Consumer Duty implementation: good practice and areas for improvement
Introduction
The Consumer Duty, which came into effect for open products and services on 31 July 2023 (and is soon coming into effect for closed product), requires firms to act to deliver good outcomes for retail customers.
The FCA's publication on good and poor practice focuses on the following aspects for firms:
It reminds firms of the consumer outcomes required by the Duty.
It outlines recent good practices for achieving these outcomes.
It identifies areas for improvement that firms to focus on.
These findings may also be relevant for firms as they prepare to meet the implementation deadline of 31 July 2024 for closed products and services. The publication provides further findings on the key elements of the duty:
Culture, governance, and monitoring
Consumers in vulnerable circumstances
Products and services
Price and value
Consumer understanding
Consumer support
1. Culture, governance, and monitoring:
Expected Outcome by FCA:
The FCA expects retail financial services to inspire customer confidence through fostering healthy competition based on high standards. Firms are required to act to achieve good customer outcomes, acting in good faith, preventing foreseeable harms, and supporting customers in achieving their financial objectives. Furthermore, the Duty also requires firms’ management and Boards to use data to identify, monitor and confirm they are satisfied that their customers’ outcomes are consistent with the Duty.
Good practices by Firms:
o Altering company purpose to underscore a focus on customer outcomes in staff actions and behaviour.
o Developing of new data and metrics to enhance customer understanding and implementing governance structures to address identified issues promptly.
o Updating staff bonus structures to ensure incentivisation aligns with the aims of the Duty.
Areas for improvement:
o Ensuring that focus on good customer outcomes permeates all levels of the organisation.
o Proactively identifying and addressing potential issues and risks of harm.
o Deliberating on the necessary information to comprehensively understand customer outcomes and the challenges they may encounter.
2. Consumers in vulnerable circumstances:
Expected Outcome by FCA:
The FCA expects that vulnerable consumers should have outcomes as good as other consumers, acknowledging their potential additional needs highlighted by the Duty.
Good practices by firms:
o Supporting the elderly by employing innovative methods, like using ‘selfies’ for identity verification to prevent scams.
o Providing literature in alternative formats such as braille, audio or with enlarged, alongside making typographical adjustments for enhanced engagement.
o Halting productivity targets for customer service staff when serving vulnerable individuals, allowing for personalised attention.
Areas for improvement:
o Avoiding automatic categorisation of all consumers above a certain age as vulnerable and instead tailoring support according to individuals’ requirements.
o Ensuring that vulnerable customers are not discouraged from accessing services due to their vulnerability status and guaranteeing they receive necessary support.
o Minimising repeated requests for vulnerable consumers to disclose personal circumstances when transitioning between teams to prevent negative impacts on their mental well-being and engagement with the provider.
o In the investment market, prioritising identification of and support for vulnerable customers to ensure their needs are addressed effectively.
3. Products and services:
Expected Outcome by FCA:
The FCA expects products and services to be designed and distributed to customers in a manner that aligns with customers’ needs, characteristics, and objectives. Consumers can only pursue their financial objectives and avoid foreseeable harm when products and services are fit for purpose.
Good practices by Firms:
o Careful and precise definition of the target markets for products and services that could cause harm if sold to the wrong consumers.
o Refinement of data and monitoring capabilities to track customers who may have purchased a product or service outside of the target market, enabling proactive measures to prevent harm.
o Adapting product development processes to prioritise meeting the needs of specific target markets and ensuring favourable outcomes for them.
Areas for improvement:
o Establishing effective information-sharing mechanisms across supply chains to promptly address issues and prevent consumer harm while facilitating good outcomes.
o Recognising their role within distribution chains, understanding associated responsibilities, and fulfilling them accordingly.
o Ensuring that distribution strategies are conducive to fostering positive customer experiences and considering actions of other entities within the distribution chain. For instance, if distribution practices deviate from the intended strategy and target, appropriate actions such as providing additional information should be considered.
4. Price and Value:
Expected Outcome by FCA:
The FCA expects consumers to receive products and services which offer fair value. A lack of fair value is inconsistent with customers realising their financial objectives, and firms cannot act in good faith if they knowingly manufacture or distribute poor value products or services.
Fair value is about more than just price. The Duty aims to tackle factors that can result in products or services which are unfair or poor value, such as unsuitable features that can lead to foreseeable harm or frustrate the customer’s use of the product or service, or poor communications and consumer support.
Good practices by firms:
o Evaluating whether the total cost of products and services, including fees, charges, and other expenses, offers fair value relative to the benefits provided.
o Enhancing the benefits of products and services to improve overall value, such as by augmenting the features or services offered.
o Implementing fee caps for long-term clients and waiving fees when firms cannot justify the cost of the product or service.
Areas for improvement:
o Providing transparency regarding remuneration practices and demonstrating how they align with the work performed.
o Avoiding the addition of fees throughout the distribution chain that could diminish the fair value received by end consumers.
o Ensuring to not charge customers for a service they are not benefiting from.
5. Consumer Understanding:
Expected Outcome by FCA:
The FCA expects consumers to understand the information provided to them and make informed decisions in a timely manner. Consumers can only be expected to take responsibility for their financial decisions where firms’ communications facilitate the understanding of their products and services, including their features and risks, and decisions implications.
Good practices by Firms:
o Establishing customer understanding frameworks to support good outcomes.
o Working with experts to improve their communications across various channels and improve customers’ understanding of their products and services, such as by adjusting content layout or simplifying language.
o Implementing methods to assess customer understanding through surveys, experiments, and interviews.
Areas for improvement:
o Avoiding undermining customer trust by promoting products or services that are too high-risk or complex for their understanding.
o Providing clarity to customers regarding applicable charges and timing, such as by offering worked examples of product and services costs.
6. Consumer Support:
Expected Outcome by FCA:
The FCA expects consumers to be provided with support that meet their needs while using the products and services they have bought, enabling them to pursue their financial objectives.
Good practice:
o Offering new customers, the same level of support available to existing customers.
o Creating additional engagement touchpoints with customers to prompt them to make better decisions.
o Implementing processes to monitor the support provided and identify areas for enhancement, such as launching online feedback panels for customer’s input.
Areas for improvement:
o Ensuring staff are adequately trained to engage in complex conversations with customers, understanding their circumstances and providing tailored solutions.
o Implementing robust systems to safeguard consumers from potential losses of investments, savings, or personal data resulting from fraud or cyber-attacks.
To learn more about how Khepri can assist with reviewing your practice, please reach out to us at info@khepri.com
