The regulator has said firms need to provide better quality data and analysis of client types and challenge governing bodies to comply with Consumer Duty.
In its review of firm practices, the Financial Conduct Authority (FCA) said the best Consumer Duty reports had a clear outcomes focus with dedication sections for each outcome and clear processes for the production of the report.
Good examples of Consumer Duty reports also included a focus on embedding this culture across a firm.
However, the regulator said some firms did not have enough data quality to justify conclusions or to reassure governing bodies that they were meeting requirements.
Some reports did not have evidence that an appropriate amount or types of information had been shared with firms across the distribution chain, while others did not demonstrate they had considered the outcomes for different customer groups, including those with vulnerabilities.
Further, it was not always clear that governing bodies had been challenged on the contents of the reports, such as through minutes of board meetings, while some action plans were not accompanied by details on timescales, who was responsible for actions or clarity of the data that would be used to evidence good outcomes.
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Smaller firms using ‘critical friends’
The FCA found evidence of good practice among smaller firms but acknowledged they faced different challenges in meeting Consumer Duty requirements.
It said smaller firms might not have dedicated compliance and audit functions, but could benefit from knowledgeable ‘critical friends’ who would give impartial feedback on their Consumer Duty approach.
However, smaller firms may be able to provide more tailored support to customers because of their size.
It said smaller firms might have fewer encounters with clients with varying needs, so extensive policies and dedicated structures might be “unnecessary”.
“We still expect smaller firms to learn from transactions with different groups of customers to ensure they deliver good outcomes in the future,” the regulator added.
Not enough detail
The FCA said not all firms sufficiently reported whether products and services delivered outcomes in line with the duty.
It said while not all firms could carry out exhaustive reviews for all products and customer groups, “illustrative examples would be useful”.
Some firms relied on high-level claims instead, such as ‘products are designed to meet the needs of the target market’.
Some reports included limited results for customers with different characteristics of vulnerability, with the FCA saying this was sometimes treated as a catch-all rather than addressing specific needs.
It also said some reports stated that a firm’s future strategy aligned with Consumer Duty but gave no detail on any review of its strategy of whether changes were needed.
Additionally, some reports outlined issues that had been identified but did not include any assurance that there was a plan to resolve them. Others said action had been taken but gave little or no evidence to show this had been effective.
The crucial role of good-quality data
Andrew Gething, managing director of MorganAsh, said the review was a reminder of the “crucial role that good-quality data plays in meeting the FCA’s requirements and demonstrating compliance”.
He added: “Given ongoing communications from the FCA, and recent action with hefty fines levied, it is further proof just how much of a priority this is for the regulator.
“Robust data is the cornerstone of Consumer Duty – it’s necessary for good management information and essential in identifying who… vulnerable customers are – let alone how their outcomes compare to resilient customers.”
Gething said: “Rather than relying just on those who reach out, or repackaging existing data, firms need to adopt a consistent and objective measurement of customer vulnerability. With the right systems and processes in place, firms can monitor outcomes throughout the lifetime of products, make necessary improvements and then report on their findings.
“While recognising that smaller firms don’t always have the same resources, demands or indeed customer challenges, the report reaffirms that small businesses still have the same responsibility to ensure good customer outcomes. This is an important reminder to those firms hoping to fly under the radar. These businesses need to learn the lessons from customer interactions and make improvements where necessary. Once again, good-quality data and good systems will help to ease any potential difficulties.”
He said the regulator was not expecting reports to be perfect, “but to at least show positive steps towards meeting its requirements and delivering better outcomes”.
Gething said a lack of understanding among firms was a “key challenge” when it came to identifying vulnerable customers, as well as “a slowness in adopting new technology to meet this key requirement”.
He added: “Most of all, though, it’s the view that Consumer Duty is just another regulatory headache. In reality, we have seen examples of firms [that] have embraced Consumer Duty and unlocked the competitive advantage of offering a better and more personalised service – especially to those vulnerable customers who are currently under-served.
“There’s no doubt that the right technology and the right data is absolutely key in achieving this breakthrough.”
