Guidance for the perplexed

In our September Newsletter we gave an outline of two recent FCA Policy Statements, one of which was Policy Statement 22-9 “A new Consumer Duty”.

As promised then, this Newsletter focuses exclusively on the Finalised Guidance FG 22- 5 “Final non-Handbook Guidance for firms on the Consumer Duty” issued in July in support of PS 22-9.

All firms with retail permission will be subject to a new duty to “act to deliver good outcomes for retail clients”. This duty is explained and defined by separate cross-cutting rules, consumer outcomes and the guidance set out in FG 22-5.

As we said in September, there’s no need for firms to consider what “good outcomes” might look like. You get good outcomes when you follow the guidance.

Therefore we remain of the view that firms can best evidence compliance with the high-level duty by evidencing compliance with the low-level guidance.

The challenge for firms whose retail clients are either rare or not individual persons is in adapting FCA’s requirements to both suit their business model and to show FCA that the firm is complying. Given the many references in the guidance to reasonableness, that should be achievable.

Firms will still need to consider how they would respond to the “Key Questions” FCA asks for each outcome and the data feeds it has (or is setting up) that allow it to evidence the conclusion that they are complying.

Products and services outcome

“We have seen harm occur where products or services were poorly designed or distributed widely to customers for whom they were not designed”.

There’s an extent to which this outcome should be the easiest to evidence. Firms which have been subject to FCA’s PROD rules will already have Product Development policies in place which meet most of this outcome’s requirements.

This includes the definition of the product / service’s target market, a coherent distribution strategy which includes distributor training and a process which looks at products and services at the design and amendment stage, as well as on a routine basis. Any vulnerable clients will need special consideration – as in all of the outcomes.

That said, firms will need to consider what data feeds into this process and how they evidence compliance with this outcome.

Price & value outcome

“Retail customers experience harm where they don’t get value for their money.”

Everybody always thinks that their product / service offers good value. Now you’re going to have to go some way to prove that’s the case.

FCA say that firms should consider the benefits provided by their service, and any limitations imposed on that service. The price paid should be reasonable in the context of the overall benefits provided.

In looking at this, FCA suggests that firms should consider data from a variety of sources, including customer surveys and market benchmarking.

Customer understanding outcome

“We want customers to be given the information they need, at the right time, and presented in a way they can understand.”

This goes beyond the “fair, clear and not misleading” requirement and applies to 1-1 communications as well. Firms need to ask a number of questions about their communications. Is the key information easy to find? Is it at the appropriate level of detail? Is it not too long? Is it jargon free? All these – and other – considerations apply irrespective of the communication channel used.

But what the FCA doesn’t want to see is the firm coming to its own conclusion that its marketing material meets these requirements. All of the firm’s communication should be tested to see whether the recipients do indeed understand it.

It’s our belief that all firms – irrespective of size or market – will need to carry out some form of market testing – either by survey, interview or focus group – to get genuine third-party evidence of success in this outcome.

Customer support outcome

“Firms should enable customers to act on [their] decisions without facing unreasonable barriers.”

FCA is thinking here of additional charges – or time – that the client may face when switching, changing or exiting a product or service. The firm should place no unreasonable barrier in the way of such a customer request.

On a more general basis, the firm’s support for customers must be appropriate to the target market and should be monitored by the firm. The key question here for FCA in this and other outcomes is whether the firm is giving as much resource to ongoing customer support as it does to pre-sale support.

Timetable

Whilst all of this needs to be in place for new and existing products and services by the 31 July 2023, FCA expects Boards to have considered and approved their approach to implementation by October 2022.

To facilitate this we have updated our Gap Analysis and are re-issuing it to clients. Review and completion of this Gap Analysis by October 2022 should stand firms in good stead if FCA ask whether Boards have done this.

Final thought

Firms with remote relationships with retail clients may be tempted to think of these changes as equally remote from their requirements, and that a paper-based exercise which amends pre-existing documentation will be sufficient to ensure compliance.

Our view is that there is real danger in this approach, notwithstanding the many provisions for reasonableness in the Policy Statement and Finalised Guidance. FCA will be expecting all firms with retail permission to have conducted at least a thorough exercise to consider the impact of these changes.

In our view every firm with retail permission will need to carry out some form of regular client contact to evidence compliance with at least the customer understanding and support outcomes. Some new management information will be necessary to allow the firm to come to positive conclusions.

Fulcrum Compliance will be working with all retained clients with retail permission in the run-up to implementation to ensure that this implementation is as seamless as possible.