The Consumer Duty: getting ready for the first board reports and the closed products deadline

The Consumer Duty – live for almost a year – sets clearer and higher standards of consumer protection, expecting firms to act to ensure good customer outcomes. However, the principles-based obligations, while flexible, have left some firms frustrated due to a lack of prescriptive rules.

With the next two deadlines fast approaching;

• the submission of the first Consumer Duty board reports and
• the commencement of the regime for closed products

fscom have experienced awareness across our clients and many other firms starting to fully recognise the extensive work this will therefore require. It can be overwhelming!

Whilst the FCA’s recent ‘Dear CEO’ letter sets out clear guidance and the main focus areas for firms, to support our clients, we highlight two immediate challenges that we have been discussing with the industry and provide some practical insight into addressing these: submitting the first consumer duty board report and dealing with getting ready for closed products compliance.

Submitting the first Consumer Duty Board Report

For those firms seeking to submit their first Consumer Duty Board report, the pressure is on for both the board and the consumer duty champion. They are central to the firm’s culture, strategy and business objectives and with respect to the Consumer Duty, obligated to ensure the regulation and ethos is embedded and adopted across the firm.

The board report is a critical part of that overall governance.

Overall, the board report is key and should achieve three objectives – and firms should ensure all areas are covered concisely in their reports:

1. Evidence that governance is in place that ensures good customer outcomes. In practice, this means showcasing effective embedding of challenge, discussion and evidencing of how that is achieved across the business.
2. Be detailed enough to showcase the firm’s activity and outcomes in practice. This means providing detail of where the embedding is effective, and where there are areas of improvement.
3. Showcase a clear roadmap that sets out areas for improvement including indicative timelines. These improvements should include both aspects that are not to the desired standard as well as future enhancements to use the established governance and data to further improve customer outcomes.
   
   

At fscom, we have developed relevant sample templates to help firms with their board reports, which you can download here: Annual Report to the Board and Annual Board Assessment.

Getting ready for closed products compliance

For the purposes of the Duty, a closed product or service must meet both of the following criteria:

• there are existing customers who took out a contract before 31 July 2023; and
• the product or service hasn’t been marketed or distributed (including by renewal) on or after 31 July 2023.
  
  

Closed products pose unique challenges for firms in demonstrating good customer outcomes – with those in the life and pensions space particularly impacted.

In particular, we highlight two challenges:

1. The complexities around fair value assessment and alternative product selection, supported by advice and suitability considerations
   a. When switching, firms will inevitably have considered the fees they levy and made a fair value assessment but given that any products being switched out of tend to be superseded by innovative alternatives with more tailored pricing relative to their benefits, it is challenging to ensure comparison of benefits and fair value and the further actions needed to address obligations under the Consumer Duty.
2. The need to ensure customers are engaged, fully informed and that suitability and customer consent requirements have been addressed.
   a. This is further exacerbated simply due to the passage of time – contact with customers, changes of systems, product provider consolidation, illiquid assets within the accounts and many more obstacles can make compliance extremely challenging.
   
   

To address these, it is paramount that firms make a proportionate assessment and provide clear rationale for how they have assessed each of the obligations under the Duty.

It is imperative that you evidence how you have acted, based on the greatest risk of harm, to ensure good outcomes and avoid foreseeable harm, along with a clear pathway, resource and budget aligned to areas where further action is ongoing.

Converging on best practices

As with the open product deadline a year ago, the FCA has since published several best practice guides, and industry forums remain a good place to understand approaches other firms are taking and how they overcame some of the specific challenges.

fscom have significant expertise within Consumer Duty and if you would like to discuss your firm’s current approach or specifics with us, please reach out to a member of the fscom team.