Common themes
- A number of firms have not yet started to undertake a gap analysis to assess the potential impact of Consumer Duty – instead, citing a plan to wait for the final rules to come out. However, if the FCA keeps to the current implementation timeline this could be challenging. The sentiment in the breakout sessions was that it is important to raise potential issues early, particularly if they relate to revenue streams or operating models.
- For those who are already thinking about the approach to Consumer Duty, there was an understanding that there would need to be a multi-strand approach. There are a number of common themes across product and service lines (reflecting the cross-cutting approach of the FCA). But the ‘devil will be in the detail’, and there was a recognition that a granular review of products and customer agreement will be needed as well.
- Many contributors raised concerns about the inherent difficulties in interpreting ‘what good looks like’ in terms of the application of a new Principle. It was felt unlikely that the FCA would provide greater clarity and examples; instead, the onus would be on individual firms to satisfy themselves that they are meeting the requirements.
- The FCA’s reference to becoming a data-led regulator raised the expectation that the regulator may be planning more risk-based and targeted supervision in the market.
Governance breakout sessions
Contributors felt there would certainly need to be some education with senior managers and upskilling on the Consumer Duty requirements. A cultural shift was also seen as an important requirement across all levels of the firm – with the expectation and obligation on senior management to articulate and disseminate positive cultural messages.
Across the breakout sessions, there was a clear view that many of the Consumer Duty requirements were somewhat vague. Therefore there was an expectation that senior management was going to need to ‘show their workings’ more frequently, and be able to demonstrate that sufficient time and focus had been given to balancing commercial and customer requirements. It will be vital for firms to evidence how products and services are meeting customers' expectations, and what actions the firm takes when good outcomes are not achieved.
Aligned to this was an expectation that senior management would need to see enhanced MI and have access to a broader range of customer metrics, with both quantitative and qualitative measures. And within this, there was a likelihood that tolerances and key risk indicators would also need to be reviewed. Firms also recognised the holistic nature of the Consumer Duty requirements, and how this would require broader measures and insights to ensure these requirements were adhered to.
In line with this recognition of the requirement for a holistic view there was an expectation that changes would be required across the whole Three Lines of Defence framework. This will start with the risk owners in the First Line, but there would also be an expectation that First Line quality assurance would need to be enhanced too. For Second Line, Compliance would need to expand their monitoring, and the Risk function would need to consider the potential impact on risk appetite statements and the risk identification process. Third Line should also be engaged, both in terms of undertaking assurance on the effectiveness of Consumer Duty implementation, and in factoring the requirements into their ongoing audit activity.
Business model breakout sessions
In the sessions on business model, it was clear that firms recognised that Consumer Duty had the potential to significantly disrupt how business was conducted, and how products were priced and developed.
For sectors with a heavy reliance on distribution chains, there was recognition that there could be potential challenges. It was noted that the FCA has highlighted scenarios where they believe the distribution model does not work in the interests of the end consumer. Firms also felt there would be inherent challenges with information flows between parties within the distribution chain (e.g. manufacturers and distributors), and there would be difficulties in ensuring that good outcomes had been achieved.
The question of back books was also raised by a number of attendees, and the extent to which the implementation of new rules in 2023 would impact the administration of products sold under contractual terms written many years ago.
Much of the debate in the session was around the question of price and value. And whilst some sectors have already been through recent reviews, there was a recognition that the Consumer Duty rules could significantly impact some established business practices. Many firms are in the early stages of considering how some business models would be justified – e.g. the spread between lender and borrower rates, or percentage-based fees (rather than fixed amounts for work), or areas where there is currently clear cross-subsidisation.
Conclusion
Consumer Duty implementation is clearly going to be a significant shift in the way firms operate and how products are sold. In order to reduce the potential impact and mitigate against future risks, it will be important for firms to make an honest appraisal of where the weaknesses within their business and operating models are, and what improvements are required.
This process should be driven by senior management, but the success of the implementation will be predicated on ensuring that the entire Three Lines of Defence are brought into the discussion.
Authored by Vincent Fornasier, Michael Thomas, Roger Tym, Frank Brown, Matthew Handfield, Dominic Hill, Grace Wyatt, and Anahita Patwardhan.
