On 9 October, the FCA published the key findings from its review of implementation of the Consumer Duty by payments firms. 

Why now?

The FCA highlighted certain specific risks to the payments sector back in February 2023 and earlier this year it conducted an assessment of 23 payments firms to verify how well they were performing against the Consumer Duty’s requirement to deliver good customer outcomes.

Who should take note?

Regulatory findings are a good temperature check for the entire industry, because there a many common themes which can inform other areas of financial services, but these ones are of key relevance to: 

• Payment service providers;
• E-money issuers;
• Money remitters;
• Merchant acquirers; and
• Open banking firms.

What are the key regulatory findings?

Out of the 23 sample firms assessed:

• “just over half” were able to demonstrate a “satisfactory” commitment to the delivery of good consumer outcomes in line with the requirements of the Consumer Duty and were therefore considered as not presenting the risk of significant poor consumer outcomes; and
• “just under half” were noted as requiring significant further works to implement the Consumer Duty and therefore of presenting a moderate to high risk of delivering poor consumer outcomes.

With no exact numbers, it looks like a 50/50 split between payments firms that are “satisfactory” and those that are causing the regulator to be “concerned” about not being “compliant with the Duty”.

Good v Bad

The FCA’s findings highlight areas of good and bad practice. This is the rich pickings of regulatory feedback to firms active in this space:

Good practice includes firms:

• recognising that improving consumer outcomes will benefit their own long-term interests;
• being able to identify their target markets and services;
• having clear customer centred purposes;
• understanding what foreseeable customer harms look like;
• understanding what good customer outcomes are;
• having strong governance arrangements;
• having good systems and controls;
• having a systematic approach to implementation of the Consumer Duty;
• monitoring the delivery of good outcomes to consumers; 
• delivering regular and quality management information (MI) to their board; and
• acting on lessons learned from addressing identified shortcomings.

Poor practice includes firms:

• failing to recognise what the Consumer Duty requires of them;
• lacking an understanding of the significant risks facing consumers from payments products and services;
• relying on processes and controls that pre-date the Consumer Duty;
• failing to define their target markets or to do so with sufficient clarity;
• failing to define what good outcomes look like and should be therefore be delivered to their customers; and
• not linking MI to the four outcomes of the Consumer Duty.

The (roughly) 50% of payments firms that fall into the “poor” category, and others not forming part of the sample taken but with similar characteristics, will be severely challenged in their ability to meet the FCA’s requirement of implementing the Consumer Duty.

What action should you take?

Payments firms should take note of the warning signs and make sure that they are putting their customers at the hearts of their businesses. So, what exactly does that look like, in practical terms?

• Read the FCA’s findings and think about whether any of them might apply to your payments business.
• Understand the Consumer Duty.
• Identify and define your target market so that you understand who your consumers are.
• Evaluate your products, services and processes against the requirements of the Consumer Duty.
• Note that the more high risk that your products and services are, the more work you will have to do to define your target market in sufficiently granular detail.
• Have appropriate systems and controls relative to any agents or distributors to whom you have delegated activities. You need to be sure that your agents and distributors are complying with the Consumer Duty.
• Undertake fair value assessments to test whether the prices that customers are paying for your products and/or services are reasonable relative to the benefits received.
• Ensure that your communications with your customers are tailored to your target market, that they are clear, and that they enable the making of informed decisions about your products and/or services.
• Provide sound and effective measures of customer support and act on customer complaints.
• Monitor, test and assess all measures on an ongoing basis so that you have appropriate oversight and can identify shortfalls in the delivery of good consumer outcomes.
• Ensure that your management is mindful of and can exercise their functions under the Consumer Duty.
• Keep a record of all your supporting analysis, explanation and rationale including all minutes, MI and board packs, so that you can clearly demonstrate that you have considered the Consumer Duty as it applies throughout your business.

Go the extra mile

Some actions seem to be particularly favoured by the regulator and these include the forward testing of consumer understanding before products or services are released to market. This level of testing can produce highly insightful feedback for example on text, terminology, and language structure that may not be obvious to those who have been closely involved in bringing the product or service to market. Any steps that you can take towards going the extra mile to deliver good consumer outcomes are likely to find favour with the regulator.

Heed the warning signs

The message from the FCA for payments firms is clear beyond doubt “Our work indicates that many firms need to take additional action to fully embed the Duty, and they should do so without delay. Firms should read this review, consider how their firm compares, and use it to address any shortfalls or gaps and raise standards. It is better for firms to resolve issues now than wait for us to identify and intervene on issues and remediate any harm later.”

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