UK Consumer Duty: FCA publishes further portfolio letters to help firms with implementation

Which sectors are covered by the latest portfolio letters?

The FCA has now published portfolio letters on the following sectors:

• payment services and e-money;
• debt advice; and
• DPCA.

What do the letters cover?

As with the letters published on 3 February 2023 for other portfolios, each of the letters remind firms of the implementation timelines, key elements of the Consumer Duty and how it applies to firms in each portfolio, together with the FCA's expectations of how firms should embed the Consumer Duty in their businesses.

The letters also highlight feedback from the FCA's recent review of firms' consumer duty implementation plans and outline the FCA's approach to supervising the Consumer Duty in the portfolio and planned next steps.

What are the key focus areas for payments firms?

The FCA has provided a list of focus areas for payments firms to consider in order to deliver consistently good consumer outcomes under the Duty. These include topics such as:

• Distribution chains: The FCA has emphasized the importance of checking that distribution strategies are being followed, sharing all necessary information with other firms in the distribution chain, and using data and management information to monitor whether products and services continue to meet the needs of customers and contribute to good consumer outcomes.
• Strong customer authentication: The FCA touches on strong customer authentication, noting that it “expect[s] payment service providers to develop strong customer authentication solutions that work for all groups of consumers”, including those with protected characteristics (under the Equality Act 2010). The FCA indicates that payments firms may need to provide several different methods of authentication to their customers, including methods that don't rely on mobile phones, to cater to customers who don't have or want to use a mobile phone or need to make payments in areas without mobile phone reception. This is a pointed reminder for digitally led firms on the potentially wide-reaching impact of the Duty on servicing channels.
• Proportionate fees and charges: The FCA highlights that, in considering price and value, firms should be giving thought to both regular and contingent charges and fees, as well as fees and charges levied by agents or distributors. The FCA has also identified the need to ensure proportionate e-money redemption fees, and to assess the impact of fee structures on vulnerable customers, as key issues to consider.
• Customer protections and use of third parties in chains: The FCA has emphasized the need to signpost differences in customer protections for different products and services (e.g. funds held by PIs and EMIs are safeguarded rather than subject to FSCS protection), provide clarity on which products are regulated, and ensure communications make clear the role played by agents and distributors in the delivery of products and services.    
• Channels and account freezing practices: The FCA has highlighted mobile/online access problems as well as fraud as examples of issues that customers might encounter that could require the use of additional and alternative servicing channels (e.g. for digital-only firms). As noted in the Retail Banking portfolio letter, the FCA is also concerned about account freezing practices and has reminded firms of their obligations under Regulation 71 of the Payment Services Regulations 2017. In essence, the FCA wants firms to freeze customer accounts less frequently and for shorter periods of time, and for communications relating to account freezing to be clearer and provided with appropriate customer service support (e.g. where account freezing could give rise to financial difficulties).

What are the key focus areas for debt advice and DPCA firms?

The FCA has highlighted several headline points for debt advice and DCPA firms to have in mind when implementing the Duty, such as:

• Cost of living crisis: For debt advice and DCPA firms alike, the cost of living crisis is (predictably) a central theme. The FCA expects DCPA firms to do more than ever to support customers struggling with debt (or showing signs of financial difficulty) by reviewing customer’s current arrangements to mitigate potential harm and prominently signposting free debt advice. As a result, debt advice firms should expect to see an increase in the demand for their services and must plan for how to manage this, without impacting the quality of service provided and whilst remaining operationally resilient.
• Operational and financial resilience: In light of the cost of living crisis, the FCA is concerned with the possibility that increasing numbers of people in financial difficulty seeking debt advice may test the resilience of debt advice firms’ operations. The likelihood of lower disposable incomes may also impact the viability of customers’ existing debt management plans. The FCA expects firms reliant on this income (through debt management plans and/or Fair Share funding) to plan for how they would maintain financial and operational resilience in circumstances where income is restricted. The FCA has similar concerns in relation to DCPA firms and has threatened that it will not be slow to use its enforcement toolkit (including litigation) where there is  evidence that financial and operational pressures are driving harmful approaches to – for example - collections on unenforceable debts and litigation.
• Statute barred debt: The FCA has reminded DCPA firms of the findings of its January 2021 letter and flagged that it continues to see evidence of some poor practices in relation to statute barred debt, with some firms continuing to send misleading letters to customers suggesting or stating that they may be the subject of court proceedings when the firm knows or ought reasonably to know that the relevant limitation period has expired. The FCA has reminded firms of its expectations on this topic and warned that it will act where practices do not improve.
• Business ownership model risks: DCPA firms need to be “alert and responsive to risks of harm inherent in certain business ownership models” and what this means for customer treatment and outcomes as these debts are collected. The FCA has referenced, for example, the sales of High-Cost lending back books, book sales of unregulated entities, and the outsourcing of collections of early arrears to business process outsourcers (BPOs) as models that are particularly within its sights.
• Emerging issues: A number of emerging issues for DCPA firms to consider and focus on are also highlighted. These include a reminder of the application of the Duty to unregulated activities which are carried on in connection with a regulated  activity; as well as a stark warning that a firm’s conduct in relation to unregulated activities (e.g. the collection of unregulated debts, such as utility bills) may be relevant to a firm’s ability to meet the threshold conditions (COND 2.5). The FCA also points to the use of online, automated and digital platforms (such as online payment portals) and reminds firms to ensure that such platforms are designed and used in a manner that is compliant with the FCA’s rules.

Next steps

On 22 February 2023, Sheldon Mills (the FCA’s Executive Director of Competition and Consumers) gave a speech in which he likened implementing the Consumer Duty to eating a frog. It originates from the American writer, Mark Twain, who said: “Eat a live frog first thing in the morning and nothing worse will happen to you the rest of the day.” The inference, from the FCA, is that firms have already, and must continue to, prioritise the most difficult but important tasks, and especially those tasks that have the most impact. These portfolio letters provide a further insight into what the FCA regards as the most important tasks for firms to undertake in the remaining months before the implementation deadline. The FCA is due to publish additional portfolio letters shortly and firms must stand ready to demonstrate the work they’ve carried out to “embed” the Duty into their businesses.

If you would like to know more about the Hogan Lovells Financial Services team and how we can help you deliver or implement your plans, please visit our Consumer Duty hub.

Authored by Michael Oxlade.