31 July 2024 marks the deadline for FCA-authorised firms to have completed implementation of the Consumer Duty (Principle 12 of the FCA's Principles for Businesses) for closed products and services. The deadline for open products and services passed on 31 July 2023.
Ahead of this year's deadline, David Hamilton conducted a fireside chat with Keith Richards (CEO of the Consumer Duty Alliance), at City & Financial Global's Financial Services Investigations and Enforcement Summit on 26 June 2024.
The chat focused on the work the Alliance is doing to facilitate firms' implementation of Consumer Duty, the role of retail misconduct enforcement actions in raising the bar within the financial services sector, the impact Consumer Duty is having on firms, and what market participants are likely to see over the coming years. Keith spoke with the benefit of over 30 years' experience of the financial services sector, highlighting several key takeaways for authorised firms and society more broadly.
Enforcement – an effective tool for change?
The FCA has recently taken several high-profile enforcement actions against financial institutions for retail misconduct issues (including arrears mishandling, IT glitches, and customer account lock outs). Keith was, however, clear that whilst the regulators will always need a stick to deter bad actors, the way to drive cultural change across industry is to reinforce positive rather than bad conduct. The FCA is doing this with Consumer Duty, publishing in February a comprehensive summary of good consumer outcomes observed during its engagement with the market [Consumer Duty implementation: good practice and areas for improvement | FCA].
Consumer Duty – front office ownership
Consumer Duty, Keith noted, is the most significant piece of regulatory change introduced since the original Financial Services and Markets Act 2000. This is because for the first time everybody is on the hook for ensuring the right consumer outcomes from product/service design all the way to ongoing support and termination. No longer is it simply a question for Risk, Legal, or Compliance to consider and advise the business. Senior managers and other front-line employees need to take ownership of decisions, albeit support functions like Risk, Legal, and Compliance will continue to play a crucial role. This will undoubtedly lead to significant cultural change within business functions over time.
Consumer Duty – treatment of vulnerable customers
David and Keith acknowledged the challenges firms have had in consistently defining "vulnerable" customers.
For example, in a Dear CEO letter to wealth management and stockbroking firms in November 2023, the FCA stated that in responding to a wealth data survey 49% of portfolio managers and 69% of stockbrokers had identified no vulnerable customers. As the FCA pointed out, this was "even though 50% of us will be classified as vulnerable over our lifetime…" Keith considered that this failure to identify any vulnerable customers was likely due to firms having an insufficiently expansive understanding of vulnerability. The concept, he noted, extends beyond registered disabilities, and may include temporary circumstances like bereavement and divorce.
With the FCA emphasising the need to consider customers' "vulnerable circumstances" in recent Consumer Duty publications, it is important that firms have effective mechanisms to identify and assist customers who may require additional support.
Looking ahead
Looking ahead, there must be greater collaboration between the financial services sector, regulators, and government to address the full range of issues affecting consumers. These include avoiding practices that create foreseeable harm. For example, Keith highlighted the problems many are unwittingly facing as they approach retirement with insufficient funding, emphasising the need for greater access to timely financial advice.
Ultimately, effective implementation of Consumer Duty will – if necessary – require firms to move away from a culture of tick-box compliance and over-reliance on support functions; senior managers need to reckon with the new layer of regulatory expectation and take decisive ownership for their parts of the business.
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