From 31 July 2023, firms will need to ensure they comply with the FCA’s Consumer Duty. In this article, we explore the five top challenges they’ll face.
The Financial Conduct Authority (FCA) has proposed a new consumer duty that will require firms to prioritise customers' interests and improve outcomes. The Consumer Duty is part of the FCA's 2022-2025 strategy and aims to create a paradigm shift for firms by making them more accountable for their actions.
The proposed rules will apply to all firms regulated by the FCA, including banks, insurance companies, and investment firms.
The FCA has said that it expects firms to embed the consumer duty into their culture and business models, and to demonstrate how they are meeting the new standards.
There are five key challenges that firms will face in complying with the proposed consumer duty.
1. Culture change
The Consumer Duty culture emphasises fair treatment, transparency, and customer-focused decision-making, which requires a shift in mindset towards putting customer outcomes first.
Firms will need to embed the consumer duty into their culture and business models, which could be a significant challenge.
This will require a commitment from senior management to prioritise customer outcomes, rather than profits or the business.
This new culture also involves creating an environment where all employees are accountable for treating customers fairly, rather than just relying on internal compliance requirements.
This should involve creating products and services that meet customers' needs and providing clear communication about their features and costs.
Finally, firms will be required to adopt a proactive approach to identifying and addressing potential harm to customers, rather than simply reacting to complaints or regulatory action.
2. Data and technology
Companies will need to invest in technology and data analytics to collect and analyse customer data, provide personalised recommendations and monitor customer outcomes. explore
They may also have to update their current cybersecurity, data management and protection systems to ensure they are effective.
Providers that use algorithms to make decisions about customer outcomes must ensure they are transparent and explainable.
Customers must be able to understand how decisions are being made, and firms must be able to provide evidence that their algorithms are not biased.
3. Training and development
Firms will need to ensure that their staff are trained to meet the new standards and that they have the necessary skills and knowledge to deliver good customer outcomes.
For example, training could include:
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Financial needs and objectives of consumers
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Financial biases and behaviours of consumers
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Paying special attention and care when dealing with vulnerable consumers
4. Regulatory scrutiny
The FCA has stated that it will take a more proactive approach to supervision and enforcement, which means that firms can expect greater scrutiny of their practices and procedures.
The fines for non-compliance with the FCA's consumer duty have not yet been specified, but they are likely to be substantial and could potentially run into millions of pounds for larger firms.
The FCA has indicated that it will take a more proactive approach to supervision and enforcement, which means that firms can expect greater scrutiny of their practices and procedures.
This could include increased frequency and intensity of supervisory visits, more frequent requests for data and information, and potentially more enforcement action.
To prepare for this increased scrutiny, compliance teams should ensure that they have a robust compliance programme in place that is tailored to their firm's specific risks and business model.
This should include regular risk assessments, effective policies and procedures, robust systems and controls, and effective monitoring and testing.
Compliance teams should also ensure that their staff are trained and competent in delivering fair outcomes to customers and that they are able to identify and escalate potential issues quickly.
5. Increased costs
Firms will incur additional costs in complying with the Consumer Duty, including investment in technology, training, and systems. This could put pressure on profitability, particularly for smaller firms.
To sum up
Implementing the proposed Consumer Duty will not be without its challenges, and firms will need to invest significant resources to comply with the new standards.
But it also has the potential to transform the way firms operate and create a more level playing field for consumers.
Firms that embrace the new standards it sets and prioritise customer outcomes are likely to benefit in the long run, as customers increasingly seek out firms that they can trust to act in their best interests.
Whom to speak to at Claro Wellbeing
Galina Stavskaya CFA, head of partnerships at Claro Wellbeing, is the best person to speak to to find out how Claro Wellbeing can support your business’s specific needs.
Email: galina@claro.team
Further recommended reading
The FCA & Financial Ombudsman Service (FOS) has published several documents about the consumer duty, including a policy statement, consultation papers, and guidance.
You can find these documents on the FCA & FOS website:
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Is your firm ready for 31 July 2023?
Arrange a call with Claro Wellbeing to discover how we can help fast-track your firm's preparations for the FCA's Consumer Duty.
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Galina Stavskaya-Barengo, CFA
