The FCA is seeking to embed an outcomes-focused approach to supervision whilst retaining aspects of a conduct-focused approach. Within this article, we explore how the regulator has evolved its approach and how it is likely to supervise firms under the Consumer Duty.
The FCA's approach will consider whether a firm has implemented and maintained an appropriate balance between its commercial interests and delivering good customer outcomes. The FCA's supervisors will assess whether the firm is culturally aligned to its customers and has an appropriate purpose and associated business model. The diagram illustrates the journey that the regulator (and firms) have been on and how the inroduction of a Consumer Duty willbe the final stage on the journey to outcomes-based regulation.
Over recent years, the FCA has developed a range of separate initiatives which, when assessed together, give the FCA a small but powerful range of supervisory tools to rapidly assess the degree to which each firm poses a risk to its consumer protection objective. The Consumer Duty will be an integral part of this regulatory toolkit.
This will allow the FCA to increase their focus on firms demonstrating the consumer outcomes they are delivering.
The FCA has made clear that the Consumer Duty fully aligns to its new transformation programme which aims to create a data-led, agile, assertive and innovative regulator. Although core supervision activities will remain, the FCA's supervisory approach will evolve. An outcomes-based approach will give it greater agility to be assertive and focus on practices that adversely affect consumer outcomes at an earlier stage whilst also supporting innovation in markets.
This change in focus will support the FCA to become more data-led, with the expectation it will be in a position to more quickly identify poor outcomes — and, before harm becomes widespread.
Case Study: Assertive and proactive regulation
Buy Now Pay Later Sector
The FCA's statement confirming action undertaken in the Buy Now Pay Later (BNPL) sector demonstrates its intention to be more agile and assertive in order to protect consumers from potential harm In advance of full FCA regulation of the BNPL market, the FCA took early action prompted by concerns of areas of potential customer detriment. Whilst not all BNPL products are regulated by the FCA , all firms must comply with consumer protection legislation.
Using their powers under the Consumer Rights Act 2015 (CRA), the FCA assessed the fairness and transparency of contract terms of four firms offering unregulated BNPL products. This action identified potential harm to consumers relating to contractual terms. As a result of FCA intervention the firms agreed to change these terms to make the contracts fairer, easier for consumers to understand and to reflect how they use them in practice.
The FCA also used this opportunity to remind all BNPL firms of their responsibility to ensure that their consumer contracts comply with all requirements of consumer protection legislation applicable to them, and provide guidance on regulatory expectations.
Whilst the elements above appear to work in concert, firms will need to reconcile how the Consumer Duty package of measures interact with other existing requirements (e.g. statutory duty-based expectations on firms, Treating Customers Fairly (TCF), client's best interest rules, as well as the duty of responsibility already on executives under the Financial Services and Markets Act 2000 (FSMA)). It remains a challenge for the FCA to create a consistent approach without creating additional complexity. There are also significant elements of the proposed new framework that rely upon an assessment of reasonableness or require firms to exercise their judgement. Whilst this is to be expected, it can create fragmented outcomes and a lack of consistency across the sectors.
Although the FCA has stated that there is no intention for the Consumer Duty to be applied retrospectively, this will be of little comfort to any firm with any form of legacy or existing business as they have confirmed that the rules apply in relation to all existing products and services once the new rules come in. With the need to regularly review arrangements under the Consumer Duty, even existing business will become subject to these increased regulatory standards pertaining to communications, products and services, consumer understanding, consumer support and pricing and value. This could have a material impact on firms with a business model of maintaining or acquiring sizable back books of business.
The FCA's own transformations programme, towards an intelligence and data led regulatory approach, is underpinned by the Consumer Duty initiative. It will create an operating model which permits a significantly more effective and efficient supervision of firms allowing the FCA to achieve “more with less” . In speeches about their transformation, the FCA has highlighted that its own work programme stretches from fast-paced innovation driven by data science projects to strategic programmes that fundamentally re-imagines how it collects intelligence, analyse data, and takes action in a more joined up way.
The FCA's approach to monitoring is interesting and represents a material divergence from its traditional mandated regulatory reporting approach. Without being unduly prescriptive, the FCA is placing the accountability to firms for defining what good outcomes look like for them based upon their culture, strategy, business model, proposition and control environment. Once defined, firms will need to collect data, insights and management evidence to prove to the FCA the appropriateness and effectiveness of their approach. Firms will need to assess whether their existing Conduct Risk framework is sufficient to meet the expectations relating to Consumer Duty or if further development is required to introduce a greater emphasis on genuine consumer outcomes. However, crucially, based upon the FCA's future approach, the associated MI will need to be agile and readily configurable to meet FCA evolving data expectations.
Finally, the Consumer Duty structure and underlying rules and guidance and its position within the FCA's High Level Standards Principles (PRIN) sourcebook provides a simpler and more efficient mechanism by which to take enforcement action against firms that wilfully do not place customers at the heart of their business.
The FCA's direction of travel is clear and therefore there are steps that firms should take now on a no-regrets basis to ensure that they have developed business models, products and services, and supporting processes and procedures that provide due consideration to their customers. However, crucially, it will also require consideration of how firms can suitably demonstrate and evidence this to the FCA.
Explore our Consumer Duty article series: