On 1 March 2023, the Financial Conduct Authority (FCA) wrote a ‘Dear CEO’ letter to all Motor Finance Providers to clarify its expectations ahead of the 31 July 2023 Consumer Duty implementation date. The FCA considers there to be existing drivers of potential harm in this sector – which has led it to prioritise this sector for comment.
The FCA expects the Duty to be a top priority for CEOs personally and that boards and senior management should embed the interests of customers into the culture and purpose of the firm, incorporating the delivery of good outcomes at the centre of their strategy. The FCA noted in January 2023 that some firms may be further behind in their thinking and planning for the Duty, with risks that they may struggle to embed the Duty effectively.
We have summarised the key themes from the FCA’s letter and posed some questions for boards to consider as they seek to demonstrate compliance with the Duty.
Motor Finance lending products are designed to meet the needs, characteristics, and objectives of the intended customer.
“Firms should be recognising where their products are complex and assuring themselves in these circumstances that they are designed according to consumer needs.”
Firms should consider whether the complexity of products prohibits customers from assessing suitability – for instance, where products may not be easily understandable or comparable. They should also consider how their product design evolves with changes in the wider economic environment and how they continue to support the transition to Alternative Fuel Vehicles (AFVs). Additionally, the FCA has identified the adequacy of affordability assessments as a key area of concern.
Questions for boards and CEOs to consider:
Motor Finance lending products and services should provide fair value
“Firms must assess whether fees charged have a reasonable relationship with the benefit to the consumer, and this must be regularly reviewed.”
The Duty seeks to tackle factors that can result in products or services which are unfair, offer poor value, contain unsuitable features or frustrate the customer’s use of the product. The FCA also references the treatment of customers who have limited ability to access alternative providers. Fair value needs to be considered throughout the product lifecycle and across all eventualities of changes in consumer's circumstances.
Questions for boards and CEOs to consider:
Firms should communicate in a way that supports consumer understanding and equips consumers to make effective, timely, and properly informed decisions.
“Firms must tailor communications to meet the needs of the customers they are intended for, and test and monitor whether the communications deliver good outcomes.”
Communications should be tailored with regard to the complexity of the product and the characteristics of the intended customer. Balanced information which is clear, fair and not misleading will always be required and should be front and centre when boards consider some of the following questions:
Firms should provide support that meets consumers’ needs throughout the life of the product or service.
“Firms should consider the range of their customers’ knowledge and financial capability in assessing how they deliver this outcome.”
The FCA expects that customer support should not end at the conclusion of the sale, but be appropriate to meet the changing needs of the customer through the life of the product, to ensure customers realise the benefits of the product in meeting their objectives. Customers should also not face unreasonable barriers in using their product and receive fair treatment where, for example, they face financial difficulties or are offered forbearance.
Questions that boards and CEOs should contend with might include:
The implementation of the Duty is only the start of the process, and firms will need to continually enhance their approach over time. There is also an expectation for boards to be able to demonstrate good outcomes in every case - this will entail documenting the rationale supporting the exercise of judgment, in identifying relevant sources of data and in the execution of business and operational strategies.
Firms will need to clarify the roles they each play in the distribution chain, i.e., as manufacturer, co-manufacturer or distributor, which will require boards to better coordinate their activities more broadly to ensure they meet their commitments under the Duty. Compliance will therefore require extended efforts before it becomes business as usual. Firms are now considering external assurance to help refine and enhance their Customer Duty frameworks, leveraging the market insight of an assurance provider, an area of focus that we expand on in our blog “Consumer Duty Assurance: how to evidence your compliance and good customer outcomes?”.