FCA Signals a More Intense Approach to Consumer Duty Compliance

Background

The Consumer Duty, which applies to a greater or lesser degree to all firms providing or interacting with the provision of retail financial services, was initially implemented on 31 July 2023.  It was in the first instance only relevant to so-called “open products”, i.e. products (and services) being offered as of the implementation date to retail customers for subscription or renewal.

On 31 July 2024 the Consumer Duty was extended to “closed products” i.e., existing products (and services) provided to retail customers which were not subject to marketing for subscription or renewal.

Dear CEO Letter 7 October 2024

On 7 October 2024, FCA issued a “Dear CEO Letter” (“Letter”) for the attention of senior management at all FCA-regulated firms whose primary business is financial advice and investment intermediation.  While in principle this is a wider catchment than the firms affected by the Consumer Duty, it is largely in respect of the latter that this Letter is most relevant.  The Letter summarises what FCA expects such firms to prioritise, in order to meet the expectations of FCA in relation to regulated firms in these sectors.

FCA highlights the important role played by financial advisers and investment intermediaries in helping consumers make complex financial decisions. However, FCA notes that the majority of retail customers do not use traditional channels of support, which deprives them of potentially valuable assistance, and can therefore affect investment returns in the long run. FCA highlights this gap in the industry, and expresses a desire to work with the industry to grow the market and ensure, in the process, that retail customers receive consistently good outcomes.  These were ambitions for FCA when the Consumer Duty was first introduced.  The Letter does not offer any commentary on the extent to which these ambitions have been achieved; so the market is left to conclude that FCA must be even more intent now in this regard than when the Consumer Duty was new.

FCA’s priorities

In keeping with this objective, FCA explains that its thee priorities over the next two years are to:

1. Reduce and prevent serious harm – with a focus on retirement income advice, ongoing advice services, ensuring the “polluter pays”, and addressing issues raised by industry consolidation.
2. Monitor and test higher industry standards under the Consumer Duty – FCA-regulated firms are under an ongoing duty to implement and evidence compliance with the Consumer Duty.
3. Enable more customers to pursue their financial objectives through FCA’s Advice Boundary Guidance Review – FCA encourages firms to actively engage with it and consider how it can assist in FCA-regulated firms’ better supporting their clients.

Retirement income advice

FCA recognises the size of the retirement income market and its growing presence, along with the potential harm caused to retail customers by poor advice. FCA states that all FCA-regulated firms must refer to FCA’s findings in its Thematic Review of Retirement Income Advice, published in March 2024, to review and update how they operate in this part of the market.

Ongoing advice

FCA reiterates its focus on ongoing advice services, citing that, based on data at its disposal, 90% of new clients in the market are placed into arrangements under which they are led to expect to receive continuing advice post-investment. FCA highlights its concerns that firms often fail to adequately consider the relevance and cost of these continuation services for all clients, and, conversely, that some clients are even being charged for continuation services which they do not actually receive. Neither of these findings is aligned with the “fair value” outcome in the Consumer Duty.

Firms will be expected to confirm the details of any ongoing advice arrangements to retail customers, including charges they make for this and how such services can be cancelled. Firms may not charge for services which are not delivered, and must maintain records to demonstrate that they understand the obligations upon them in relation to ongoing advice (generally, and at a client-by-client level).

“Polluter pays”

In light of significant liabilities of failed investment firms falling upon the Financial Services Compensation Scheme, FCA is shifting the onus onto FCA-regulated firms to ensure that they, and any appointed representatives of theirs, hold sufficient resources to meet potential redress liabilities without falling into insolvency. Firms looking to sell their business or client bank must act to deliver good outcomes, and FCA expects any firm seeking to sell its business to identify and meet any potential liabilities before FCA will be willing to cancel its authorisation and allow the transfer to proceed.

Addressing industry consolidation

FCA is keen to monitor and manage the merger of regulated firms in order to ensure that good outcomes continue to be delivered for all retail customers affected by this sort of consolidation – a phenomenon that has become much more common across the financial services industry in the last few years.

FCA obviously expects firms to notify it of proposed changes of control at the corporate ownership level.  However, business is often consolidated through the sale of books of clients as assets (which falls outside the statutory change of control regime), and FCA needs to be fully informed of these as well.   Any such firm must also ensure that leadership, governance and oversight arrangements and controls are adequately resourced to match any growth in size and complexity of its client-base arising from client purchases of this nature, and undertake adequate due diligence on the assets in question, and hold adequate financial resources at all times to reflect the expansion.

How FCA plans on achieving these priorities

FCA is planning as follows:

1. Increased industry engagement and collaboration – including in-person events in order to gain greater insight into the issues and challenges FCA-regulated firms are facing, help shape future regulatory proposals, and share FCA’s expectations with the market.
2. A forward-looking and data-led approach – including data collection (surveys are expected in 2025 across the retail financial services sector).  Firms should be prepared for individual approaches to provide FCA with evidence from their client service activities and compliance regimes to help to build and expand this dataset.  It remains to be seen whether approaches will be informal or if FCA prefers to use the blunter approach of a request for information under s.165 FSMA 2000.  Failure (without good reason) to effectively comply with the latter will be highly detrimental to the given firm’s record with FCA.

Conclusion

The 7 October 2024 Dear CEO Letter is a reminder of FCA’s clear focus on market development, and the effective implementation of the Consumer Duty.

Each addressed CEO is expected to review the contents of the Letter and consider how it applies to his/her firm.

For the most part, this exercise will call upon each affected firm to discuss compliance standards with its external compliance consultants.  However, if your particular circumstances might give rise to legal exposure and you wish to discuss this further, please feel free to contact Daniel Tunkel or Eva Wichtowski for a discussion.