FCA gives clear message to UK firms: the Consumer Duty journey is only just 'beginning'

The Financial Conduct Authority (FCA) brought the Consumer Duty into force for closed products and services on 31 July, with the same date marking the deadline for boards to have reviewed and approved their first annual report on the new regulation.

Since its initial implementation in July 2023, the Consumer Duty has changed how retail finance is regulated in the UK with the introduction of outcomes-focused rules in addition to traditional product-specific regimes. More than a year later, how has the FCA engaged with firms around the introduction of the Consumer Duty and its extension to closed products and services? And what further activity can they expect from the UK financial regulator?

The challenge of closed products

The FCA wrote to firms in May to help them prepare for the closed products deadline and to outline a number of challenges they would need to consider ahead of the 31 July implementation.

Firstly, the FCA noted that many closed products have gaps in customer data, due to challenges with legacy systems and back-book purchases. The regulator said it expects firms to take "proportionate steps" to reduce material gaps to ensure good outcomes for consumers. It warned firms to take special care with gaps that might make vulnerabilities hard to spot.

On fair value, the FCA reminded firms that there must be a "reasonable relationship" between the price customers pay for a product and the benefits they receive, even if the product was not previously subject to the Consumer Duty.

Another issue is the treatment of "gone away" or disengaged customers. The FCA identified potential for harm if customers are paying for products they no longer want, need or are eligible for, or if they are failing to take advantage of new features. Accordingly, firms should make efforts to contact unresponsive clients, if necessary with the help of third-party specialists. At the least, firms should assess the effectiveness of their efforts to contact unresponsive customers and know what action to take when customers get back in touch.

The FCA also highlighted that firms are not expected to give up "vested contractual rights" related to closed products, such as pre-existing rights to fees. In the FCA's view, if a customer can terminate a contract without an exit charge, firms have "no more than an expectation of the customer continuing the contract", which means that future charges are not a vested right. If genuine vested rights exist and firms do not want to give them up, they should consider alternative ways to prevent potential harm to customers, such as providing greater flexibility on how customers can engage with a product, help for customers to switch or increased support.

Progress so far

Sheldon Mills, the FCA's executive director of consumers and competition, in a speech on "taking the leap" on the Consumer Duty to mark the one-year anniversary in July assessed its impact to date and its future.

Mr Mills reported that significant improvements had been made since the Consumer Duty came into force for new and open products, particularly in sectors where the regulator had intervened. As examples, he cited firms acting more quickly to increase savings product rates in response to base rate rises and investment platforms abandoning the practice of "double dipping", which involved their making a return on interest as well as charging customers for custody of cash. More generally, he said that firms have developed metrics to track customers' experience, improved how they capture information about vulnerabilities, adjusted incentives to reflect Duty outcomes and simplified and improved communications.

Room for improvement

Mr Mills made clear, however, that this is "the beginning of the journey and not the end". In an accompanying Consumer Duty webinar, an FCA and Financial Ombudsman Service panel mentioned fair-value assessments and outcome monitoring as areas where firms could improve.

The regulator pointed out that benchmarking against comparable firms and products in the market is just a starting point: customers need to be assessed by cohort (for example, those with different characteristics), and there should be a holistic assessment of the value the customer is receiving in relation to the total price they paid for the product.

The panel also said firms should look at their customer journeys and use both quantitative and qualitative information to identify where poor outcomes may be experienced and corrective action is needed. Where changes are made, firms should be able to evaluate their impact to judge whether consumer outcomes are improving.

Information requests and enforcement

The FCA will also seek to understand how firms are embedding the Consumer Duty and where issues are emerging. "Where we need more information and data from firms," Mr Mills said, "we'll only ask for what we really need."

Asked about enforcement in the webinar, the FCA panellists said that the regulator would take a proportionate approach but expects firms to respond to requests promptly and resolve any issues.

Handbook review

A call for input launched in July is running until 31 October seeking views on whether, where and how the regulator could refine and simplify its (non-Consumer Duty) retail conduct rules. The idea is to address areas of "complexity, duplication, confusion or over-prescription" that create costs and offer limited benefits, and build in flexibility to allow the regulator to be responsive to future changes and innovation.

Price and value

The FCA has now published examples of good and poor practice on the price and value outcome, warning it would act where it sees firms not improving in response to feedback, or whose products are "clear poor value outliers".

The FCA emphasises the "holistic" approach firms should take to the Consumer Duty outcomes, namely the importance of not considering the price and value outcome in isolation. A product that does not meet customers' needs or causes harm is unlikely to offer fair value, whatever the price. Opaque pricing, for example, can disguise poor value and blunt customer understanding at the same time.

Another message to firms is to focus on thoroughness. If two products have significantly different features, or distinct target markets, firms should complete separate fair value assessments for them. If savings products with different rates and terms are assessed together, for example, this 'oversimplified analysis' can conceal poor value for some customers. Similarly, if target markets are defined too broadly, it becomes difficult to identify true needs and objectives.

Firms should think critically about customer outcomes rather than seeking to justify their current approach to a product's pricing or benefits, the FCA notes. Benchmarking non-price benefits against those of competitor products is worthwhile; examining a product against a favourable subset of the market only skews firms towards giving themselves good marks. Similarly, if a firm seeks to justify higher prices based on costs it incurs, the FCA expects to see a clear rationale within the fair-value assessment, not least to allow for an effective challenge at board level.

Osborne Clarke comment

The FCA has been quick to engage proactively with firms around their implementation of the Consumer Duty, in particular by requesting documents from firms such as board reports. This approach gives us a sense of how the FCA may intend to supervise the Consumer Duty from now on.

The Consumer Duty is not "once and done", the FCA stated in November 2023. It is an ongoing set of standards that firms must keep in mind at every stage of a product's "lifecycle" and embrace as part of their culture. The regulator's recent messaging and engagement with firms makes it clear that the Consumer Duty is a top priority – and we can expect it to be a critical tool for supervision and enforcement.

We will have to wait to find out where the review of FCA requirements following the introduction of the Consumer Duty will lead, but we could see a streamlined FCA Handbook in the future – the fact that the FCA is undertaking this review, against the background of the Consumer Duty itself, reinforces the sense of an ongoing shift in its thinking towards more flexible, outcomes-focused regulation.