Consumer Duty in the consumer finance sector: 6 tips for board and senior managers as the deadline looms

Well after much debate, planning and preparation the Consumer Duty will soon be upon us. For the consumer finance sector this has come at a challenging time. The cost of living crisis alone would have been challenge enough, but now firms must be ready for the Duty. Well, are they?

Any brokers, lenders, debt collectors and managers in consumer finance have a significant challenge to be able to demonstrate that they are “supporting their customers to make good financial decisions, avoiding foreseeable harm, and checking whether their customers are getting good outcomes”. Some business models will struggle to fit into this key central theme of the duty. Getting things right across the whole consumer journey is essential. Lending decisions have to be based even more on the ability of the consumer to repay and/or if they can’t repay then forbearance procedures must be designed to avoid causing further harm. It will be a tricky balance to get right and there is no doubt that in some cases profits and customer outcomes will be in direct conflict.

So, is your firm ready? Many firms will have made changes to wide ranging products and processes and are now in an embedding phase as the duty comes into force. Others will still have significant changes to make as they have identified the scale of the work that the duty entails. A sizable minority may have done little more than gather evidence to try and justify what they already do. Very few firms will be ready with a full suite of management information that can really demonstrate good consumer outcomes.

What is encouraging is how many firms appear to have found the exercise to be a good opportunity to reflect on their approach to consumers and we have seen product and service innovation implemented more quickly than may otherwise be the case. And while Management Information may not be comprehensive yet it is better than what was available before.

However, the warning is clear, firms that are not in the right place to meet their Consumer Duty may well be building a risk of regulatory attention and potential intervention even as we speak, so firms must get this right. There is a key role for senior managers through Boards or oversight committees to challenge progress. If you are in such a role, I would suggest you consider these 6 things:

1. First be clear on the timetable. The deadlines are as follows.

• 31 October 2022, firms’ boards or management bodies should have agreed their plans for implementing the Duty.
• 30 April 2023, manufacturers of financial products and services should have completed all reviews necessary to meet the outcome rules and shared necessary information with their distributors.
• 31 July 2023 the Duty comes into force for new and existing products or services that are open to sale or renewal. Board should confirm compliance with the new Consumer Duty.
• 31 July 2024 the Duty will be in force for closed products or services. Board will have to attest ongoing compliance on annual basis.

2. Be clear on the responsibility. Most of you will have approved the plan for implementation by end October 2022. Did you meet the April date, if applicable? Are you really clear on who is responsible for delivering the plan you approved? Even if the Consumer Duty champion role may appear to be a cosmetic measure, they will need to have their role clearly understood within their organisation and a means by which a record is kept of their questions and interventions that keep consideration of the Consumer Duty at the heart of decision making.  In my view it is even more important that responsibility amongst the executives is clear. In some firms it still seems to be an awkward combination of individuals. Clearly there is always a default to the Chief Executive but is that right for your organisation?

3. Be clear when/how will you gain assurance that you have done enough for the July deadline and you are clear on what is outstanding? How will you satisfy yourself that this assurance can be relied upon? Have the executives really challenged what they were already doing or just built evidence to justify the status quo. Think about asking for details of what has changed. In many smaller organisations those people that have been leading the work may very well end up marking their own homework. Do you need a more independent view or a means of benchmarking against peers?

4. For outstanding actions, challenge the focus on the plans to deliver these and the embedding of the duty. The FCA has been very clear that boards and management should ensure effective prioritisation of the areas that will have the greatest impact on outcomes for customers. There should be answers to the big questions, and where issues are identified,  clear actions to mitigate the impact on consumers prior to implementation. These may include temporary measures to cease or modify charges, or in most extreme cases stop selling some product lines.

5. Be clear on the information that is being collected to demonstrate the outcomes being achieved. Be wary of too much aggregation that leaves unidentified pockets of consumers being disadvantaged. And most of all satisfy yourselves that it is the customer outcomes being measured and not your firm’s process. For example, the outcome is not your firm’s assessment that all their product documentation is entirely clear, it is MI that support the fact that consumers understand it.

6. Lastly, and this shouldn’t really be last, are the really big questions. Have you been given enough information to satisfy yourself that:

• your firm has really tackled the most important areas of potential harm,
• the culture is aligned with your obligations under the Duty,
• staff are committed and equipped to deliver the Duty,
• the Duty is being considered in all relevant discussions such as strategy, remuneration and risk,
• remuneration and incentive are structured to drive good outcomes for customers,
• your firm is forward looking and flexible enough to prioritising delivering good outcomes for customers in a changing external environment, and your firm is clear, with pop up projects winding down, how this now transforms to business as usual.

The Consumer Duty is a key initiative for the FCA and it is crucial that you are not complacent about what has been done – it is not a point in time, and you will need to maintain internal focus for it to embed. As the activities to meet the implementation deadline wind down, it is also a good time to think about the effectiveness of the changes and frameworks put in place – whether that’s second, third line or external reviews.