As the deadline for financial service companies to implement the Financial Conduct Authority‘s (FCA) Consumer Duty regulation draws closer, is the industry finally ready to adopt widespread, purpose-driven initiatives for good?
The FCA’s Consumer Duty regulation requires industry players to direct their initiatives and operations to deliver good outcomes for their retail customers.
Firms must act in good faith towards their customers and mustn’t seek to cause foreseeable harm to them or the wider industry.
Additionally, the services of these firms must enable their customers to pursue their own financial objectives.
In essence, firms must provide customers with services and communications they fully understand, offering fair-value products that meet their needs and support their financial desires.
The FCA published a final guideline for Consumer Duty on 27 July this year, with firms having only until the end of October to officially announce and implement plans to comply with the regulation.
According to the FCA’s official website, “Firms’ boards (or equivalent management body) should have agreed their implementation plans and be able to evidence they have scrutinised and challenged the plans to ensure they are deliverable and robust to meet the new standards” by 31 October 2022.
A little later down the line, the FCA expects manufacturers to have completed all the necessary reviews to meet the outcome rules for their existing open products and services by 30 April 2023.
This April deadline is to ensure that manufacturers have the time to collaborate with distributors, allowing them to meet their obligations under the duty and to identify where changes need to be made.
This will then be followed by a 31 July 2023 deadline for implementation across open services and products, with implementation for closed services and products expected to follow exactly a year later on 31 July 2024.
The FCA’s new regulations are to ensure that customers receive communications from financial services firms that they understand, and are being offered products that meet the individual’s need at the point of sale and throughout the entire product lifecycle, offering fair value and providing support when they need it.
Speaking at the Consumer Protection in Financial Services Summit on 29 September 2022, Sheldon Mills, executive director of consumers and competition at the FCA, discussed how the Consumer Duty will put “customers in a position where they can make informed decisions; where they are presented with suitable products and services for their individual needs; and where they receive fair value for those purchases.”
“The duty will require all firms, whether designing, selling or advising on products and services, to put their customers’ needs first,” his speech continued.
Mills’ speech cited trust and confidence in financial services as key and explained that achieving good outcomes for consumers will help to achieve this.
“I worked closely with many firms during the pandemic and really saw the industry pull together to support consumers, businesses, and the wider economy,” he explains. “We began to see the trust growing. The new Consumer Duty will help build on this. And this ultimately benefits businesses, the economy and growth and productivity.”
So with only the end of the month to deliver plans to comply with the regulations, as per the FCA’s October deadline, is the industry ready?
According to the open finance data and payments platform, Moneyhub, only 22 per cent of firms believe that they are currently compliant with the new regulation.
This is despite 79 per cent of FCA-regulated firms acknowledging the significant impact that the new Consumer Duty regulations will have on their way of doing business.
As per Moneyhub‘s data, 56 per cent of decision-makers at these firms fear that their business is not prepared nor do they currently have projects in place to become compliant ahead of the deadline.
This is a significant concern given the FCA expects boards to have an implementation plan approved by the end of October 2022.
Importantly for FCA-regulated companies, these regulations will eventually affect firms’ book of business rather than just new business. This in itself will prompt a re-evaluation of products that current customers are on and whether they are still appropriate.
While the FCA has shifted the first implementation deadline for firms back from April 2023 to July 2023, with the majority of businesses still lacking plans to make the business compliant, there is a risk that many will not meet the new deadline.
With legacy systems in use by many businesses, full implementation will by no means be an easy journey, as knowledge of the customer and their current and ongoing situation will be paramount when implementing change.
Open finance has evolved into a solution that can bridge the disclosure gap, help firms become compliant at speed and significantly reduce the cost of compliance.
Samantha Seaton, CEO of Moneyhub, commented: “While many firms believe they are already customer-centric, Consumer Duty will test the reality of this. The new regulation demands a level of customer knowledge that most firms are yet to appreciate. The amount of data needed on the customer to comply with Consumer Duty requires a new level of operation for most businesses.
“There is an expectation that boards already have a plan in place by October. However, we can see that this is unlikely to be the case.
“By not preparing early for the incoming regulation, firms not only risk being non-compliant but also missing out on the opportunity that Consumer Duty presents. Taking a customer-centric approach rather than a product-led mode of operation is now imperative for all businesses. Moneyhub’s platform can provide this knowledge and the ongoing monitoring to ensure appropriate and suitable products now as well as throughout the entire lifecycle of that product.”
The aforementioned lack of readiness by financial services companies to implement the FCA’s Consumer Duty regulation comes in tandem with the company’s similar findings that showed how one in 10 decision makers, including CEOs and the wider c-suite, say that they don’t feel that their firms have a good understanding of impending Consumer Duty legislation.
Late to the party
The company’s findings emphasise a significant risk that many won’t be ready by the deadline.
The research, commissioned by Moneyhub and carried out by Opinium Research, saw 150 senior members of the financial services industry interviewed by telephone in order to evaluate the industry’s preparedness for the new regulations due to come into effect in July 2023.
With one in 10 doubting their own firm’s understanding of the new rules, a knowledge gap was clearly identified. Indeed, while 61 per cent of those interviewed claimed that they knew a lot about the impending legislation, 31 per cent admitted knowing a little, while seven per cent admitted that they knew nothing at all.
There is a concern that this knowledge gap has contributed to inaction across the sector with a third of decision-makers saying their firm won’t be compliant by the deadline of April 2023 originally given by the FCA.
Nineteen per cent said that it would be a challenge to hit the original deadline, and 14 per cent said it wouldn’t be possible at all.
While the FCA has moved the deadline back to help businesses on their journey to become compliant, with only a couple of additional months available there is significant concern that many will still struggle to be ready.
The research found that 56 per cent of decision-makers said their firms were still not compliant and, importantly, had no projects in place to become so despite the FCA voicing expectations that boards have plans in place by the end of October 2022.
In order to offer appropriate products and services for clients now and throughout their life, a deep understanding of the customer’s life is required. The company underlines the use and application of data as a potential to bridge this gap and could offer a cost-effective solution for businesses needing to become compliant soon.