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Clifford Chance

Clifford Chance

Regulatory Investigations and Financial Crime Insights

FCA's Consumer Duty - what should firms be doing today to prepare?

Now that the FCA's consultation on its new Consumer Duty has closed, and while we wait for the FCA to agree to a more reasonable, perhaps phased, implementation period, what should firms be doing today to prepare?

As things currently stand, and even if the implementation timelines are extended, timings are tight and firms would be well advised to start ramping up their implementation efforts. Here we set out just some of the issues firms should be considering.

Governance

Firms should establish, or formalise, teams with responsibility for implementation, creating working groups and steering committees to manage what is likely to be a burdensome journey ahead. Every department within a firm has the potential to be impacted by the Consumer Duty and therefore the situation and perspective of each should be taken into account.

Firms should start to consider how, practically, they will review their products and services and how they will ensure they apply appropriate criteria to meet the FCA's heightened standards. Debate will persist as to the gap analysis of what firms should be doing differently between Principles 6 and 7, and the new Principle 12. The need to evidence their approach and deliberations to the FCA in due course is something firms must turn their minds to now.

Management information

Effective MI will be critical to firms' ongoing compliance with the Consumer Duty and firms' Boards will expect it, particularly as they will need sufficient comfort in making their annual sign-off of compliance with the Consumer Duty. The design of MI flows, including qualitative data, and feedback loops will likely be a focus for FCA supervision in the future.

Firms that are accused of not responding to concerning MI may be able to mount arguments around what action was reasonable at certain points in time. However, firms found to lack effective MI may find it more difficult to rebut alleged systems and controls failings. The appetite for enforcement will likely be greatest in relation to harms which were foreseeable for vulnerable customers.

Closed products

Particularly for firms which have inherited back books, defining the parameters of the application of the Consumer Duty to closed products in the "real world" will be difficult.
Although required by the Consumer Duty, there is a practical challenge in identifying the aspects of design that could cause the product or service to breach the cross-cutting rules where the information to make this assessment is simply not held by firms. This can be a particular issue where books of business have been purchased. Determining what information is capable of being retrieved to make an assessment and to implement a mitigation strategy to avoid harm arising will be an arduous task.

This is compounded by the need for firms to determine which rights have vested, which the FCA say "will depend on all the facts of the case and interpretation of the relevant contract". Unless the FCA provide firms with comfort that application of the Consumer Duty to closed products will be deferred, firms may want to start the required reviews without delay.

Conclusion

The FCA largely listened to the regulated community's responses to the first consultation paper, and it is hoped that this engagement continues, through the FCA:

  • issuing guidance to the FOS to ensure consistent application of the Consumer Duty;
  • providing clear practical guidance for firms during the implementation period; and
  • giving firms a reasonable amount of time to implement the Consumer Duty given that the FCA wants to see a significant change.

However, the essence of the Consumer Duty is unlikely to change significantly and as things currently stand the timetable is aggressive. There is, therefore, no time like the present for firms to start their implementation programmes.