Implementing the Consumer Duty in payments firms [pdf]

The Financial Conduct Authority, FCA, has published an open „Dear CEO Letter“ addressed at payment service providers and e-money institutions as regards the upcoming new consumer duty.
Among other things, the letter
– reminds firms of the implementation timeline of the new duty,
– summarizes the key pillars of the duty,
– outlines how these pillars apply towards such firms,
– provides feedback from a recent review of firms‘ level of adaptation to the new duty,
– sets out the expectations of the FCA in this context, and
– summarizes some key issues firms shall take into account when transposing their new requirements.
Some of the key issues addressed in the letter are briefly summarized below. It shall be noted in this context that the summary is far from complete which is why affected firms MUST review the original Letter.
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##### Issues to consider when transposing the new requirements and how the new duty applies to payment service providers and e-money institutions
As the range of activities performed by payment service providers and e-money institutions is quite large, ranging from the issuance of debit or credit cards, to the facilitation of account deposits and withdrawals and the performance of payment transactions, the FCA notes that the new duty is likely to apply to almost all firms authorized or registered under the Payment Services Regulations 2017 and / or the Electronic Money Regulations 2011. Even in cases where third party distributors are engaged, the payment service provider or e-money institution is ultimately responsible that the third party complies with the new consumer duty.
As far as issues are concerned that such firms shall consider when implementing the new consumer duty, the FCA particularly emphasizes the „products and services“ and the „price and value“ outcome of the new duty. Specifically, the FCA expects payment service providers and e-money institutions to determine their target market and assess and constantly monitor whether or not their products and services meet the needs of retail clients. Additionally, they also need to ensure that their products and services do not cause any harm to customers. Particular attention must be paid to products and services that are offered in combination with other regulated products and services so as to avoid miscommunication to and confusion of customers.
With respect to the „price and value outcome“, the FCA reminds firms that the costs charged to customers, e.g. for the redemption of e-money, must be „proportionate and commensurate with the costs actually incurred by the electronic money issuer“. Furthermore, the fee structure must be evaluated so as to ensure that customers with low value, but frequent transactions aren’t disadvantaged to a point where the additional charges imposed on them aren’t in line with the additional costs incurred by firms.
The FCA also expects payment service providers and e-money institutions to help customers understand the basic terms and provisions in connection with their products or services which particularly holds true for service charges and fees. Therefore, firms shall use adequate signposting and labeling to eliminate any uncertainty. Additionally, where firms use different models as outlined above, they need to take adequate steps to clearly differentiate between their (regulated) products and services.
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##### The implementation timeline of the new duty
– The policy statement to the new duty was published on July 27, 2022 (please see EventID 16865 in this context for more information).
– A corresponding guidance (FG 22/5) was issued at the same time.
– The FCA expects / expected that by October 2022, all management boards have agreed upon a plan to implement the new duty.
– By April 2023, manufacturers of products, including e-money issuers, should have concluded their reviews to ensure that their products or services meet the above noted requirements.
– On July 31, 2023, the duty comes into force for new or renewable products and services.
– On July 31, 2024, the duty comes into force for legacy products or services not subject to any renewals.
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##### Findings from a recent review of firms‘ level of adaptation to the new duty
Most firms have understood and „embraced“ the new duty and have assigned a significant number of resources and have implemented adequate plans to transpose the new requirements. However, some firms still seem to lack prioritization of the new duty and / or are unclear on how to do this. In this context, the FCA notes that they shall look at above noted issues and determine „where they are likely to be furthest away from the requirements of the Duty“. Furthermore, they shall focus on issues that could potentially lead to consumer harm.
The FCA also found that some payment service providers or e-money institutions are over-confident that their current policies and procedures are sufficient to satisfy the new requirements. Therefore, and in view of the scope of the new consumer duty, the FCA strongly urges firms to review their products and services, pricing strategies, and customer support to ensure that they are truly prepared for the new obligations
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Finally, the FCA concludes by stating that it expects larger firms to frequently report to their supervisors on their progress in implementing the new duty. Additionally, all firms shall be expected to provide adequate „proof“ of their actions and implementation strategies to the FCA upon request.