During the latter half of 2022, many firms regulated by the U.K. Financial Conduct Authority (FCA) were rushing to complete their Consumer Duty implementation plans for approval by their governing bodies before the regulator’s deadline. In July 2022, the FCA published its final rules for a new Consumer Duty, which set higher and clearer standards for consumer protection in the U.K. financial services sector.
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Given the short timelines to fully implement the rules to firms’ systems and controls infrastructure, plus other recent regulatory changes such as the U.K. Investment Firms Prudential Regime, it is no surprise duty implementation has proved to be a complex challenge.
The scope of the new duty is very broad. Its requirements capture any FCA-regulated firm that can “influence the outcomes” for retail clients who are users of financial services and products. The level of application of the new rules therefore depends on the extent a firm’s services or products are used by retail clients, either through direct interaction with the regulated firm or indirectly via third parties.
Some wholesale firms without FCA permission to provide products or services to retail clients but that are a manufacturer with retail clients as end users discovered they, too, were in scope of the duty, although potentially in a more limited way.
Product manufacturers, such as fund managers, were put under pressure to conduct their product value assessments by the end of April. This deadline had been set to allow the product distributors to conduct their own fair value assessments by the time the duty entered into force three months later. Different industry working groups were created to enable firms to find a common set of industry standards, such as the modified version of the European MiFID Template to meet duty disclosure requirements.
The duty has now been in force since the end of July, but much implementation and remedial work is still ongoing. Below are a few key trends identified regarding different types of FCA-regulated businesses on Consumer Duty compliance.
Fair value assessments and remedial work: Regulated product manufacturers and distributors should have now completed their first fair value assessments as part of their duty requirements. During the upcoming year, these firms must repeat the same review process again for any open products and complete their first assessments of any in-scope closed products previously exempt from the review requirements.
In 2024, product manufacturers are expected to collect information from their distributors. This data—which includes sales numbers, redemptions, and complaints—should then be used by the product manufacturers as part of their product review process. By now it is clear the different financial services sectors are moving toward standardized and automated information sharing models, whereby outsourced service providers request and collate data from distributors on behalf of multiple FCA-regulated firms.
More importantly, where firms have identified existing issues with their products or services as part of their fair value assessments, the expectation is those firms are working to address these issues prior to the next required review in 2024. The obvious danger is that, if a firm has a repeat issue or potential consumer harm in their 2024 duty assessments, it could become difficult for that firm to justify why the product or service still provides good value, given nothing has been done to address the issues identified.
To ensure firms are completing any required remedial work following their 2023 duty assessments, it is important any issues with products and services are clearly identified in the management information, which is provided to the firm’s governing body for oversight. Firms in scope should allocate responsibility for each remedial action to a senior manager, thus ensuring there is an individual ultimately responsible for making sure the remedial work has been completed.
Firms should also consider subjecting their internal value assessment results to independent challenge by an outside, third-party, subject matter expert. This has the potential to address any conflicts of interest.
When it comes to comparing the performance and costs of the firm’s products and services to peer groups and benchmarks, it is important these remain consistent year on year. Compliance teams should ensure a firm’s business units are not succumbing to the temptation to change the previously agreed comparators just because it makes the firm’s products or services look better.
By being consistent, firms can ensure they have useful data to allow meaningful long-term comparisons. This also helps firms to defend their duty assessment if they are ever challenged by the regulator.
Management information: Following internal duty reviews of a firm’s products and services, it is vital the results are clearly presented to the governing bodies. Good quality management information will allow the board of a firm to make informed decisions regarding the quality of its products and services.
By July 2024, governing bodies of FCA-regulated firms must have assessed a report regarding good consumer outcomes and their compliance with any arising duty requirements.
Governance: At the governing body level, nonexecutive independent directors and the firm’s Consumer Duty champion serve an important role where they can challenge the value assessment results prepared by the firm. Compliance teams should ensure all the directors and the duty champion have been provided with enough training on the topic of Consumer Duty and the firm’s obligations thereunder to enable them to provide effective challenge when needed.
A firm’s compliance team needs to ensure duty matters are regularly addressed at the governing body level and clearly recorded in the board minutes. We are starting to see more duty agenda items for FCA investment firm clients. Earlier this year, the FCA noted that at some firms, duty implementation plans did not receive enough scrutiny or challenge by members of the board.
Testing marketing communications: Under the Consumer Understanding Outcome, the FCA wants firms’ communications “to support and enable consumers to make informed decisions about financial products and services.”
This is a duty requirement under which the firms with no direct retail client relationships are likely to have the highest risk of causing consumer harm.
A wholesale fund manufacturer who creates funds that can be sold to retail investors must produce key information documents for potential retail investors. Depending on the fund investment strategy, the risk warnings and ratings on the documents can be confusing. Larger firms tend to have the internal resources to conduct focus-group testing of their financial promotions and websites to check their communications. Smaller firms are less likely to have such resources available when they review their communications.
This is where guidance for checking retail communications from the regulator and industry groups would be helpful. The FCA and Investment Association have yet to publish their updated guidance for checking retail communications.
Continued priority: The duty continues to be a key focus for the FCA. Firms applying for FCA authorization, or a variation to their existing permissions, are asked regularly by the regulator to explain how their new proposed regulated activities are compliant with duty requirements.
Existing regulated firms, some of which previously had very minimal interactions with the regulator, have been approached by the FCA to check on how the firm has applied the duty requirements to their services and products.
In November, the FCA sent a “Dear CEO” letter to wealth management and stockbroking firms, highlighting their obligations under the duty and potential consumer harms the FCA detected arising from these firms. In a speech, Nisha Arora, the FCA’s director of cross cutting policy and strategy, stated duty “is not a once-and-done exercise.” The speech made it clear the FCA considers duty implementation to be only the beginning of an ongoing process, through which new standards become embedded in the U.K. financial services sector.
This is a departure from some other past regulatory implementation projects which, once implemented, required less ongoing engagement from the compliance professionals working at firms.
This article is a condensed version of the full story by author Matti Pekkola, principal consultant at investor services group IQ-EQ, for the International Compliance Association. The ICA is a sister company to Compliance Week. Both organizations are under the umbrella of Wilmington plc.