Consumer Duty: final notice

05 July 2023

The FCA’s long awaited Consumer Duty takes effect for open products and services on 31 July 2023. In this short Q&A, we consider the enforcement risk of this new regulatory change and whether there is anything firms can be doing, in these final weeks and thereafter, to mitigate their risk.

When will the FCA begin its Consumer Duty supervisory and enforcement action?

The FCA has said it will “take robust action where [it] see[s] firms’ failure to implement the Duty causing actual or potential harm to consumers. This could include holding senior managers to account where they have failed to act to implement the Duty and prevent such harm.” This sort of statement by the FCA is not unusual and it does not mean that referrals for enforcement will begin promptly on 1 August 2023.

Nevertheless, there are some signs, in our view, that the FCA may act more swiftly, and take a stronger approach, than it has before on domestic driven, regulatory change. There are several relevant factors as outlined below. 

  • There is a tough economic backdrop with households increasingly struggling to manage their finances. This will heighten the focus on firms in the mortgage market, but not only there. As FCA has said in relation to the investment and advisory market, the hazards have grown. The FCA data published late last year showed an increase in adults now holding high risk investments, up to £5.7m, and a 47% increase in reported investment fraud losses in financial year 2021/22 compared to 2020/21, up to £915m. 
  • The genesis of the Consumer Duty was, to a degree, the lobbying of consumer groups and other stakeholders to address perceived levels of consumer harm across sectors. The base case was that consumer harm in financial services is unacceptably high, and there is a need for change to improve consumer outcomes. The Consumer Duty does not provide consumers with a private right of action for damages based on breaches of FCA’s Principles as some consumer groups wanted, but it is intended to improve behaviour and this will only happen with FCA supervision and enforcement.
  • The Consumer Duty does not set out a series of prescriptive changes firms need to make. It requires interpretation and application and no amount of FCA guidance can cater for every situation and business model. Market knowledge and being “middle of the pack” on an issue is also not necessarily enough to be compliant, as the FCA is seeking to raise standards. There is no guarantee that current standards will pass muster in the future so applying the Duty requires difficult judgement decisions in many instances, as well as regulatory and market knowledge.
  • The FCA’s approach to the Consumer Duty includes a focus on firms’ implementation plans and the need for senior-level engagement. The requirement for implementation plans and Consumer Duty champions, both initiatives that are not embedded in any specific PRIN 2A requirements, set this latest regulatory change apart from other regulatory changes. Nowadays firms cannot afford to have poor systems and controls in implementing and signing off regulatory change projects.
We have finished our implementation plan, but really there were no substantive actions or changes we needed to make. Should we be worried given your comments above?

Not necessarily. A well-run firm with good products and services working well and of value to consumers may still not have much, if anything, to change. Some firms may have had to uplift data and reporting and make changes to their product governance, approval and review materials without needing to make wholesale changes to their products and services.

On the other hand, it is also the case that an apparently textbook implementation project with a vast amount of energy and time expended on it, will remain a waste of time (and indeed may even be counter-productive in an enforcement situation) if there are latent issues that have not been identified and resolved, as a result of it.    

As you near the end of your implementation plan, we still recommend following the steps in question 3 below. We also think that Boards should ask for in depth analysis of complaints and breach logs, as well as Financial Ombudsman Service (FOS) and final notices in their sector. Questions to consider on review of the evidence include: are there any residual themes? If you were a client of the firm, what areas of the firm’s services would you be least happy with as a client? Looking forward at the tough economic outlook, have you carried out sufficiently robust stress testing of your products and services? Do they remain of value to clients and fit for purpose in a tougher or changing economic climate?

If my firm is not ready for 31 July, what can we do to manage our enforcement risk?

At this stage, we suggest following FCA’s recommendations and pivoting focus to the key questions FCA included in its Finalised Guidance (FG22/5). These questions should be tabled for Board review and discussion. Where there are areas of non-compliance or perceived risks, firms should put in place a remediation plan and consider making a Principle 11 disclosure to the FCA. These projects and any discussion with FCA, if required, should be overseen directly by the Board.

Note that the FCA will take action in response to breaches in proportion to the harm caused or risk of harm, prioritising the most serious breaches at the outset and acting quickly to limit harm to consumers.

We are still not clear what the Consumer Duty requires of us, in our sector. There still seems to be a lot of confusion in the market and we are still waiting to see materials from our industry body and for engagement from some of our counterparties. Do your comments in this note still apply to us and should we be worried?

Yes, the Consumer Duty will apply regardless of the unfortunate confusion. There is no obligation to use industry wide materials to comply with the Consumer Duty. Industry materials do not provide a formal safe harbour for individual firms or obviate the need to do individual firm specific work. Nor is it a safe harbour to say you tried to engage with stakeholders but gave up (unless you genuinely have no material influence over them or consumer outcomes). Where the FCA sees a market wide failing, there is still a danger it may in due course make an example of a particular firm or firms.

One frequent area of confusion applies to firms that do not have direct retail consumers, but which have indirect relationships with retail consumers via intermediaries. The FCA expects firms to comply with the Consumer Duty to the extent that you have a material influence over the consumer outcomes (for example, in the provision of information to the intermediary that is relayed or interpreted by the intermediary for the benefit of the end consumer).

We recommend following the steps in questions two and three above. You could consider setting up a workshop with key stakeholders in your business to work through these questions and your breach and complaint logs in respect of each product and service you provide.

We have finished our implementation project and are content with our findings and decisions. Do you recommend we take any further steps to manage our risk?

Yes, we do. The Consumer Duty requires ongoing work to remain compliant. Additionally, we also think firms should subject their decisions to robust scrutiny and challenge. The role of the Champion and Board engagement more generally will assist with this challenge, but firms may also wish to consider subjecting their projects to objective third party appraisal and challenge. You may be able to do this by engaging with industry bodies or by commissioning bespoke assistance.   


Where can we get further help?

We would be pleased to have a conversation with you about your Consumer Duty project at any time. Please call or email us using the contact details set out below.