Kareline Daguer

Kareline Daguer

Some retail banks potentially face having to review their business and pricing models as they will have to ensure they deliver fair value to consumers following the FCA finalising its consumer duty rules on July 27. By Kareline Daguer, director in Deloitte’s EMEA Centre for Regulatory Strategy

The duty applies to all firms providing financial services and products to retail consumers and will come into force in July 2023 for most products, and one year later for closed books products. It is a very material piece of regulatory reform that is likely to have ramifications for the industry for years to come.

Getting prepared

The core of the duty is a new ‘consumer principle’ which requires firms to act to deliver good outcomes for consumers.

The principle is underpinned by three rules: firms must act in good faith, avoid causing foreseeable harm to consumers and enable consumers to pursue their financial objectives. This is an extensive piece of regulation that affects all aspects of a firm’s customer lifecycle – from product manufacture and design, pricing and value, communications and customer support services (referred to as the four ‘outcomes’).

Firms will have to be quick off the mark. The Financial Conduct Authority (FCA) expects boards to have signed off detailed implementation plans by October. This means that finalising a robust gap analysis and involving the board should be the top priority right now.

Beyond the timetable, there are three key areas of challenge for regulated firms and, in particular, retail banks.

Determining the scope

First, firms need to determine the rules’ scope; that is, how the rules apply to their business and their specific roles within the different distribution chains to which they belong.

The deciding factor here is whether the firm can materially influence consumer outcomes in relation to the product or service. Retail banks may manufacture retail products and distribute them directly, or through a broker. In other cases, they will distribute other firms’ products (e.g. general insurance underwritten by an insurer). To begin to understand their obligations under the duty, firms must first unpack this complex matrix of roles and responsibilities.

The FCA also introduced a new rule requiring firms to notify it if they become aware that another firm is or may not be complying with the duty. This will require firms to develop a framework to identify a notifiable event, the thresholds for notification and to train their staff. This is likely to be a very sensitive area where decisions may have significant commercial and relationship implications.

Ensuring fair value

Second, the duty requires manufacturers to ensure that their products or services provide fair value to retail customers.

All firms will need to review their pricing models and develop or enhance value assessment frameworks. We expect this to create further pressure, especially for some high-cost credit lenders. They have already been subject to numerous interventions to address the value of specific products, and the FCA has highlighted business models that rely on practices that may harm consumers, for example, relending and charging late payment fees or arrears.

The duty may also result in downward pressure on certain distribution charges. The FCA raised concerns about lifetime mortgages, and it will challenge intermediaries to justify that their fees and charges are commensurate with the value of the advice and services they provide.

Manufacturers must consider the overall charges that the customer might pay, including any that might result from the firm’s distribution strategy – for example, they should factor average intermediary fees into their value assessments. Manufacturers are expected to complete their open product reviews by April 2023, three months ahead of the overall implementation deadline.

The aim is for manufacturers to share their review outcomes with distributors in good time to enable all parties to decide if changes are needed. In practice, providing distributors with information on product reviews as it becomes available might be preferable. Firms should consider maintaining an open dialogue with their distribution partners to avoid having to rush difficult commercial decisions as the deadline approaches.

Monitoring outcomes

Third, the FCA emphasises the importance of monitoring outcomes, particularly for vulnerable customers and other distinct groups of customers.

The regulator expects firms to identify whether particular groups of customers are experiencing worse outcomes or some form of inadvertent discrimination. Firms may struggle to assemble the necessary data to assess this. However, this is a sensitive topic that could reveal potential areas of harm to groups of customers that firms have not previously identified.

The FCA will require firms to prepare an annual board report on compliance with the duty. In addition, firms will also need to reflect the duty in their strategy, governance, leadership and people policies, including incentives. This is intended to ensure that the duty is embedded in the firm’s culture and that it is focused on enabling good consumer outcomes.

More than just compliance 

Firms and their boards have much to do to ensure their implementation of the duty is effective, from scoping decisions, determination of responsibilities through the distribution chain, development of value assessment frameworks and demonstrating delivery of the four outcomes.

Yet boards should see this as much more than another compliance exercise. Not only is it vital for the protection of consumers but, if done properly, could lead to more satisfied customers overall and drive commercial success.

A Speaker’s Corner: A Speakers’ Corner is an area where open-air public speaking, debate and discussion are allowed. The original and most noted is in the north-east of Hyde Park in London

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