A Consumer Duty Focus On Supervision And Enforcement – What Changes Now That The Consumer Duty Has Teeth? - Financial Services

Summary:

The aim of this note is to give an overview of how the FCA is using its supervisory and enforcement powers in the Consumer Duty space.
This note also provides an overview of areas of related regulatory focus (fair value, payments, outcomes monitoring, and products and services).
The grace period for firms to embed Consumer Duty has ended and firms should expect that the FCA will now use its supervisory and enforcement powers to drive better consumer outcomes.
The first Consumer Duty focused enforcement investigation opened in 2024. There are now 11 open investigations that reference the Consumer Duty and cover theinsurance, pensions, wealth management, consumer investments, peer-to-peer lending and claims management sectors.
The FCA is also increasing the use of its supervisory tools. There were382 supervisory interventions in the last financial year.
Fair value remains a challenge for firms. The FCA is focused on ensuring that firms deliver products that are suitable for the intended customers, deliver meaningful benefits to consumers, address consumer needs, that consumers have a good understanding of and can assess the costs and benefits of products, make informed choices about products, and use and access products optimally.
The FCA’s good and poor practice findings are essential reading for all firms and are specifically intended to help firms learn from the experiences of others.
All firms should be prepared to demonstrate to the regulator how they collect and use data to help them to understand their customers and the needs of those customers, provide appropriate support to their customers (including those in vulnerable circumstances), and deliver good outcomes to their customers.
Firms should place the Consumer Duty at the core of their operation, at the heart of every design and launch, every consumer communication, every decision made, and be able to evidence this to the satisfaction of the FCA.

Introducing Enforcement Watch 2

Enforcement Watch 2 spotlights the FCA’s approach to supervising and enforcing the Consumer Duty. Published during the summer, it reflects on the Consumer Duty’s third anniversary and brings laser focus to how the FCA is now utilising its assertive supervision and enforcement powers to improve consumer outcomes.

In case you missed Enforcement Watch 1, which came out in January this year, you can read about it here.

What is the trend?

The direction of travel is for more Consumer Duty related interventions and investigations. In January this year, there were 6 open enforcement investigations related to the Consumer Duty, and there are now stated to be 11. In addition, the statistics refer to 382 supervisory interventions taking place in the last financial year.

Behind the statistics, the indicators are that the FCA is looking less at the existence of Consumer Duty frameworks, that is just expected now, and more to whether firms can demonstrate that their frameworks are embedded within their business, delivering on good outcomes, and making a meaningful difference to consumers. To this end, the FCA is looking for evidence of decision-making, for evidence of harm and the potential for harm being identified and managed, and to the appropriate management of Consumer Duty related issues to ensure good consumer outcomes.

Uncertainty within flexibility: what does “doing the right thing” mean in practice?

It is inevitable that with outcomes-focused regulation there will be some ‘grey’ areas within which there will be a range of ways in which firms can meet regulatory expectations. In these areas where flexibility is permissible, the FCA expects that firms will take different approaches and will exercise professional judgement to determine how best to “do the right thing” in their individual circumstances.

This approach allows firms the room to take a proportionate approach reflective of and tailored to the nature, scale and complexity of their business model, the nature and characteristics of the products and services that they offer, and the type of customers they have within their customer base and target market. This means that smaller firms can take a leaner, proportionate approach, avoid creating unnecessary complexities, ensure that their focus is structured around meaningful issues, and that their overall approach is workable.

To assist firms in exercising their professional judgement, there will be a range of resources that can provide an insight into the position of the regulator, and how it might expect firms to meet the relevant standards. These resources are diverse and are intended to help firms to strengthen and improve their approaches, and to deliver good outcomes to consumers. They might include good and bad practice reports, guidance notes, policy statements, and even speeches. Enforcement insights are another such resource and offer a rich perspective into regulatory thinking.

What “doing the right thing” means in the Consumer Duty context

Enforcement Watch 2 is clear in referencing what “doing the right thing” looks like in relation to the Consumer Duty, stating that the FCA expects firms to:

consider customer outcomes and put customers’ interests at the heart of their activities;
challenge themselves on how they are treating their customers (“’Am I treating my customers as I would expect to be treated?’ or ‘Are my customers getting the expected outcomes from my products and services?’”); and
continually ensure that their actions are compatible with their customers’ interests and financial objectives.

Assertive supervision – what tools does the FCA have available to it, and what does supervisory intervention look like?

Supervisory interventions are one part of the FCA’s toolkit and exist in addition to its enforcement powers.

The FCA has a range of assertive intervention powers designed to enable it to identify and respond to activity that it perceives to present the risk of harm, with the aim of preventing or disrupting this activity, and putting things on the right track going forward.

These powers include the ability to request information, vary permissions, impose restrictions on business and appoint skilled persons to undertake reviews. The FCA will choose the tool(s) that it uses depending on various factors that might include the speed at which it needs to move, the gravity of the issue, and the number of consumers who might be in harm’s way.

Any firm engaged by assertive regulatory supervision should respond openly and constructively to avoid any escalation. The FCA will be seeking an honest and open dialogue and will want to understand that the firm comprehends the nature and gravity of its concerns. The FCA will need to see a credible plan for how those concerns will be addressed within an acceptable timescale.

Regulatory engagement of this nature will demand a firm to deploy very senior oversight and accountability in relation to addressing issues and to putting them right. Remediations are hard work and place significant demands on management time, force a retrospective focus, may involve restrictions on business activity, and will carry a significant financial cost. They can be a tight “stranglehold” that the FCA will not release until it is satisfied that all deficiencies have been remedied.

It is worth noting that the FCA’s use of its supervisory powers to agree or impose restrictions (VREQs and OIREQs which you can read more about here), is almost always made public for reasons of transparency and consumer protection, and that there might be significant reputational issues that flow from this.

Recent examples of Consumer Duty interventions

Enforcement Watch 2 is helpful in providing clarity around the sort of issues that have resulted in interventions and the powers that the FCA has utilised in response to its concerns. The table below summarises a few of the examples given by type of firm, issue identified, and the intervention tools used:

Type of firm:	Issue identified:	Intervention used:
Fund manager	The firm was unable to show that it was: delivering fair value to consumers; or actively monitoring consumer outcomes	The FCA imposed a VREQ restricting the firm from accepting new investors or additional investor capital, launching or managing new funds, and from taking fees, charges or expenses from the assets of funds it already managed
Wealth management firm	The FCA had several Consumer Duty related concerns, including whether the firm: had appropriately considered its influence on retail client outcomes in the distribution chain; and was appropriately supporting vulnerable clients	The FCA imposed a VREQ preventing the firm from accepting new retail clients
Claims Management Company	The FCA had concerns about: repeated apparently non-compliant and potentially misleading financial promotions; and misuse of the firm’s regulatory status	The firm was invited to sign a VREQ requiring it: to cease promotions; and commission an independent review of its marketing, systems, and controls to mitigate risks of consumer harm and improve outcomes

What about open investigations?

Enforcement Watch 2 is also instructive in helping firms to understand the factors that might move an intervention towards an investigation. In summary, the answer lies in a combination of factors that might include the seriousness of the central concern, be it a form of misconduct or a source of harm (or potential harm), the level of and nature of engagement from the firm and its senior management, and the degree of risk that is presented to consumers. There may be some cases that are very serious and merit a public outcome which has the aim of raising awareness and deterring future similar conduct.

The table below summarises a few of the examples in Enforcement Watch 2 by reference to the sector concerned and to the central issues involved:

Sector:	Focus:
Wealth management	Price and value; consumer support; financial promotions; high fees; the quality of engagement with the FCA; whether consumers may have paid more than is fair for what they received, potentially leaving them unable to save or invest more for their future; and whether those with vulnerable characteristics experienced heightened and/or foreseeable harm
Peer-to-peer lending platform	The information provided to consumers, which included misleading or unclear communications; financial promotions about products which prevented consumers from making an informed decision on how to invest their money; and poor conflicts of interest management
IFA	Failure to carry out or document assessments to ensure that the firm provided fair value to its customers
Home and travel insurance	Shortcomings in claims and complaints handling; delays; high rejection rates; inconsistent outcomes; missed complaints; incorrect claims decisions; whether customers received fair value for certain products, including whether products met customer needs and objectives; customers being let down; and vulnerable customers experiencing heightened and foreseeable harm

Fair value focus – it’s not all about money

Fair value is one of the four fundamental pillars of the Consumer Duty and the open enforcement investigations indicate significant regulatory focus on it. Fair value, like vulnerability, is an area that some firms have found particularly challenging.

The FCA’s work on fair value is long running, with detailed work having been undertaken well ahead of the Consumer Duty coming into force in July 2023 and remaining ongoing with regular feedback to firms being provided along the way.

The FCA has clearly articulated the concept of value stating that “Fair value is about more than just price. A product or service that doesn’t meet any of the customer’s needs, causes foreseeable harm, or frustrates their objectives, is unlikely to offer fair value whatever the price. A product or service that has negligible or no obvious benefit for consumers is unlikely to provide fair value. And firms cannot act in good faith if they knowingly manufacture or distribute poor value products or services.”

So, value is about a holistic picture of interconnected factors which might include the following and which the FCA will be looking to scrutinise as a bigger picture:

the product or service;
customer-facing communications;
consumer understanding of the product or service;
consumer support, including for vulnerable customers;
the needs of the target market; and
the price paid compared to the overall benefits and applicable exclusions.

To withstand regulatory scrutiny applied to them on their delivery of fair value, firms will need robust and credible evidence of a range of relevant factors, including how:

they understand the meaning of fair value and what the regulatory requirement for good outcomes means both in general and across the firm’s specific product and service lines;
their products and services have been designed and promoted;
they assess customer needs and objectives;
they identify and respond to harms and potential harms; and
their products / services are reviewed on an ongoing basis.

Good and poor practice insights on price and value

Good practice

Good and poor practice insights provide lessons from the learnings of others and give clarity around what the FCA are looking for when they scrutinise how a firm has applied its judgement to assessing and ensuring that it is providing fair value. The table below summarises some of the recent good practice findings by reference to what the FCA are looking for and why, and what “good” might look like:

What are the FCA looking for?	What would ‘good’ look like?	Why are the FCA looking for this?
The fair value outcome being deeply embedded into firm governance and decision-making	Robust fair value frameworks, governance, and monitoring, including ongoing reviews of design, price, product approvals and reviews, that have fair value considerations actively embedded into them. For example: regular board and governance committee product and service reviews supported by suitable management information such as whether products are being used as intended, whether certain groups of customers derive less value, and customer behaviours; evidence of senior stakeholder oversight, engagement with and challenge to relevant data; and challenge leading to further analysis, learning and changes in approach, with subsequent board and committee meetings being updated on changes made and outcomes improved	To ensure that firms are gathering evidence, monitoring outcomes, identifying and addressing issues on an ongoing basis and are able to identify the possibility of a poor outcome and address it as part of the end-to-end decision-making process
Fair value assessments that reflect decision-making in real time (i.e. fair value assessment should not be a retrospective exercise)	A real-time record of how a firm has analysed and then made decisions about fair value in practice	To ensure that firms are considering fair value from the outset and on an ongoing basis
Fair value assessments that are informed by relevant context (i.e. by the other pillars of the Consumer Duty, products and services, consumer understanding, and consumer support)	Holistic fair value assessments that draw insights from a firm’s consideration of all four Consumer Duty outcomes, and inter-related rules and obligations (such as the cross-cutting obligations), including: how it designs products and services for the needs of its target market; how well customers understand key features (including but not limited to price); and customer support over the length of a product or service life cycle	To ensure that firms are considering the full context and meaning of value and have a complete and well-evidenced basis to conclude that their products and services are delivering fair value to their customers
Clear understanding of the firm’s target market and granularity within that, for example, of differing customer objectives and differing customer uses and/or behaviours	Evidence that a firm understands its target market and the outcomes that it delivers into its target market, together with evidence that this understanding informs other aspects of the firm’s ongoing fair value assessment including: how to define and group products; how to assess benefits and limitations; and how to make market comparisons	To ensure that firms are undertaking fair value assessments that are adequately comprehensive
Fair value assessments to include the total (or overall) price paid, including fees and charges, benefits and limitations Differential pricing strategies that are supported by appropriate fair value assessments that evidence the firm’s analysis of and reasoning as to why different groups may pay different amounts and experience different outcomes (with caution around customers within the target market who may have characteristics of vulnerability and who may be less likely to receive fair value)	Evidence that a firm has made good use of relevant evidence and thought about how best to assess the overall price in the circumstances (for example, an investment firm has looked at the different kinds of investment customers and the full range of fees and charges, including third party charges, together with interest retained on any cash balances) Evidence that the firm assesses each different price group for fair value supported by evidence that each customer group receives fair value and that: groupings relate to customer bases and product features that are sufficiently similar; and groupings do not hinder thorough value assessments	To ensure that charging structures are well-considered and consider customer circumstances and the overall impact of charges (rather than charges in isolation) To ensure that benefits that are used to justify prices charged are used by and valued by customers (for example, under-used features are removed) and customers are nudged to make use of available benefits To ensure that differential pricing strategies are transparent, justified, and that consumers receive fair value and can understand their options and switch products and services as appropriate To ensure that: characteristics of vulnerability within the target market, and the impact these might have on relevant customers receiving fair value, are considered; and firms can identify where these customers might be at risk of poor outcomes and take actions to improve outcomes for these customers
Prompt and effective action in cases where consumers do not receive fair value	Evidence of a clear plan to identify issues, address risk, take defined actions, and monitoring to ensure that appropriate intervention has improved outcomes	To ensure that customers who may not have received fair value to be the subject of appropriate action and a timely outcome

In summary, the FCA are looking for firms to:

make meaningful (not superficial) fair value assessments;
understand who their products are for;
understand how their products are used in practice;
gather and use evidence of actual consumer behaviours;
reflect efficiencies (for example, from economies of scale, or service deliveries that reduce overall costs) in charges applied to customers; and
identify where fair value is not being delivered, learn from those experiences, address root causes, and take pro-active measures to improve customer outcomes.

Poor practice

In terms of what poor practice might look like, firms should note that the FCA has called out examples of the following:

fair value assessments that are created after the event and/or based on retrospective analysis of fair value;
fair value assessments that relate primarily to price and benefits and fail to consider wider relevant factors such as customer needs, how products are used in practice, consumer understanding and consumer support;
data that supports findings (for example, poor customer engagement or customers not accessing benefits), which is not analysed or acted upon;
grouping materially different products together into the same fair value assessment;
target markets that are defined too broadly;
fees that are not clearly explained or result in different outcomes for customers in similar circumstances without clear rationale;
interest on cash balances retained without analysis of how this relates to the overall value received by customers;
overlapping or duplicative charges; and
advising customers that they are getting a low rate on cash balances without explaining the steps that might lead to a better outcome (for example, considering alternative products).

Consumer Duty outcomes focus – a broader look at regulatory findings

The FCA has published good and bad practice insights into several sectors of the ecosystem. As many findings are sector agnostic, here follows some generalised observations drawn from wider insights than those already reflected above:

Good practice:

Poor practice:

Customers:

The firm is customer-centred and understands its customer base and the needs of its customers at a granular level
The firm undertakes research and seeks feedback from its customers and from consumer-facing organisations to improve its understanding of customer needs, characteristics, objectives and behaviours
The firm has meaningful thresholds for good and bad outcomes
The firm can define a “good outcome” in relation to different kinds of customers, and understands what “good” looks like in practice
The firm designs the support that it delivers to meet the real needs of its customers
The firm has mapped out its consumer journeys from end to end, can identify different customer groups, can identify the risks of harm at each stage of the customer journey, and ensures that it can mitigate those harms

Customers:

The firm has a simplistic or generic understanding of its customers and target market
The firm cannot define good outcomes for key customer journeys
The firm does not have clear thresholds against which to assess customer outcomes
The firm sets thresholds but does not use them to explain the distinction between good and bad outcomes
The firm does not have the evidence to demonstrate customer outcomes
The firm is unable to make consistent outcomes-based decisions or demonstrate whether its customer outcomes are good or bad

Customer understanding:

The firm communicates with customers in ways that are clear, accessible and appropriate
The firm uses a variety of different communications strategies and tests these to ensure that they are effective in supporting good outcomes

Customer understanding:

The firm relies on standardised communications
The firm is unable to evidence whether its communications are understood by its customers

Products and services:

The firm ensures that its products and services are designed to meet the needs, characteristics and objectives of its customers and targets, and carries out regular reviews and assessments to ensure that this continues, and it takes action where needed to improve outcomes
The firm understands which customers are not suited to its products and services (its ‘negative target market’)
The firm ensures that its distribution strategy is appropriate for its consumer and target market
The firm ensures that its products and services do not adversely affect groups of retail customers and avoids causing foreseeable harm in its target markets
The firms considers vulnerable customers at all stages of product and service design, drawing on their lived experiences to improve the design of its products and services to ensure that it can meet the needs of different customer segments

Products and services:

The firm does not define its consumer and target markets at a sufficiently granular level and is unable to demonstrate its understanding of how the needs of its customer or target market align with its products or services
The firm can identify the needs of groups of customers, including the needs of vulnerable customers, but is not taking steps to meet those needs

Vulnerability:

The firm clearly understands the characteristics of vulnerability that exist in its customer base
The firm can identify the common drivers of vulnerability
The firm segments vulnerable customers by vulnerability driver and can identify different needs, requirements for support, barriers, and outcomes, for different groups of customers
The firm can identify and flag its vulnerable customers early and can evidence the number of vulnerable customers and the characteristics of vulnerability they have
The firm prompts its customers to communicate their need(s) for additional support (for example, through customer surveys)
The firm tailors its communications for customers with characteristics of vulnerability
The firm uses data, technology, and other signals to identify vulnerability (for example, through training its call handlers and/or language analytics technology)
The firm offers appropriate, effective, and consistent support to its vulnerable customers in ways that meet their needs
The firm’s approach is flexible enough to respond to individual circumstances
The firm offers flexibility (for example, it can offer the use of different communication channels and tailored support for those with limited IT skills)
The firm analyses (through monitoring and testing) how its processes work in practice

Vulnerability:

The firm cannot identify or can identify only a few vulnerable customers
The firm relies on the judgement of its staff to identify vulnerability
The firm is unable to evidence how information on vulnerability is recorded
The firm does not offer flexible ways for its customers to engage with it
The firm has limited knowledge of different customer needs and has limited evidence or understanding of how outcomes differ between different groups of customers
The firm is unable to identify which customers have poorer outcomes or may need more support

Policies and processes:

The firm can evidence that policies and processes are tested and work in practice
The firm is monitoring whether its customers get good outcomes in practice, including whether changes to its practices drive improvements for customers
The firm understands what is happening throughout the customer journey, can identify risks (including emergent ones), and takes appropriate action

Policies and processes:

The firm is unable to demonstrate how policies and processes translate into practice

Third parties:

The firm understands its responsibilities across the distribution chain and takes all relevant steps to ensure that distribution strategies are appropriate, and that products reach the identified target market(s)
The firm has strong oversight of intermediaries and third parties and takes a holistic approach across both its internal teams and stakeholders, and its external partners, working together (for example, by sharing relevant data) to improve consumer outcomes
The firm understands where poor outcomes may arise in distribution channels and can work with relevant firms as appropriate to ensure that relevant data can be shared, issues or harms (for example, a distribution outside of the target market) can be identified, and good outcomes can be reached

Third parties:

The firm only has a generic distribution strategy
The firm may have undertaken due diligence of third parties but does not obtain assurance that those third-parties and the channels they use are appropriate
The firm is unable to demonstrate regular contact with third parties, which might include the identification of issues, appropriate actions, and outcomes tracking, across these relationships

Data:

The firm has clear monitoring frameworks and can evidence clear links between the data it collects, the decisions it makes, the actions it takes, and the outcomes it reaches
The firm uses its data (for example, customer feedback, complaints data, rejections, attrition, missed vulnerability flags, and compliance monitoring outputs) to adapt its approach and effect positive change because it can identify the sources of data that it needs and can analyse this data to identify issues, risks, and actions needed, and go on to monitor whether those actions result in positive changes
The firm takes a complete and holistic view of its data points (for example, linking the number of vulnerable customers, and types of vulnerability, to outcomes and complaints data)
The firm has a structured approach to monitoring and can analyse different parts of the consumer journey, it can identify where customers may be at risk of harm, develop a clear picture of how customer outcomes evolve, and respond proactively to issues that arise
The firm sets, reviews and challenges performance targets, responding to its historic performance and encouraging continuous improvement

Data:

The firm has a poor quality of and/or frequency of data being provided to senior management
The firm conducts inadequate monitoring that is not clearly focused on the risks of harm or on consumer outcomes
The firm has inconsistent, incomplete, and gap-filled data which makes it unable to evidence or understand consumer outcomes
The firm is unable to identify emerging issues or offer pro-active support to consumers at risk of harm
The firm may collect relevant data but does not use it to or cannot demonstrate that it uses it to assist its decision-making to improve consumer outcomes
The firm does not assess the effectiveness of the actions it takes to improve outcomes
The firm relies on high-level indicators rather than looking into the specifics of each of its products and linking the data to the various key stages of the customer journey
The firm cannot articulate why indicators were chosen or how they were used to identify risks or outcomes
The firm relies on a narrow set of indicators and misses others which could be sources of valuable insights

Continuous improvement:

The firm continually reviews and enhances its approach (for example, by trialling different customer support options)
The firm enhances its testing and monitoring over time
The firm embeds learning throughout the organisation
The firm can demonstrate that its approach is leading to good outcomes, and, where necessary, changes its approach to ensure good outcomes

Continuous improvement:

The firm has limited testing to assess the efficacy of policy implementation in practice
The firm is unable to provide evidence of how its support mechanisms support good outcomes
The firm does not resolve issues promptly, does not track actions, and has frictions that persist

Culture, governance and oversight:

The firm can articulate clear governance and demonstrate how it works in practice (for example, evidence of challenge, scrutiny, and discussion driving better outcomes)
The firm can articulate its culture and point to how it affects their behaviours, decision-making, and outcomes
The firm has clear governance arrangements, including oversight of monitoring and effective use of data, actions tracking, clear and effective escalation routes, effective challenge of performance, and clear senior accountability
When it identifies issues, the firm follows a clear approach to understand the root cause, formulate actions, check that changes are implemented and effect the appropriate change (for example, addressing frontline staff performance with clearer expectations, targeted training, call monitoring and appropriate supervision, followed up with reporting and evaluation to ensure that staff performance improves and that customer outcomes improve)

Culture, governance and oversight:

The firm can describe a culture but not evidence it
The firm is unable to evidence how it manages the journey from the identification of consumer-facing issues, through analysing the underlying causes, to addressing those issues, and to the resulting improved consumer outcomes
The firm’s board reviews relevant reporting but does not use it as a basis for challenge or for pushing for better outcomes

Conclusion

In simple terms, this is about firms being able to show that they place the customer at the centre of their operations, that they can make effective use of relevant data, and can make good consumer outcomes happen. This includes firms being able to understand real consumer problems, real consumer needs, and appreciate the significance of the lived experiences of real people. It means firms being able to drive into the relevant detail so that they can understand the root causes of poor outcomes, and can effect the necessary changes to deliver the improvements that are needed, and be able to validate that those changes have real and positive downstream effects on customer outcomes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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A Consumer Duty Focus On Supervision And Enforcement – What Changes Now That The Consumer Duty Has Teeth?

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Finance and Banking

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United Kingdom