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

Which sectors are covered by the letters?

The FCA has published portfolio letters on the following sectors:

• Asset management, custody and fund services and alternatives.
• Consumer investments.
• Credit reference agencies and credit information service providers.
• General insurance and pure protection.
• Life insurance.
• Mainstream consumer credit lending.
• Mortgage lending (including administration).
• Retail banks and building societies.

What do the letters cover?

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.

Overarching messages for all firms

The publication of the portfolio letters marks an intensification of the FCA’s engagement with the industry and provides further clues as to where its focuses lie – and where firms might currently be falling short.

The letters emphasise that the FCA expects the Consumer Duty to be a top priority for a firm’s CEO (or directors). They must ensure that good outcomes for customers are at the heart of the firm's strategy and business objectives, and firms' boards and senior management should embed the interests of customers into the culture and purpose of the firm.

The FCA also notes that although its work on the Consumer Duty pre-dates the cost of living crisis, it is now particularly important as consumers face increasing pressures on their household finances. According to the FCA, the crisis underlines the need for high standards and strong protections, stating that “it is more important than ever that consumers can make informed, effective decisions, act in their interests and pursue their financial objectives”. This message is echoed in a recent blog post on how the FCA can help consumers cope during the cost of living squeeze. In the post, Sheldon Mills, FCA Executive Director for Consumers and Competition, refers to the upcoming Consumer Duty implementation deadline in July this year but states that: ‘Firms should be stepping up now to support customers in these tough times.’

Key areas of focus for retail banks and lenders

The FCA has highlighted three headline points for retail banks and building societies to have in mind when implementing the Duty given the current cost of living crisis:

• Financial difficulties: The FCA has emphasized the need for firms to deliver good outcomes for customers in financial difficulty and stressed that – although not yet in force – firms should already be stepping up to support customers in these straitened times (see also the recent FCA blog post referred to above). Annex 2 contains specific examples of what the FCA has in mind. For example, firms who delivery services wholly or predominantly through digital channels must – nevertheless - ensure that they offer to engage in “different ways including through a range of channels” for borrowers in financial difficulties.
• Fair value: The FCA has underlined the need for firms to critically examine whether their products and services provide fair value to retail customers. The FCA has flagged that, even in areas of retail banking where it has previously intervened on questions of price and value (e.g. overdraft fees and interest rates), the Duty will be an additional overlay, particularly in respect of monitoring and evidencing good customer outcomes. The FCA has warned that firms should not underestimate the new requirements of the Duty about fair value, the enhanced extent of its interest in it, or the high expectations it now has of the “rigorous and balanced analysis with which firms should be able to support their assessments of fair value”.
• SMEs: The FCA has reminded firms not to overlook the requirements of the Duty when considering the treatment of relevant SMEs or the FCA’s heightened interest in this cohort of customers, especially in the current challenging economic environment. Annex 2 of the letter picks out particular hot topics, citing – for example – complex charging structures, the treatment of business current account customers in financial difficulties, and its expectations when closing accounts (e.g. for profitability or risk reasons).

In its letters focusing on the consumer credit and mortgage lending sectors, the FCA has stressed the importance of topics such as:

• Price and value in the context of affordability: Affordability is a topic that remains under intense regulatory scrutiny and the FCA sees it as relevant to the price and value of a product or service offered. The FCA expects lenders to be proactive in assessing whether customers can afford increased credit, alongside their creditworthiness assessments, particularly in the current cost of living crisis.
• Helping customers to make informed decisions: In the context of the consumer understanding outcome, the FCA has given examples of situations where it is “particularly important” that firms support customers in understanding the options available to them. These include situations where customers are experiencing or anticipating repayment difficulties, coming towards the end of an incentivised rate (e.g., a 0% introductory APR Offer) and repeat borrowing, or pursuing borrowing for consolidation purposes.
• Data analytics: The FCA has flagged that, as mortgage lenders and administrators (in particular) make greater use of AI, advanced analytics and big data, they need to consider matters such as the scope for these technologies to give rise to foreseeable harm and the extent to which they give customers a clear understanding of, and informed choice about, the use and/or monetising of their data. 
• Appropriate products and services: The FCA has reminded firms of the need to ensure all products and services are fit for purpose and designed to meet the needs, characteristics and objectives of the identified target market. By way of example, in the mortgage lending space, the FCA has underlined that extra care should be taken in relation to customers who are “outside or on the edge of the target market”, citing an example of a lifetime mortgage lender offering or selling to customers at the younger end of the age range where alternative products exist that might lead to better customer outcomes (e.g. where interest is serviced, rather than rolling up).

The FCA has also reminded firms to take note of the letters to other sectors where firms in those sectors are a part of its distribution chains.  

Next steps

The portfolio letters mark a further ratcheting up in the FCA’s engagement with the industry to help firms prepare for implementation of the Duty in good time. This engagement is set to continue:

• For retail banks and mortgage lenders, the FCA has flagged that from April 2023 it will engage with a sample of firms on the frameworks and methodologies they have used to conduct their “baselining and gap analyses” of whether customer outcomes are meeting, or falling short against, the higher standards set by the Duty, and on specific instances of those baselines and gap analyses of particular products, services and customer journeys.
• Firms in other sectors should expect a similarly close dialogue with the FCA in the coming weeks and months – and should stand ready to demonstrate the work they’ve carried out to “embed” the Duty into their businesses.
• The FCA will also shortly publish further portfolio letters to credit unions, debt advice firms, debt purchasers, debt collectors and debt administrators, mortgage intermediaries, motor finance providers, payments services and e-money firms, retail finance providers and credit brokers.

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.