Spotlight: New UK Consumer Duty
Rolling out new protections
In focus
- In the short term, firms need to consider how to enable good outcomes for the increasing number of their customers facing financial difficulty due to the cost-of-living crisis and inflationary environment. In the medium term, firms will need to remove inefficiencies and improve third-party (TP) relationships to monitor customer outcomes.
- We expect most firms to struggle to implement aspects of the Duty on time. Firms will need to apply a risk-based approach to completion of tasks and understand key dependencies with other parties across the distribution chain. Some firms might have to make difficult commercial decisions, for example whether they can maintain certain partnerships if price and value issues emerge.
- Successful implementation of the Duty will present an opportunity for firms to move towards a truly customer-centric business model. They could use the Duty framework to design and deliver products and services that adapt and evolve with the needs of their customers. A well implemented Duty framework will give market-leading firms an opportunity to win new customers and retain existing customers for longer.
- Firms need to embed the Duty in their culture. Boards and senior management must ensure there is substance to the implementation. The Board and Duty Champion have an important role to play by challenging whether a firm is directing its efforts to enable good customer outcomes.
Acting to deliver good customer outcomes
Be in no doubt: the Duty will be a significant shift in what we expect of firms. It means making lasting changes to culture and behaviour to consistently deliver good outcomes.
– Speech by Sheldon Mill
FCA Executive Director, Consumers and Competition1
The UK Consumer Duty (the Duty) is the most material piece of cross-sectoral conduct regulation in the UK of the last decade. The Consumer Principle (the requirement for firms to demonstrate that they have acted to deliver good customer outcomes) puts the onus on firms to be proactive in their approach to conduct risk, striving to anticipate and prevent harm where it is foreseeable. It will require firms first to define good outcomes and then design the metrics to measure and monitor them. The Duty rules and guidance are structured across four consumer outcomes that reflect the journey from product development, pricing, customer communications and support. The Duty includes a requirement for firms’ Boards to review and approve an assessment which confirms compliance on an annual basis. Firms will also have to ensure they can evidence compliance on an ongoing basis.
From implementing the Duty to making it a success
The remaining timelines for the Duty are tight. Firms need to complete their product value assessments by the end of April 2023 and implement the Duty in full for open books from July 2023. Firms and their partners in the distribution chain need to unpack the complex web of roles and responsibilities involved in manufacturing and distributing financial products. For those using embedded finance and banking-as-a-service models these requirements can be particularly onerous as they lengthen and add complexity to the value chain. These new distribution models might make it harder to define value and to anticipate and prevent foreseeable harm.
Moreover, firms are having to implement the Duty amid high inflation, in the context of which customers’ needs are changing and, in most cases, their own business and finance models are under pressure. For example, claims inflation in the insurance sector means that the general insurance (GI) industry is likely to record underwriting losses in some lines of business for 2022 and well into 2023. Firms will need to review and update the prices and fees for their products and services in light of inflationary pressure but will have to bear in mind that many of their customers may already be struggling to afford their products. The European Supervisory Authorities (ESAs) are also closely monitoring the impact of economic conditions on firms and customers.
Many firms will consider cost reduction drives, but the Financial Conduct Authority (FCA) has already raised questions about whether decreasing levels of customer support would be compatible with the Duty. For example, banks and consumer credit firms are expecting increasing numbers of customers in financial difficulty to need debt advice. Imminent changes in the overall operation of the provision of debt advice services from the Money and Pensions Service2 (MaPS) might result in FS firms needing to step up their efforts to ensure the most vulnerable are supported. Firms will be expected to rehabilitate customers quickly and in a sustainable manner. Firms have frequently fallen short of existing regulatory expectations for collections and recovery processes, complaints handling and arrears payments, suggesting these are areas where Duty compliance might be particularly onerous.
Developing a sustainable Duty framework
Beyond July 2023 most firms should look at streamlining their Duty frameworks to manage the costs of ongoing implementation. This means developing a Duty framework that is effective and efficient and also provides flexibility to evolve with changing regulatory expectations over the medium term. This will require engaging with TPs and outsourcers to understand how to automate processes and obtain data from different systems to allow for monitoring and measuring outcomes across different groups of customers. Some firms already use tools to track clicking behaviour through online journeys for marketing and sales purposes. Some of this data can be integrated into the Duty framework to help improve outcomes metrics and measuring. The Duty involves annual processes, such as Product Value Assessments, which again can be onerous given the need to obtain data from TPs to complete. Such processes would benefit from standardisation and a degree of automation.
The Duty as a catalyst for innovation
From a more strategic perspective, some firms will see the Duty framework as an opportunity to accelerate a more customer-centric approach, and for market-leading firms it will be a catalyst for product innovation. The requirement for firms to monitor customer outcomes, including for distinct groups of customers, means that new forms of data on how customers engage with products and services can be leveraged in new product development (subject to data protection considerations).
Under the Duty it is possible that firms will approve complex products with dynamic features or involving hyper-personalisation, if they are underpinned by robust control frameworks that can convincingly monitor customer outcomes in real time, supported by artificial intelligence (AI) systems where necessary. However, the Bank of England and FCA have also indicated that the Duty provides a framework within which supervisors will be able to scrutinise how firms’ use of data and AI models affects customer outcomes, and to explore issues such as unfair bias, discrimination and vulnerability.
Cultural embedding of the Duty
In general, the Duty will be more successfully implemented by those firms that best embed it into their culture. The FCA expects firms to implement the substance of the Duty and several requirements should help this shift, such as the annual assessment, the appointment of a Duty Champion and the reflection of the Duty in the Senior Managers and Certification Regime.
Firms might want to consider the scope and reach of the Duty for those customers that might remain just outside its scope, with Buy-Now-Pay-Later (BNPL) products being one pertinent example. The FCA has signalled its concern that some of these products, and the way they are promoted and sold, might be putting customers at risk of harm. Reflecting this concern, the Government looks set to press ahead with its plans to bring BNPL products within the remit of the FCA and started consulting on proposed legislative changes in October.3
In the meantime, the FCA has stressed that all firms distributing BNPL products need to have their related financial promotions approved by an FCA-authorised firm. Given that many banks have launched their own BNPL products, they may want to consider how the Duty and other conduct risk responsibilities should apply to these and other unregulated products (for instance around payments or unregulated digital assets) regardless of whether, technically, they remain outside the regulatory perimeter for now. Can the Board justify a lower standard of protection for BNPL and similar customers, compared to customers who hold a regulated product with the same firm? And even if the Board can satisfy itself on this point, does it make operational sense to run two levels of consumer protection with the associated compliance complications (and costs) this entails?
Consumer and investor protection: EU landscape
The ESAs are closely monitoring the impact of the current adverse economic conditions on financial institutions and their customers.
The European Securities and Markets Authority (ESMA) expects firms to incorporate the impact of inflation into information provided to retail clients, suitability assessments, and product governance processes.4
As part of its policyholder protection agenda, the European Insurance and Occupational Pensions Authority (EIOPA) is focusing on the impact on product value of differential pricing practices in GI5 and value for money in unit-linked products. In this area, following a supervisory statement in 2021 EIOPA has now published a detailed methodology for national competent authorities (NCAs) to assess unit-linked products in their respective markets.6 It is also concerned about credit protection insurance products and banks that distribute them, following a thematic review and a warning to the market.7
EU GI insurers and intermediaries should assess whether their current pricing practices include differential pricing and if so, whether they may lead to the unfair treatment of certain groups of customers. For those insurers and banks distributing credit protection insurance it will also be important to understand the value of these products and assess whether their design and pricing lead to the fair treatment of customers in light of the significant concerns identified by EIOPA.
In the asset management sector ESMA continues its focus on cost and charges for retail investors. A common supervisory action (CSA) was conducted through 2022 on MIFID II cost and charges disclosures and we expect a report in 2023. 8This follows from a CSA on costs and fees in relation to UCITS products in 2021. This led to ESMA requesting NCAs to scrutinise fund managers that lack formalised and structured pricing processes with a focus on smaller firms where undue costs are cause for concern.9 Some NCAs have started to take action in their markets, with the Luxembourg regulator urging fund managers to conduct a comprehensive assessment of compliance with policy, approach and arrangements related to costs by the end of Q1 2023.10 Other NCAs are likely to take similar actions during 2023.
EU fund managers may want to look at the actions taken by ESMA and some NCAs (e.g. the Luxembourg regulator) and assess their own policies and approach to fund costs to identify areas for improvement.
EU fund managers will also be affected by the Duty if their funds are distributed in the UK, since UK distributors will need to request information from EU fund managers to ensure the funds meet the Duty’s price and value outcome if they are to continue to sell them to UK retail customers.
Actions for firms
Responding to short-term challenges
- Determine the potential need for extra customer support in the next few months due to inflation and cost-of-living crisis, and changes to the provision of debt advice by the MaPS and how to mobilise increased capacity (including “surge capacity”) as a priority.
- Identify price / value issues arising from the current volatile economic conditions and cost-of-living crisis. For example, firms are expected to reflect higher interest rates for savers within a reasonable timeframe and consider carefully the impact of withdrawing mortgage products. Insurers should be mindful of fairness in claims processes and ensure motor claims are not underestimated to the detriment of customers.
- Deploy a risk-based approach in areas where meeting deadlines is likely to be most challenging. Ensure decision-makers take into consideration the potential for customer harm when prioritising and that any such decisions are carefully documented and revisited in the light of changing market conditions.
Medium-term planning
- Assess how to comply with the Duty more effectively and efficiently in the medium term. Review the use of data, technology and TPs and find solutions to create a holistic approach to compliance and measuring customer outcomes.
- Transform the Duty into an opportunity for developing a more customer-centric approach. The Duty can be leveraged to accelerate product innovation, aided by AI and machine learning applications.
Endnotes
1 Speech by Sheldon Mills, FCA Executive Director, Consumers and Competition
2 MaPS, Media statement: debt advice commissioning update, October 2021
3 HMT, Regulation of Buy-Now Pay-Later: Response to consultation, June 2022
4 ESMA, Public Statement to investment firms on the impact of inflation in the context of investment services to retail clients, September 2022
5 EIOPA, Consultation on the supervisory statement on differential pricing practices in non-life insurance lines of business, July 2022
6 EIOPA, Methodology to assess value for money in the unit-linked market, October 2022
7 EIOPA, Warning to insurers and banks on Credit Protection Insurance (CPI) products, September 2022
8 ESMA, ESMA Launches a common supervisory action with NCAs on MIFID II costs and chargers, February 2022
9 ESMA, Final Report on the 2021 CSA on costs and fees, May 2022
10 CSSF, ESMA common supervisory action on the supervision of costs and fees of UCITS: CSSF feedback report, October 2022
