Dear CEO/Director | Release Date: 3rd February 2023
To read a shorter summary of this Dear CEO/Director letter, click here.
To access the original FCA document, click here.
Long Summary
The Financial Conduct Authority (FCA) has issued a directive specifically to CEOs and directors of Retail Banks and Building Societies, emphasising the critical role of implementing the Consumer Duty. This new regulation marks a shift towards an outcomes-focused approach to consumer protection, enhancing the standard of care that firms provide to their customers.
Implementation Timeline
The FCA provided a clear timeline for the adoption of the Consumer Duty:
By the end of October 2022, firms’ boards should have approved their implementation strategies.
By the end of April 2023, all necessary reviews to align with the outcome rules should be completed.
The Duty will apply from 31 July 2023 to all new and existing products and services available for sale or renewal.
From 31 July 2024, the Duty will extend to closed products or services.
This structured timeline underscores the urgency and importance of the Duty, particularly in light of economic challenges such as the cost-of-living crisis, which amplify the need for robust consumer protections.
Scope and Application
The Consumer Duty applies across all products and services offered to retail customers and encompasses any firm that can influence customer outcomes, extending beyond those with direct customer relationships. This includes a significant focus on SMEs within the banking sector, emphasising the Duty’s broad reach and the necessity for firms to ensure compliance across all service and product lines.
Key Requirements of the Duty
The Duty mandates that firms:
- Act in good faith towards customers.
- Avoid causing foreseeable harm.
- Support customers in pursuing their financial objectives.
- Ensure products and services are designed to meet the needs and objectives of their specified target market.
- Maintain a reasonable balance between the price paid by consumers and the benefits received.
- Communicate clearly and effectively to enhance consumer understanding.
- Provide continual support that meets consumers’ needs throughout the product or service lifecycle.
Feedback from Implementation Plan Reviews
The FCA’s review of initial implementation plans from firms revealed varying degrees of preparedness. While some firms have shown a strong understanding and integration of the Duty’s requirements into their operational planning, others appear to be underestimating the scope or the depth of changes required. The FCA highlighted three critical areas needing attention:
- Prioritisation of implementation efforts.
- Depth of understanding and integration of the Duty’s requirements.
- Enhancement of cooperation among firms within distribution chains.
FCA’s Supervisory Approach and Next Steps
The FCA intends to actively supervise the integration and ongoing adherence to the Consumer Duty. This includes:
- Detailed engagements with firms about their frameworks and methodologies for compliance.
- Assessments of the changes firms have made based on their initial gap analyses.
- Evaluation of the new data and monitoring tools firms employ to ensure they meet the Duty’s standards.
Conclusion and Key Actions
Retail Banks and Building Societies must prioritise the integration of the Consumer Duty into their operational and strategic frameworks. The FCA expects firm leaders to:
- Critically assess and continuously monitor their compliance plans.
- Engage constructively with the FCA and other stakeholders.
- Ensure that all strategic and operational changes, especially those related to product design, pricing, and customer interaction, align with the Duty’s requirements.
This letter serves not only as a directive but also as a reminder of the heightened expectations for consumer protection within the financial services sector, stressing the importance of ethical conduct, transparency, and customer-centric operational practices.