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The Consumer Duty, enacted by the UK’s Financial Conduct Authority (FCA) on July 31st, 2023, represents a pivotal regulatory shift, mandating firms to prioritise customer interests and elevate outcomes. Applicable to all entities regulated by the FCA, spanning insurance firms, banks, and investment companies, the Duty extends across the spectrum of products and services offered to individual consumers and micro-enterprises. Since enforcement, adherence to the Duty has brought forth an array of challenges for firms subject to the new rules. With regulators imposing strict scrutiny, let’s explore the challenges around compliance with the Duty and how firms can overcome them.
Act in the Best Interests of Customers: Firms must foreground customer interests throughout the design and distribution of products and services. This entails furnishing comprehensive and intelligible information about product and services offerings, facilitating informed decision-making for consumers.
Mitigate Conflicts of Interest: Vigilance against conflicts of interest is essential, with firms tasked to identify and mitigate such conflicts diligently. Transparent disclosure of any conflicts, alongside measures to ensure fairness to customers, is mandated to ensure firms are not unfairly disadvantaging customers.
Provide Fit-For-Purpose Offerings: Products and services must be tailored to meet the unique needs of customers. A nuanced understanding of individual circumstances is pivotal in delivering solutions that align with customer requirements effectively.
At its core, the Consumer Duty aims to instil greater transparency and accountability within the regulatory landscape, ensuring customer interests remain at the forefront of industry practices.
Predictions from DAC Beachcroft stated that the Consumer Duty will present significant challenges to the market throughout 2024. Forecasts from their report suggest an amplification in regulatory enforcement actions, necessitating firms to not merely demonstrate compliance with existing rules but also showcase additional measures undertaken to fulfil the key obligations delineated within the Duty. DAC Beachcroft also anticipate intensified scrutiny from the FCA, particularly concerning fair value assessments for insurance products, and expect the regulator to spotlight issues like GAP insurance, noted for potential discrepancies in value proposition.
A ‘Dear CEO’ Letter issued by the FCA in December 2023 further reiterated concerns over firms’ failures to comply with the Consumer Duty rules, which were expected to have been fully implemented by November 2023. The letter specifically referred to the unfavourable treatment of the interest earned on customer’s cash balances, which was highlighted to not be in line with the Duty. Following a review into a sample of investment platforms and SIPP operators, the FCA declared that on average firms are retaining 50% of the interest, 61% are also charging a platform fee on the customer cash they hold and a notable variance was identified in the quality of disclosures made to consumers, as well as differing justifications for interest retention. The letter underscored the imperative of ensuring fair value provision and transparent communication, aligned with the Consumer Duty.
At a 2024Insurance DataLab webinar, compliance expert Claire Carpenter emphasised imminent enforcement actions, signalling heightened regulatory oversight in the coming quarters. Carpenter warned that the FCA had “20 enforcement notices sat on their desk ready to go to insurers over the next quarter.”
Understanding customer needs is paramount to ensure future changes appease consumer interests. Obtaining feedback from customers regarding areas to improve is vital to ensure adherence to the Duty. Without transparent and clear communication between parties, many run the risk of non-compliance for failing to put the needs of the consumer first. Effectively communicating with consumers to ensure they understand their rights, options, and obligations can be challenging. Firms must develop clear, transparent communication strategies to educate and empower consumers while avoiding jargon or misleading information.
Embracing Consumer Duty mandates a cultural shift within organisations, wherein consumer interests supersede profit motives. Firms must prioritise enhanced consumer outcomes, fostering a culture of transparency, integrity, and accountability throughout the organisation. Embedding this new mindset throughout the organisation is key to fully investing in the needs of consumers and aligning with the Duty.
Continuous monitoring and oversight are essential to ensure ongoing compliance with Consumer Duty requirements. Firms must establish robust monitoring mechanisms, conduct regular reviews, and implement corrective actions as needed to address any compliance gaps or issues. By embracing sophisticated RegTech for insurance technology, companies can automate and streamline their regulatory processes to strengthen their compliance and ensure constant regulatory adherence and effective risk mitigation.
To fulfil Consumer Duty obligations, firms may need to collect and process sensitive consumer data. This raises concerns regarding data privacy and security, necessitating robust measures to safeguard personal information from breaches or misuse.
Following the implementation of fair value and consumer duty, regulatory bodies can be expected to further tighten their scrutiny on regulated firms to ensure compliance. With the FCA already formally writing to firms who have shown inadequate adherence to the rules, coupled with enforcement notices to non-compliant companies, it’s clear firms failing to comply face strict consequences. With 74% of the market already noting the regulatory burden to have dramatically intensified over the last year, it is vital the market invests in forward thinking solutions like RegTech to better manage their trading, legal and regulatory obligations in a centralised and streamlined manner.
Implementing Consumer Duty measures often requires significant financial and human resources. Firms may need to invest in technology, staff training, and infrastructure to ensure compliance, which can strain budgets and impact profitability. Firms must look to solutions that provide material benefits which streamline their adherence with the Duty. Investing in technology and training not only strengthens resilience to Consumer Duty requirements, but also provides cost-effective strategies that mitigate potential compliance breaches which could incur heightened financial strain.
Overall, navigating the challenges of the Consumer Duty requires a proactive and holistic approach; integrating compliance efforts into core business strategies and values, shifting organisations’ cultural mindset to adopt a customer-centric approach, as well as embracing technology that helps to automate and streamline regulatory requirements. It’s crucial firms prioritise compliance with Consumer Duty, given the enhanced scrutiny imposed by regulators and ensure their strategies align with the basic ethos of the Duty, which is ensuring consumer interests are focal to improve outcomes for their customers. In turn this will ensure the safeguarding of consumer interest, bolster industry integrity and create a competitive market where priorities are forward thinking and focused on promoting ethical profitability.
The recurring ones are evidencing fair value across a distribution chain, communicating clearly with customers, monitoring outcomes continuously rather than annually, and keeping records that stand up to an FCA review. Most firms find the difficulty is not the policy but operating it consistently across every counterparty.
MGAs sit inside the distribution chain, so they carry obligations both as manufacturers of products they design and as distributors of products they place. In practice that means contributing fair value evidence upstream to carriers and gathering it downstream from brokers, and being able to show both on request.
A fair value assessment is the firm’s documented judgement that the price a customer pays is reasonable relative to the benefits they receive. It needs supporting data on claims, cover, distribution costs and remuneration, refreshed regularly, and it must be evidenced rather than asserted.
The FCA expects a board-level annual assessment showing how the firm monitored customer outcomes, what it found, and what it changed as a result. Firms are also expected to share information across the distribution chain so each party can meet its own obligations.
Head of Marketing
Zoë Parsons is Head of Marketing at REG Technologies. With a passion for creativity, she is dedicated to driving the success of REG’s digital presence through innovative strategies and a keen advocate for diversity and inclusion.
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