FCA Review Offers Insights on the Consumer Duty in the Payments Sector

The FCA’s latest analysis on how firms within the payments sector are implementing the Consumer Duty provides important guidance for prioritising customer outcomes under the new regulatory framework. Here’s what you need to know.

Understanding the Consumer Duty

Introduced by the FCA in July 2023, the Consumer Duty aims to shift the focus of financial services firms towards better consumer outcomes. The regulation requires businesses to design products and services that meet customer needs while reducing potential risks and harm.

This outcomes-based approach represents a shift from traditional, rule-based regulations, encouraging firms to focus on delivering results rather than simply following prescriptive steps. A recent FCA review provides valuable insights into what constitutes good practice within the payments sector.

Key Takeaways from the FCA Review

The review evaluated 23 firms across the payments industry, including e-money providers, merchant acquirers, money transfer services, and open banking firms. It found that many still have work to do; nearly half of the firms reviewed had only partially implemented the Duty, posing moderate or high risks of poor customer outcomes.

Here are the main areas of focus from the review:

Aligning Business Goals with the Consumer Duty

Firms that excel in implementing the Duty understand that aligning their business strategies with customer outcomes benefits their long-term success. These firms establish a clear, customer-focused mission, identify what positive outcomes look like, and recognise potential risks.

Top-performing firms take a structured approach, clearly defining target markets and expected outcomes while setting measurable benchmarks for evaluating price, value, and customer understanding. Effective governance structures are used to monitor and adjust their processes as needed, supported by regular management information (MI) reports that often utilise Red, Amber, and Green (RAG) ratings to track progress.

In contrast, firms that fall short often rely on outdated processes, assuming their products pose minimal risk. This lack of proactive adaptation can lead to poor customer experiences and compliance issues.

Defining Target Markets Clearly

The Consumer Duty requires firms to have a detailed understanding of their target markets, considering the characteristics and complexities of their products. Broad definitions may be suitable for low-risk products, but high-risk offerings require more precise market parameters to minimise potential harm.

Overly broad target markets can obscure product risks, making it difficult to identify potential issues. Narrow, well-defined target markets are essential for medium and high-risk products to ensure consumer protection.

Monitoring Agents and Distributors

Firms in the payments sector must take responsibility for the actions of their agents and distributors. The review found that many firms lack adequate oversight, with some relying only on initial training and onboarding while neglecting ongoing monitoring.

Effective firms implement strong governance frameworks to oversee agents, conduct regular compliance checks, and use detailed MI to identify issues promptly. Firms that fall short often leave consumers confused about where to seek help, damaging trust.

Conducting Fair Value Assessments

The Consumer Duty mandates that firms ensure their products offer fair value, which means conducting thorough assessments beyond just benchmarking against competitors. Some firms were found to benchmark prices without considering the full cost-benefit balance, potentially overlooking market-wide pricing discrepancies.

The most effective firms provide a clear rationale for their pricing and value propositions, considering how different charges impact diverse consumer groups and addressing any inconsistencies proactively.

Enhancing Consumer Understanding

Ensuring consumers understand their products is a key aspect of the Duty. However, the review found that some firms had not sufficiently updated their communication strategies, with minimal testing of their messaging before and after delivery.

Firms that perform well in this area utilise comprehensive testing methods, such as A/B testing and post-communication surveys, to measure consumer comprehension. They also provide MI on the effectiveness of their communications, making it easier to track and improve outcomes.

Ensuring Adequate Consumer Support

To comply with the Duty, firms must offer customer support that matches consumer needs, particularly for vulnerable groups—a focus area for the FCA. Effective firms show a strong understanding of how to assist these consumers, ensuring clear and accessible support channels. Poor practices, such as unclear instructions or inadequate signposting, hinder consumers from accessing help when needed.

Firms should regularly monitor customer support data, using complaints and feedback to identify and resolve issues swiftly, thereby maintaining consumer trust.

Strengthening Governance and Management Information

Robust governance structures are essential for integrating the Consumer Duty into a firm’s operations. The FCA’s review found that while boards receive information on Duty implementation, there is often insufficient scrutiny and discussion. Increased board engagement is needed to ensure the Duty is fully embedded in business strategies and practices.

Best practices include using detailed MI that tracks performance against the Duty and allows for swift resolution of identified gaps. Some firms had not updated their MI frameworks to meet the new standards, making it difficult to monitor consumer outcomes effectively.

Next Steps for Firms

The FCA’s review offers a roadmap for firms aiming to enhance their Consumer Duty implementation. It highlights the need for proactive measures to ensure compliance and prioritise customer welfare.

Firms are encouraged to assess their current practices in light of the FCA’s findings and address any deficiencies promptly. Boards should regularly review and approve evaluations of customer outcomes, ensuring their commitment to delivering positive consumer experiences is clearly demonstrated.

As the FCA continues to monitor compliance, firms are expected to take a systematic approach to implementing the Duty, refining their strategies as necessary. This outcomes-focused framework offers firms the flexibility to innovate and find effective, cost-efficient ways to achieve consumer-centric results.

The FCA’s review underlines the importance of a comprehensive and systematic approach to the Consumer Duty. While developing best practices will be an ongoing process, the flexibility of an outcomes-based approach allows firms to innovate and deliver more efficient consumer solutions.

At K2 Accountancy Group, we stay ahead of regulatory developments to help our clients navigate these changes effectively. If your firm needs guidance on implementing the Consumer Duty or assessing compliance strategies, our team is ready to support you in prioritising customer outcomes and aligning with FCA expectations.

Contact us today for specific advise on your specific circumstances.