The burden on financial institutions to protect their consumers is rapidly and significantly expanding. More than ever, these businesses not only need to protect their customers from bad outcomes but also have a positive duty to have - and must be able to evidence - measures and procedures to promote good outcomes.
The Financial Conduct Authority (FCA) has published its final rules for the Consumer Duty (PS22/9), together with additional guidance (FG22/5), and these must be complied with by 31 July 2023 for all open products and services. An additional 12 months will be granted for closed products and services. Implementation plans for all firms needed to be agreed at board level by 31 October 2022. The deadline for open products and services to comply with the Consumer Duty rules is 31 July 2023, while closed products and services have an additional year with a deadline of 31 July 2024.
The first step is to analyse the changes that need to be made to your current business. An appropriate project lead will need to be appointed. Senior leadership buy-in will be critical for this process. Firms must understand the main risk areas and the level of resources that will be required to address these. The FCA estimates that implementation for small firms could cost between £6,700 and approximately £26,000.
The Consumer Duty outcomes are as follows:
Products and services
You will need to consider the different needs of different groups of clients, particularly those with vulnerable characteristics. This will need to be considered in conjunction with identifying target markets for your services. It will also be important to identify whether your processes are aligned to your intended distribution strategies.
Price and value
Firms are required to provide value for money. A review of the costs of your advisory services will therefore be necessary. While carrying out this analysis, firms should consider the answers they would give to the FCA if questioned on the costs versus the outcomes of their services. Management information systems will be essential for monitoring outcomes. Consideration of the nature and limitation of these services will therefore be useful.
How do you ensure that your customers understand the services they are purchasing? Ensure that you review your methods of communication and how these could be improved from the perspective of the consumer. Consider which documents are the most essential documents for the consumer to review and understand.
Additional considerations include the need for businesses to review their complaints procedures to ensure that these minimise the stress caused to their customers. Businesses will also need to assess how they can best offer support to consumers.
Firms must try to prevent foreseeable harm to their customers and must be able to demonstrate that they have undertaken a structured assessment of this issue. This will involve considering the different types of risks to the client and implementing procedures to manage these risks and then monitoring these procedures.
Particular consideration should be given to the initial stages (eg profiling, research, considering the client’s vulnerabilities etc), the risks of the product in question and the potential firm and governance risks.
The next step is to document your implementation plan. The complexity of this plan needs to mirror the size of the business. Smaller firms will not, therefore, be expected to produce detailed project management plans in the same way that larger firms will be expected to. As evidencing the involvement of senior management and a plan based on facts, data and evidence will be essential, you should also include staff training plans, quantitative and qualitative assessments, and management of key actions and timescales.
Finally, the FCA requires independent supervision to be given to consumer duty procedures. Senior managers will be held to account if their businesses do not comply with their consumer duties.
Firms will need to be able to prove how they are meeting the new regulations and recording and monitoring this compliance.
Our team understands that implementing a compliant plan may be a daunting proposition but we can ease the burden and give you the guidance and comfort required to ensure that you are taking the right steps.
Penningtons Manches Cooper has financial services sector-focused employment, regulatory and litigation lawyers with a wealth of experience and cross-discipline knowledge to provide holistic advice to ensure that your business installs a robust implementation plan.
Whether this is by taking you through each stage set out above or providing a crucial independent review of your proposed procedures, we can provide expert advice to ensure that your business is safeguarded and compliant with the rapidly evolving Consumer Duty.