Firms flag key challenges with the FCA’s Consumer Duty

The devil will need to be in the detail of the FCA's next Consumer Duty paper

Earlier this month, we welcomed over 300 attendees to an event exploring the FCA's Consumer Duty proposals. We had some fantastic questions and challenges from the audience, which led to a lively and insightful panel debate on Consumer Duty as well as some of the practical implications. In case you missed it, here were the key takeaways.

More questions than answers…

There was a broad agreement that the Consumer Duty is coming, so focus should be on the `how' and not the `why'. However, the second consultation, due in December, faces a significant challenge if it is going to effectively address the key questions and challenges that firms have highlighted. Conceptually, it is difficult for firms to disagree with the intention of the Consumer Duty. However, there is a strong undercurrent of objection to the package of measures. The industry has a difficult line to tread. On one hand, it needs to accept the cited detriment the current regime has not prevented. However, it also needs to ensure that the FCA strikes the right balance in delivering a leading financial services sector - where both industry and consumer alike can experience good respective outcomes - without any unintended consequences. ·

• If the new regime tips the balance too far towards the customer, there is a risk that a firm's risk appetite will stifle innovation.
• Scope will be crucially important. For example, how many degrees of separation from retail customer will wholesale firms need to consider? Further, there are several unanswered questions in relation to the practical application of the duty on SME businesses.
• Consumer Duty does not represent a single piece of regulatory change. Its impact needs to be considered in the broader context of business strategy, operating models, strengthening existing frameworks, technology and data.
• If the FCA proceed with the private right of action initiative, how will it be defined and applied so that it does not have considerable unintended consequences, and accelerate a litigation culture?
• The materiality of impact on firms will be largely driven by whether current operating models in firms hinder, or encourage, a culture to take a joined-up approach to customer propositions. As a result, the importance of `tone from the middle' becomes even more crucial. Middle management cannot be in the mindset of narrowly focusing on their direct remit or component of the customer journey.
• It is currently unclear how prescriptive will the FCA be in detailing the evidence framework that firms will need to develop to illustrate that they are generating appropriate customer outcomes? This is likely to require a significant investment in technology.

Is it worth the wait?

Firms are rightly asking what should they do now? Where should they focus on the impacts of the proposals? Whilst waiting for the details and clarity to emerge from the FCA, there are steps firms can take to assess their existing conduct risk management frameworks, with a specific focus on product governance. Further, some firms are reviewing their client agreements, terms and conditions, and other disclosure material to challenge themselves as to whether they maximise the likelihood of customer understanding and are appropriately balanced. 

Where next?

The devil is, as they say, in the detail and in this example the detail is exactly what firms are desperate for. However, the industry is rightly concerned that if the FCA does not take the time to pay attention to the key details, it may miss something important and result in some of the unintended consequences the industry fears. It may fail to achieve the FCA's ambition with the Consumer Duty.

The FCA therefore must balance its desire to move quickly, whilst ensuring that it has listened to the feedback and appropriately addressed the industry questions about the Consumer Duty. If the second paper fails to deliver, it significantly increases the risk that the FCA's July 2022 target for final rules will be in jeopardy. Given the success of KPMG's client event, we also plan to run another client event in January 2022 where we can assess the degree to which the FCA has addressed the many industry questions, the practical challenges with the proposals, whether it will achieve its ambition and whether it has an appropriate implementation timeline. For more in-depth analysis of the FCA's Consumer Duty initiative, along with practical insights on the implications for firms, visit our Consumer Duty webpage and download the KPMG Report.