Introduction
On 21 February 23, the Financial Conduct Authority (FCA) issued a Dear CEO Letter to Payment Institutions (PIs), Electronic Money Institutions (EMIs) and Registered Account Information Service Providers (RAISPs) to help them implement and embed the Consumer Duty effectively.
As discussed in our previous insight, in relation to payments firms the Consumer Duty applies to:
a) products and services offered to retail customers, including micro-enterprises and small charities with an annual turnover of less than £1 million; and
b) firms who determine or have a material influence over consumer outcomes and not only to those with a direct customer relationship. When a payments firm, for example a money remitter or electronic money issuer, provides payment services through an agent or, in the case of an electronic money issuer, distributes or redeems electronic money through an agent or distributor, the authorised or registered firm will be responsible for ensuring that the third party agent complies with the Consumer Duty.
What has been discussed?
The letter has set out:
- A reminder of the implementation timeline, key elements of the Duty and how this applies to payment firms.
- The FCA’s expectations on how payment firms should embed the Consumer Duty, including examples of good and poor practice.
- Feedback from the FCA’s recent review on firms’ implementation plans.
- The FCA’s approach to supervising the Consumer Duty in the payments portfolio and planned next steps.
Key dates
| End of April 2023 | Manufacturers should have completed all reviews necessary to meet the outcome rules and shared necessary information with their distributors. |
| 31 July 2023 | The Consumer Duty comes into force for new and existing products or services that are open to sale or renewal. |
| 31 July 2024 | The Consumer Duty comes into force for closed products or services. |
Key areas of focus for firms in the run-up to the 31 July 2023 implementation deadline
- Effective prioritisation: Firms must make sure they are prioritising work appropriately by focusing on the areas that are likely to make the biggest impact on outcomes for consumers and reducing the risk of poor outcomes.
- Embedding the substantive requirements: Firms need to ensure they are making the changes needed so consumers receive communications they can understand, products and services that meet their needs and offer fair value, and they get the customer support they need, when they need it.
- Working with other firms: Firms need to share information and work closely with their commercial partners to make sure they are all delivering good customer outcomes. The FCA has found that some firms need to accelerate this work to implement the Consumer Duty on time.
Key areas for firms to consider in order to deliver good outcomes
The FCA has set out five key areas to consider along with specific practical examples:
- Products and services: Firms are expected to demonstrate that they have assessed and satisfied themselves that their products are designed to meet the needs, characteristics and objectives of their specified target market. Firms are also expected to implement ongoing processes to collect and use data and management information to monitor whether products and services are continuing to meet the needs of customers. There should also be an assessment of whether there are particular features of products that cause harm to specific groups of customers, including customers that have different characteristics of vulnerability. Interestingly, the FCA has commented on the implementation of Strong Customer Authentication (SCA) and it expects payments firms that operate payment accounts to offer SCA solutions that work for all groups of customers, in particular those with protected characteristics, as part of the design process. This could include offering more than one method of SCA to avoid customers being disadvantaged – for example, One Time Passwords shared by mobile phone may not be suitable for all customers.
- Price and value: This includes considering fee charging structures and how products can be tailored to provide fair value to their intended customers. This includes EMIs assessing whether fees for redeeming e-money is proportionate and in line with the costs incurred. Firms also need to consider whether their fee structures work for all categorises of customers, including vulnerable groups. Firms that have distributors or partners also need to consider the charges levied on customers as part of assessing whether such fees are fair value.
- Consumer understanding: Customers must be enabled to make informed decisions. Payments firms will be expected to highlight the differences between the protections that apply to customers using different products and services. By way of illustration, highlighting that EMIs or PIs are not banks, and that funds are protected by safeguarding arrangements rather than by the Financial Services Compensation Scheme. Also, firms offering regulated products alongside unregulated ones should make it clear to consumers which products are regulated, and which are not, and clearly set out the consumer protections relating to each product.
- Consumer support: Firms must provide support for customers through the lift of the product. This includes providing appropriate support channels. For example, some firms operating purely online may not offer other channels for consumers to contact them if they are experiencing difficulties, such as being unable to access mobile and internet services, or if need to speak to a member of staff directly to report fraud on their account. In some instances, this approach may not always be sufficient, and the FCA expects firms to ensure their contact channels meet their customers’ needs.
- Account freezing and fraud report: The FCA sees poor financial crime controls and the freezing of accounts is for too long and without adequate explanation. The FCA has set out certain processes to address these weaknesses. The FCA expects firms to consider their handling of alleged cases of fraud and assessment of complaints through the prism of the Consumer Duty. Amongst others, the FCA has urged firms to consider how the freezing of accounts becomes: (i) less frequent (e.g. through better upfront onboarding and KYC controls and more intelligent transaction monitoring); (ii) less protracted (e.g. through swifter investigation of suspicious fraud); (iii) better communicated (to the extent this is permitted doesn’t amount to tipping off); and (iv) better supported (especially for customers in financial that could face financial difficulties as a result of the freeze). Firms will need to carefully consider how it implements this guidance from the FCA against its statutory requirements in respect of ensuring it does not breach its obligations under the Proceeds of Crime Act 2002, including in relation to not tipping off.
Next Steps
The FCA has described the Consumer Duty as a “cornerstone” in its three-year strategy and a key element of its work to set and test higher standards between now and 2025. The FCA will be publishing further events and updates to support firms’ embedding activities in the run-up to the July 2023 implementation deadline and is also working with an external research agency that will soon be sending out a short survey to a sample of firms. The responses to the survey will enable the FCA to inform its ongoing communications to firms. In the meantime:
- Larger payments firms should expect to be asked regularly to provide their supervisors updates on implementation progress and their internal governance papers and minutes, which the FCA is likely to engage with and challenge.
- Firms of all sizes should expect to be included in the FCA’s engagement process and, upon request, they must be ready to explain the actions they have taken to comply with the Duty.
Our Payment Services Regulatory team will be monitoring next steps and shall keep you up-to-speed with the latest developments.
For further information, please contact:
Gavin Punia, Partner, Bird & Bird
gavin.punia@twobirds.com
