In the media

Day 1 is only the beginning for the UK Consumer Duty

Caroline Wayman

By Caroline Wayman

The Banker

28 June 2023

The Consumer Duty, which has been long awaited and long debated, is nearly here. Retail financial services firms need to be ready for implementation by the end of July.

But this is just the beginning; firms have a lot of work ahead to demonstrate that they have embraced the new duty and will be able to show that customers are now truly at the heart of their businesses.

By July 31, firms need to have taken all the steps they believe necessary to implement the new duty’s requirements.

Getting to this stage has not been easy. The far-reaching nature of the new duty means it has been a busy few months for firms, making changes across their systems, processes and people. There have been many challenges, not least the importance of collecting and managing the data firms need to demonstrate compliance to boards and regulators.

Other key areas have included reckoning with the influence of behavioural bias; eradicating any residual examples of ‘sludge’ practices; examining key products and services to understand whether they provide fair value for customers; and meeting the FCA’s expectations around the treatment of vulnerable customers.

Meeting the challenge 

To address these challenges, most firms have set up firm-wide transformation programmes, with some led by the business and others led by compliance teams. The requirements of the new duty have been studied, shortcomings identified, and steps taken to close key gaps, with many challenging debates within businesses to drive the elimination of foreseeable harm and the delivery of good outcomes.

Firms may be tempted to breathe a sigh of relief, but Day 1 of the Consumer Duty requires a permanent change in the behaviour of every financial institution, not just a one-off implementation. Firms need to live and breathe it, incorporating the new principle into their organisation, culture, policies and processes.

Firms need to live and breathe the consumer duty 

And it will be crucial that leaders are demonstrating how that culture is being driven from the top and how it is truly embedded. That will take time and will also need to be evidence-led, with many businesses needing to plan post-implementation reviews for the autumn.

The FCA has been clear that it will soon be looking for evidence that firms have fully embraced the spirit of the new duty. They have even told firms exactly what kind of questions they will be asking in a range of speeches and ‘Dear CEO’-style letters.

This transparency is welcome, given the inevitable uncertainty about what the duty will mean in practice. But greater clarity brings higher expectations.

To set themselves on the right track, firms need to create plans for further action after Day 1. It will be key to show to the FCA that the new process, framework and culture uplifts that have been designed for July 31 will be embedded in the business and that there is a robust strategy in place for developing continuous improvement against the duty.

That means firms building on initial compliance to pivot their entire culture so that outcomes drive processes, not the other way around. Failing to do this will make for some difficult conversations for senior managers with FCA supervisors when they conduct more detailed work on compliance against the duty, from September this year.

Questions to ask

The questions that the FCA are likely to ask – and which firms should ask themselves in preparation – might include:

  • What has changed in practice since implementation?
  • What steps have you taken to instil a top-to-bottom customer-focused culture?
  • How are you uplifting your approach to protect the most vulnerable customers?
  • How are boards and executive management engaging with customer outcomes on a regular basis?
  • How have you embedded the new duty’s principles into business as usual?

In other words, the FCA will be looking for more than statements of intent. Firms need to put the work in now so they can produce evidence of customer-centricity. For example, products and services that are not only designed to deliver good outcomes, but do so in practice, and with which firms will intervene to prevent poor outcomes when they do not perform as intended.

Moving target

And inevitably, Consumer Duty best practice is likely to be something of a moving target. The FCA has set out the framework that it expects firms to comply with, but it also expects them to ensure there is a journey of continuous improvement; while they are doing this, it is likely that the FCA’s regulatory priorities will also evolve over time.

Firms need to develop a cross-organisational approach to horizon-scanning regulatory priorities and engaging with the FCA. They need a clear, longer-term strategy on how they intend to embed data and technology in their approach to the duty and to be able to evidence regular and proactive engagement from senior executives and the board on how good customer outcomes are being delivered.

And of course, the deadline for compliance in relation to ‘closed’ products in July 2024 seems far away now, but it will come around very quickly.

As one chapter ends, achieving Day 1 compliance with the Consumer Duty is the beginning of the next one, and where the real work starts.

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