The new Consumer Duty so far
One of the questions most asked of me in recent weeks is how far the payments sector has got in implementing the new Consumer Duty. The FCA allowed a year for implementation and we’re over half-way to the 31 July deadline so firms should be moving into the final stages of their implementation plan. But given the newness of some aspects of the rules for the sector and the breadth of reach of the duty it’s a very good question whether it was ever likely that the sector could be ready within the year timeframe.
Newness for the sector
The ‘significant shift in culture and behaviour’ that the FCA expects from the sector, as referenced in their Dear CEO letter a couple of weeks ago shouldn’t be understood as a statement that the sector is collectively anti-consumer or letting consumers down. Every payments business I know asserts, and I’ve no reason to doubt them, that their customers are at the heart of everything they do and there are many examples of consumers benefiting from payment and e-money institutions’ products with competitive pricing and convenient and inclusive services. However, unlike firms authorised under other regulatory regimes such as MiFID, payment and e-money institutions have not been required (by regulatory rules) to document their product governance policy and procedure, categorise clients, assess suitability and evaluate remuneration and incentivisation, for instance.
This low starting point means there is further for payment and e-money institutions to climb. It may also be that the particular interdependencies of the payments industry adds to the complexity of the task at hand for the firms.
The breadth of reach of the duty
Some firms, those that are business-to-business, were delayed in kicking off their Consumer Duty workplans because they assumed it did not apply. The FCA’s letter puts the scope succinctly:
The Duty applies to products and services offered to retail customers, including to microenterprises and small charities with an annual turnover of less than £1 million, and to all firms who determine or have a material influence over consumer outcomes – not just those with a direct customer relationship.
The ‘material influence’ part broadens the potential reach considerably as it necessitates that the firm must, at least, consider how their role in the chain could negatively influence the outcome for the retail customer who is the end user. It suggests a creeping of liability for the actions or inactions of a partner or fellow participant in the chain. At least where there is a formal partnership, the role and responsibilities of each party will have already been documented to some extent. In cases where the parties are simply co-participants in the transaction, as is the case for card issuers and acquirers and for payment initiation service providers and account servicing payment service providers, the scope of what material influence entails requires consideration and defining, which will be subject to the FCA’s assessment of whether they agree with the conclusion.
For applicants, the deadline has, effectively, already passed with the FCA’s publication at the end of January of the list of material to be included in the application submission. Applicants must provide all the policies, processes, Management Information (MI) and any other materials created or relied upon to support compliance with the Consumer Duty. The following must be provided, at a minimum.
- A target market analysis and identification.
- A product and service governance framework.
- A fair value assessment framework.
- Customer understanding assessment and testing framework.
- Customer support monitoring polices and supporting Management Information (MI) suite.
- Customer outcome monitoring framework.
- Root cause identification process.
Both the low starting point and the breadth of scope are pressing heavily on firms who do not generally have material inbuilt flexibility, or contingency, in their resourcing for projects such as these. Teams are struggling to afford the time to develop the methodology for the end-to-end analysis as well as to collect the data from which to draw conclusions. At this stage, a degree of prioritisation is necessary in recognising that it may not be possible to implement and embed the Consumer Duty as fully as one would like. Prioritisation must be about focusing efforts on areas where most can be gained for consumers and with a clear plan for post-deadline upgrades to data collection, depth of analysis, documented procedures etc. as relevant.
It is within this context that the ‘significant shift in culture and behaviour’ statement is better understood: it is a reflection on the maturity of the sector, which is a continuing theme for the FCA.
Maturity shifts are seen when:
- the Board asks the business whether they have sufficient resources to meet the implementation plan timelines and supports with further resourcing and/or prioritisation;
- the firm recognises it has to look beyond the party to whom it sells its product to the underlying customer who takes up the product;
- the first line teams take ownership of implementation without heavy dependence on the compliance team to push the agenda; and
- the policy documents are written as a statement of how the firm meets the obligations in the context of its own business model rather than a restatement of the rules.
At this stage, first line teams need practical ideas and inspiration as to how the Consumer Duty rules can be met. It’s why peer-to-peer discussion forums, like the one the Payments Association’s Project Regulator is hosting tomorrow (and online the following week), and the event hosted by AFEP are so important, both of which are strongly supported by fscom.
If you would like to join a session or speak to a fscom expert about your implementation needs, get in touch with me.