Regulatory focus increases as firms get to grips with scale of Consumer Duty change

by | Jan 31, 2023

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With six months to go until the FCA’s Consumer Duty comes into effect Oliver Sharland, managing principal at consultancy Capco, comments on the urgent need for financial services firms to act:

Last week the FCA re-emphasised the requirement for firms to demonstrate material change through their implementation of Consumer Duty. The Regulator has reviewed the plans firms completed in October and identified that the financial services sector will experience significant challenges meeting the requirements of the new rules in time for the implementation deadline.

The FCA has consistently stated that firms should prioritise areas that have will have the greatest impact for customers by July 2023. It also expects firms to show a commitment to continuous improvement beyond July through further investment in customer-centric initiatives, which may run in parallel to the review and uplift of closed products.

We urge financial services firms to focus on the following areas, where the FCA will expect to see progress, by July this year:

  • Proposition design: Firms should make material changes to their products, communications and customer journeys where they can best provide a tangible positive impact for customers. They must reassess the proposition development process they use to bring products to market, as well as improve how they use data to identify the needs of their target market and tailor products accordingly. They should also reassess how they determine pricing, including the pass through of interest rates. 
  • Prioritisation : Firms should prioritise redesigning customer journeys where there is the greatest risk of customer detriment. This may be driven by a number of factors, including the volume of impacted customers and the number of those customers that are potentially vulnerable customers. Firms should re-evaluate their existing frameworks for assessing product risk by applying a customer lens and have a robust triage methodology to distinguish and address high priority areas based on recognised instances of customer harm. 
  • Data: Firms should enhance their data capabilities to enable proactive monitoring of customer outcomes and develop a deeper understanding of their customers’ needs and preferences.  Digitisation of product lifecycle management with a connected view of customer data will enable firms to effectively monitor their products on an ongoing basis rather than through periodic product reviews.  Firms should also consider how data and machine learning is used to inform business strategy and objectives. 
  • Third party relationships: Firms must also re-evaluate how they identify and mitigate risks related to third party providers, including information sharing between product manufacturers and distributers as well as outsourcing providers. They need to ensure they can evidence a comprehensive review of their products to provide sufficient information to third party distributers by April. They may also wish to establish a consistent template for information sharing up and down the distribution chain to ensure that Consumer Duty requirements are embedded by third parties. 

The expectation for firms to act in “the spirt of the new Duty” is evidence that the FCA wants firms to demonstrate material change and a cultural shift. As the July implementation date approaches, it is clear the financial services industry is getting increasingly nervous about the scale of change required to achieve full compliance. Firms must now act with urgency.

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