The Financial Conduct Authority (FCA) has moved its Consumer Duty principle to a self-policing model, with brokers needing to gather evidence to demonstrate compliance to providers.
One of the major differences Consumer Duty will introduce is the FCA has effectively moved the responsibility for identifying poor behaviour in respect of how consumers are handled. This will move from the regulator to the industry. Firms must not only police themselves, but they must also report to the FCA if they find brokers, lenders or protection providers in their distribution chain who are not implementing Consumer Duty correctly.
All firms must identify poor practice within their distribution chain; they must flag this and work with their partners to change it. If this is not effective, then firms spotting the poor practice are duty bound to report this to the FCA – in other words, they must ‘whistle blow’ on their non-compliant partners. This effectively moves the sector to a self-policing model.
This is not a discretionary feature. It is a requirement of firms to report non-compliance of Consumer Duty to the FCA.
Arguably, this overcomes one of the FCA’s previous challenges – its lack of resource to police the industry. The industry must now self-police itself, it must collect the evidence and the Financial Ombudsman Service is the judge and jury.
When monitoring themselves, firms must collect the evidence needed to demonstrate to both their boards and the regulator that their behaviour results in good outcomes for their customers. While many may say ‘this is what the industry already does’, the big difference with Consumer Duty is the need for firms to evidence that this is taking place.
Just saying so isn’t enough. Firms will need data to provide this evidence.
When poor outcomes are discovered, it will be difficult to retrospectively identify customers’ characteristics and vulnerability from previous interactions.
Hence, the only practical solution is to try and capture the customer characteristics data at the time of sale for all customers and then monitor this through the product life cycle. It will be sensible for all firms to have this in order both to prove compliance with Consumer Duty and to protect themselves from claims by others in the chain.
Sharing of a person’s data will require individual consumer consent. For the purpose of demonstrating evidence of compliance to providers, it will be attractive to share high level (non-personal) consolidated data. This will demonstrate the spread of consumer characteristics, vulnerabilities and protected characteristics, so advisers and providers can be confident that Consumer Duty is indeed being complied with, and each party is in agreement on the target markets.
For many brokers their first phase of implementation on vulnerability has used subjective assessments. These have generally delivered inconsistent results due to each broker or agent having a different view on vulnerability. There is hence a need for firms to adopt an objective and consistent measure of vulnerability, to provide consistent results that can be summated and provided as evidence to providers.
Digital solutions will be required to store the vulnerability and customer characteristics in sufficient detail, and in compliance with GDPR. Firms have the option to build the IT systems themselves or to buy in existing systems.
Lenders will be under pressure to see this due diligence, and indeed must inform brokers how they intend to implement Consumer Duty by the end of April 2023.
Industry consultant, Tony Crane, says: “The self-policing element goes to the heart of the culture change the regulator is looking for. I’m sure we’ve all heard stories of poor outcomes but what have we done about them? There’s no excuse and no hiding place now, we’re all directly accountable.”