FCA reviews implementation of Consumer Duty in payments firms

Last month, the Financial Conduct Authority (FCA) published its key findings from a review of 23 payments firms’ implementation of the Consumer Duty (the Duty) (the Review), which also took into account how far payments firms had considered the specific payments sector risks identified by the FCA in a Dear CEO letter in February 2023. In its Review, the FCA found evidence of poor practices in just under half of the firms surveyed, and concluded that if this is representative of the sector, a “substantial minority” of payments firms may not be compliant with the Duty.  This post summarises the key aspects of the failings that the FCA identified during the Review.

The Consumer Duty

The Duty came into force on 31 July 2023 for open products and services and 31 July 2024 for closed products and services. The aim of the Duty is to set a higher level of consumer protection in retail and financial markets for firms to adhere to, ensuring that firms provide products and services at a fair value to retail customers. Among other things, the Duty provides that firms must undertake fair value assessments to ensure that the price a consumer pays for a product or service is reasonable in comparison with the overall benefits, taking into account the nature of the product or service, any limitations and any applicable fees. 

The FCA has identified the Duty as a “cornerstone” of its 3-year strategy and a fundamental way in which it has “set higher standards for firms”. 

The Review

The FCA has issued a range of guidance on implementing the Duty in practice, including a review which highlighted general good practice and areas for improvement across the financial services industry, a speech by Sheldon Mills, and a review into the price and fair value element of the Duty. The FCA’s most recent review asked a range of payments firms to evidence how they have identified and addressed any gaps in implementation of the Duty. Where firms’ responses suggested non-compliance, the FCA provided feedback to those firms.

The FCA’s findings

Of the 23 payments firms reviewed, the FCA rated just over half as satisfactory. However, just under half of the payments firms reviewed were found to have only partially implemented the Duty. 

The FCA expressed concern that if the Review findings are representative of the sector, then a “substantial minority” of firms may not be compliant with the Duty, and indicated that it would continue to work with these firms to ensure that any harm is mitigated.

In the FCA’s view, the best firms tended to have clearly articulated customer-centric purposes and understood what good outcomes and foreseeable harms looked like for their customers, with strong governance and control frameworks which they used to scrutinise and challenge the firm’s implementation of the Duty and deliver any enhancements required. 

On the other hand, the Review detailed the following examples of poor practice in some payments firms’ implementation of the Duty. The FCA identified that some firms did not:

• Recognise the higher standards of the Duty, as they thought that payment products or services did not present the same risks to their customers as other FCA-regulated products like investment or pension products.
• Have effective controls in place to ensure that they consistently deliver good outcomes to consumers and effectively correct any shortfalls in a timely manner, instead relying upon pre-existing processes and controls. 
• Clearly identify the target market for their products and services. Some payments firms had also not accounted for the characteristics, risk profile, complexity and nature of the products. The FCA noted that wide target markets make it more difficult to identify potential harm caused to customers, in the event that the products and services are not the right fit.
• Have sufficient Management Information (MI). The FCA indicated that linking MI to the benchmarking of prices against those of competitor firms is not a substitute for a broader consideration of costs and benefits. It found that some firms struggled to identify metrics that were directly relevant to the Duty’s outcomes (i.e. products and services, price and value, consumer understanding and customer support), and which could be collected regularly. Where relevant data was collected, the FCA said it wasn’t always correctly analysed. 
• Clearly assess whether fair value was provided, or give a clear rationale for the assessments of price and value. The FCA found that non-financial benefits, such as the level of consumer support provided, were not sufficiently considered by some firms. 
• Provide their intermediaries with the information needed to ensure compliance with the Duty, nor adapt their monitoring processes in order to ensure that their agents and intermediaries were complying with the Duty. The FCA found that it was also unclear what ongoing testing some firms were carrying out to ensure that, in practice, agents and intermediaries delivered prescribed disclosures, customer communications and support services.
• Clearly demonstrate that they had considered the Duty in their governance arrangements. Some governance documents disclosed to the FCA did not mention the Duty, some Board minutes disclosed included limited evidence of challenge regarding the firms’ implementation of the Duty and also failed to address key shortfalls, such as late delivery of key actions raised in other documents received.
• Sufficiently consider the needs of their customers, including those who may be vulnerable, and provide appropriate support channels (including complaints handling) to them. 
• Demonstrate the provision of adequate support to customers, to allow customers to make informed decisions in relation to products and services. Some firms conducted limited or no pre-testing or post-testing of communications. Additionally, some firms’ customer MI appeared to be limited to “distant proxy measures of customer understanding” such as email open rates or net promoter score measures. 
• Provide sufficient evidence as to the consideration of remuneration and incentive policies, and whether these could lead to foreseeable harm for customers.

Where the Review found that payments firms hadn’t quite applied the Duty’s ‘higher standards’ to their business, products or services, the FCA found that firms were often relying upon pre-existing processes and controls. 

Next steps

The FCA has noted that it will continue to explore how firms are meeting its expectations under the Duty. If the FCA finds significant shortfalls in firms’ implementation of the Duty and/or risks of poor consumer outcomes as a result, it has indicated that it will require firms to implement mitigation programmes – and where there is unmitigated or potential harm, the FCA has indicated that it may take action. 

The FCA’s comments indicate that it wishes to see payments firms taking prompt action to remedy any gaps between prior practices and the new higher standards imposed by the Duty.  As well as focusing on achieving good outcomes, payments firms should put careful thought into good governance and risk processes which sit behind the individual parts of their product and service frameworks, and also ensure that they are able to not only implement but evidence the different ways in which they are monitoring and assessing their products and services for good consumer outcomes.