four outcomes. This underpins the importance of establishing strong systems for monitoring and management information data. Additionally, the letters highlight the critical need for effective utilisation and processing of this data to make informed decisions and to ensure it contributes to the outcomes, ultimately leading to improved results for consumers. Consequently, the board through the annual report will seek assurances of the firm’s compliance with the Duty backed by strong quantitative and qualitative data and analysis.

Should your firm require assistance in meeting the expectations set out by the Duty or any of the areas covered within this post please do not hesitate to contact us

Wealth management and stockbroking firms –

The letter outlines the FCA’s assessment of key harms within the sectors and updates supervisory priorities. It sets specific expectations for firms: first, prevent financial crime and second, to ensure firms meet the outcomes of the Duty.

The main points addressed by the FCA:

1. Ensuring alignment of products and services with consumer needs: Firms must consider the financial needs and objectives of their target market, ensuring products and services align with those needs, risk profiles and circumstances. This includes having appropriate arrangements in place to identify, monitor and tailor services to the needs of those identified as having vulnerable characteristics.
2. Consumer understanding and product suitability: Firms are expected to ensure consumers fully understand all aspects of the investment products and services they are sold. This includes not misleading consumers about the risks of unsuitable portfolios and avoiding the promotion of overly complex products that are not aligned with the client’s risk profile. Firms should identify all cohorts within their target market and if the product and services are suitable by all such groups as well as understood. Product information and how services are marketed and delivered should be well-thought-out with all consumers in mind, to ensure consumers fully understand the products and/or services they are signing up for as well as using.
3. Transparency and fair value: The FCA has stressed the importance of clear, fair, and non-misleading communications, as well as taking steps to test consumer understanding. Moreover, firms should be regularly assessing the overall cost and value for money of their products and services, making changes when poor value is identified. In May 2023, the FCA released their findings of a review of 14 firms’ fair value assessments. In summary, they found four key areas firms should further consider:

• • collecting and monitoring evidence that demonstrates that products and services represent fair value;
  • establishing clear oversight and accountability of the necessary remedial actions where they do not provide fair value;
  • ensuring sufficient analysis of the distribution of outcomes across groups of consumers in the target market, beyond broad averages, to demonstrate how each group receives fair value; and
  • summarising and presenting fair value assessments in a way that enables decision-makers to robustly discuss whether the product or service represents fair value, such as by being clear on any limitations in the analysis or evidence.

4. Risk of upgrading consumer classifications: Given the loss of protections involved, firms should not re-categorise consumers from retail to professional status unless supported by robust systems and controls.
5. Justification of complex investments: Firms must fully justify any complex and/or unregulated investments they offer, ensuring they are suitable or appropriate for the consumer.
6. Loss of protections: Firms should ensure consumers understand if/where any of protections afforded by Financial Ombudsman or Financial Services Compensation Scheme are limited or removed in relation to their investments.

The FCA expects wealth management and stockbroking firms to conduct ongoing surveillance for actual and potential harms by maintaining regular monitoring and management information systems. This vigilance is essential to consistently deliver good outcomes to retail clients.

Payment firms –

The letter is a reminder of the necessity of the implementation of the Duty, the timeline, key elements and how it specifically applies to payment firms. Authorised firms within the payments portfolio and those registered under the Payments Services Regulations 2017 (PSRs) and the Electronic Money Regulations 2011  including Payment Institutions (PIs), Electronic Money Institutions (EMIs) and Registered Account Information Service Providers should reflect on the FCA’s feedback.

1. Products and Services: Among other things, firms are expected to:
   • ensure products and services are fit for the target market’s needs and they function as it was intended
   • identify and mitigate potential harms to vulnerable customer groups
   • exercise caution in cross-selling to avoid offering unsuitable products to a broader audience
   • share and receive crucial information within the product distribution chain to comply with the Duty
   • use data and management information to review and adjust offerings, ensuring firms are able to meet ongoing customer needs and promote positive outcomes.

 

The letter also stressed Strong Customer Authentication (SCA), which is vital for firms as they are required to design products or services that cater to the needs and objectives of their target market. Consequently, payment service providers should create SCA solutions that work for all cohorts within the target market, especially individuals with characteristics of vulnerability. This may require firms to offer multiple authentication options, including alternatives that do not depend on mobile phones, to serve customers without access to or preference for mobile phone usage, or those in areas lacking mobile reception.

2. Price and value: Firms should assess if their fee structures, such as redemption fees or minimum charges for e-money account top-ups, are fair and just. It’s crucial for firms to evaluate if their pricing models are suitable for the customer groups engaging with their products. Firms which utilise agents or distributors to sell products must review the fees charged to consumers to ensure they align with their fair value assessments.
3. Consumer understanding: Where relevant, it’s important for firms to distinguish the protections available to customers across various products and services. For instance, it should be emphasised that PIs and EMIs are not banks, and therefore, customer funds are secured through safeguarding measures instead of the Financial Services Compensation Scheme. Where both regulated and unregulated products are offered, firms must transparently inform consumers about which products fall under regulation and which do not. In addition, they should clearly outline the consumer protections associated with each specific product. Firms should use language that is clear and concise, which consumers can easily understand, this is particularly relevant when firms involved in open banking need customers to agree to share their payment account information or when explaining which services they offer. This will ensure customers grasp what exactly they are agreeing to and enable them to make choices based on a solid understanding of their situation.
4. Consumer support: If firms are purely operating online, consideration needs to be given to the channels for consumers to contact the firm, especially in times when firms are experiencing difficulties such as internet outage or to be able to speak to a member of staff to report cases of fraud on their account.

Account freezing and fraud reports: The FCA also highlighted concerns with payment firms having insufficient financial crime controls, thereby increasing the risk of firms and their clients being exploited by criminals. Specifically, the FCA observed that too many accounts were being frozen upon a financial crime suspicion being triggered. Whilst this practice is reasonable, the FCA noted that a disproportionate number of accounts were being frozen for too long and without adequate justification. Firms are reminded of their obligations under regulation 71 of the PSRs and the related guidance in the FCA’s Approach Document, focusing on improving the frequency, duration, and communication of account freezes. This includes enhancing initial customer onboarding, KYC procedures and transaction monitoring to reduce unnecessary freezes, conducting quicker investigations, and ensuring transparent communication within legal limits.