Naomi Seward, company commercial (retail finance) partner at Eversheds Sutherland, sets out guidance on how the FCA’s latest regulation will affect advisers.
It’s fair to say the new Duty has the potential to radically change the treatment of retail customers and is therefore hugely significant. These changes are intended to ensure that regulated firms take more responsibility for the outcomes that are delivered to customers as a consequence of the products and services they offer and to ensure that the reasonable expectations of their customers are being met. The products and services that firms sell need to represent fair value and customers must receive the support they need. Finally, customers must also be equipped with the right information to make effective, timely and properly informed decisions.
What does this actually mean for the equity release market? As a product that involves a multi-party distribution chain, it is positive that the FCA has confirmed that firms are only expected to take responsibility for their own activities and should not need to oversee the actions of others in the distribution chain. However, in practice, the application of these principles is likely to be far from straightforward. For example, where end users in a complex distribution chain do not achieve good outcomes, activities of all firms in that distribution chain (including ancillary unregulated activities which are connected to a regulated activity) are likely to come under scrutiny irrespective of how close a firm’s relationship is with those end users. Do your current contractual relationships with third parties sufficiently delineate the regulatory roles and responsibility of the respective parties, such that liability can be assigned to one party rather than the other in relation to the new obligations under the consumer duty?
Whilst the FCA has confirmed that the Consumer Duty will not be retrospective, the new higher standards will apply, not only to all products and services currently being sold but also to all closed products that are in runoff or have been purchased. Firms will therefore need to review all in scope products and services during the implementation period to ensure that on an ongoing basis, these products meet the new higher standard, set out by Duty and as required by the cross-cutting rules.
Firms will need to be able to monitor the customer outcomes for these products on an ongoing basis to ensure compliance. Depending on the extent of your current and historic product range, this could be a hugely significant and time consuming task. The review may identify the need to make changes to the contractual terms, involving notices of variation. Systems changes may also be required to ensure that the correct information can be captured to evidence that the actual customer outcomes, match those intended.
To achieve ongoing compliance with the new rules, firms will either need to the development or in the majority of cases, enhance existing products, services and process design frameworks so that the new cross-cutting rules are adequately considered, applied and documented. These include considering questions such as:
- Who is the target market?
- What are the financial objectives of this target market?
- What are the customer needs that this product/service is designed to meet?
- How are these needs met?
- How will we know when these needs are not met?
- How is this communicated to customers to ensure alignment and appropriateness with the customer’s needs?
- What are the reasonably foreseeable harms?
- How are these harms identified, monitored and mitigated?
Firms will also need to continue to consider, as a separate and additional requirement the answers to these questions are impacted by the potential vulnerability of customers.
A firm’s success in implementing the new Consumer Duty will depend on the level of accountability and by-in across the entire first line of its business, from the marketing team to complaints handling, as responsibility for delivering compliance will permeate the entire business.
The new concept of Fair Value is also likely to be challenging to apply in practice. It is clear that value is more than just price and firms will need to ensure that the price charged for the products and services it offers is proportionate to their value and the overall benefit received by the customer. Distributors of a product will also need to ensure that they are satisfied that the product/service they are distributing is providing fair value and each firm in the distribution chain is responsible for the value of the prices that they control.
However, the firm that is at the end of the distribution chain will have the ultimate responsibility to the customer to ensure they do not receive poor value. This is likely to discourage chains of distribution, for example in the credit broking market.
Evidencing value is not going to be easy. And whilst the FCA does provide guidance on what this may mean, including factors to consider in the assessment of value, we can foresee operational issues with the implementation of some of these, particularly for products with differential pricing. Evidencing value, will be linked to the transparency of cost information presented to customer and their understanding of the benefits they are receiving for the products. Is the key to achieving this held by the marketing department?
One of the FCA’s goals in introducing the Consumer Duty and increasing the standards required is that firms should be in a better position to self-identify customer harm at an earlier stage and rectify the position, thereby reducing the need for regulatory enforcement and significant back book redress activities. As a consequence, where firms are unable to readily evidence good outcomes, our expectation is that this is likely to lead to earlier intervention by the FCA.
Under the proposed timeline, firms will have until 30 April 2023 to fully implement the new Consumer Duty. However, as highlighted by the FCA’s cost benefit analysis, given how much work there is to do, firms should not delay their implementation plan until the rules are finalised in July 2022.
First, firms need to understand and disseminate the requirements of the new Consumer Duty. Firms need to move towards a new Consumer Duty mindset, including in the way they use terminology as part of their governance and controls. This should start with the Board, Executive and Senior Management teams, with wider training part of the implementation plan.
Second, firms should conduct a high-level assessment to identify priority issues. It is essential to undertake high-level assessments of customer journeys and key products and services in order to identify priorities for action and key commercial implications. Firms must identify now where they may need to invest to meet the new standards.
Next, firms should review their customer outcomes framework and MI. Firms need to make sure that the new Consumer Duty outcomes are reflected in conduct frameworks and processes, and that there is a specific MI that aligns and evidences compliance with the duty.
Firms should review product governance frameworks and processes. Ensuring that the new Consumer Duty is embedded in the way a firm works, and how it documents products and processes is key. This includes how an organisation plans to approach product development, product reviews and fair value assessments.
Finally, firms should develop and socialise a template for the Board’s annual assessment of whether the firm is delivering good conduct outcomes. Firms should get an early idea of what the assessment might entail as well as the results, and get buy-in from the Board for the process. We suggest piloting this exercise as a preliminary assessment, and to help finalise a template for the subsequent formal assessments.
- The views of contributors are not necessarily shared by the Council.
