Implementing Consumer Duty in the Payments Sector: Key to Delivering Good Customer Outcomes

The Financial Conduct Authority (FCA) has set higher standards for financial services firms through the implementation of the Consumer Duty, a key part of its 3-year strategy to promote transparency, fairness, and consumer protection.

In a recent multi-firm review conducted in early 2024 and published the 9th of October, the FCA evaluated how payments firms have responded to the Consumer Duty’s requirements. This review examined how firms identified gaps in their compliance, addressed sector-specific risks outlined in the FCA’s Dear CEO letter of 21 February 2023, and implemented actions to ensure they deliver good consumer outcomes.

Sheldon Mills, the Executive Director of Consumers and Competition at the FCA, emphasizes the importance of the Consumer Duty in reshaping the financial services landscape: "The Consumer Duty is at the heart of our mission to set higher standards for firms and ensure that they deliver good outcomes for consumers. It represents a fundamental shift in how firms should approach their relationships with customers, ensuring that fairness, transparency, and customer care are embedded in every aspect of their operations. Firms must not only meet these higher standards but embrace them as a way to build long-term trust and sustainable success."

The FCA’s findings highlight areas where payments firms are excelling, as well as areas requiring significant improvement.

Who Should Pay Attention?

The Consumer Duty is relevant to a broad spectrum of payments firms, including:

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

Other firms operating within the financial services industry, particularly those handling consumer retail products, can also benefit from understanding the FCA’s expectations under the Duty.

FCA’s Expectations: A Customer-Centric Approach

The Consumer Duty demands that firms put customer needs at the centre of their business strategies. The FCA expects firms to:

• Deliver good outcomes for customers, ensuring that products and services are fair and designed to meet the needs of the target market.
• Proactively identify and mitigate potential harms before they affect customers.
• Maintain ongoing evaluations of their products, services, and practices to align with the Duty’s requirements.

The FCA further outlines that firms must review and update their business practices across four key outcomes:

1. Products and Services: Ensuring that products are fit for purpose, targeted to the right customer group, and deliver intended outcomes.
2. Price and Value: Products should offer fair value to customers, considering both the price and the non-monetary benefits they provide.
3. Consumer Understanding: Communications with customers should be clear, transparent, and tailored to the needs of the target market.
4. Consumer Support: Firms must provide accessible and effective support channels, ensuring that customers can realise the benefits of the products and services they have purchased.

In addition, firms’ governance structures should reflect the Duty, with regular reviews at the board level to assess the effectiveness of customer outcomes and address any shortfalls in a timely manner.

Key Findings from the FCA’s Review

In January 2024, the FCA reviewed 23 payments firms to assess how they were implementing the Consumer Duty. The findings revealed a significant variance in compliance across the sector.

Good Practices Identified

Firms that excelled in the review had a systematic approach to the Duty’s implementation, characterised by:

• Clearly defined target markets for each product or service.
• Strong governance frameworks, including clear oversight of agents and distributors.
• Comprehensive management information (MI) to track the delivery of good consumer outcomes, often with red, amber, green (RAG) ratings to quickly identify risks or gaps.
• Proactive remediation processes that quickly addressed identified shortfalls.

These firms viewed compliance with the Duty as aligned with their long-term business goals and customer-centric strategies. They demonstrated a deep understanding of foreseeable harms and implemented practices to continuously improve customer outcomes.

Areas for Improvement

On the flip side, nearly half of the firms reviewed had only partially implemented the Duty and required significant work to fully comply. The most common gaps identified by the FCA include:

• Insufficient target market identification, with overly broad target audiences that risked failing to deliver the right outcomes for the right customer groups.
• Inadequate oversight of agents and distributors, with some firms unable to demonstrate that they were effectively monitoring third-party partners to ensure compliance with the Duty.
• Weak governance structures, where board-level oversight lacked sufficient challenge or scrutiny over the Duty’s implementation.
• Poor value assessments, where firms focused solely on price benchmarking alone, neglecting to consider the non-financial benefits or how different groups of customers would experience value from their products and services.
• Lack of robust communication testing, with firms often relying on outdated approval processes without pre-testing or post-testing their communications to ensure consumer understanding.

FCA’s Specific Expectations for Firms

In light of the findings, the FCA has reinforced the following key expectations for payments firms:

Products and Services

• Firms must specify their target market in detail, taking into account product complexity and risk. High and medium-risk products require a narrower and more defined target market to prevent harm.
• Oversight of agents and distributors is critical. Firms need to have systems in place to monitor and ensure that their partners comply with the Duty’s standards. This includes regular testing and reporting to the board on agent performance.

Price and Value

• Firms must conduct comprehensive value assessments, considering the total price and benefits of the product or service. It is not enough to benchmark against competitors; firms need to assess whether their products offer fair value for different groups of consumers.
• Firms offering products with variable pricing structures (such as menu-based fees) should evaluate how different consumer groups are affected by these charges, ensuring that the overall package delivers fair value.

Consumer Understanding

• Communications must be tailored to the target audience and the complexity of the product. Firms are expected to test communications both before and after they are issued to ensure that consumers fully understand them.
• Firms should move beyond simple measures like email open rates and consider more direct feedback methods, such as customer surveys or A/B testing, to gauge whether customers can make informed decisions based on the information provided.

Consumer Support

• Support channels must be accessible and appropriate for the needs of different consumer groups, including those who are vulnerable. Firms should have clear service level agreements (SLAs) for responding to customer issues and use complaint data to identify and address any gaps in support.
• Firms should improve their communication practices around account freezes or other restrictions, ensuring that they are providing clear explanations to consumers where permitted by financial crime requirements.

Governance and Management Information

• The FCA expects firms to demonstrate that consumer outcomes are a central part of their governance frameworks, with regular board reviews of Duty-related MI. This should include clear reporting on any shortfalls, corrective actions, and progress updates.
• MI packs should be concise and actionable, enabling boards to assess whether the firm is delivering good outcomes. Metrics should be linked directly to the Duty’s four outcomes, with clear triggers for investigation when potential issues arise.

Next Steps for Payments Firms

Firms must take immediate action to address any gaps in their implementation of the Consumer Duty. The FCA has been clear that it will not hesitate to take regulatory action where firms fall short, including business restrictions or enforcement measures.

Payments firms should:

• Review their current practices against the FCA’s findings to ensure they meet the Duty’s higher standards.
• Implement strong oversight frameworks for third-party agents and distributors.
• Ensure that board-level discussions on the Duty are robust, with clear documentation of any challenges or corrective actions taken.

The FCA will continue to monitor firms’ compliance and will be conducting further sector reviews to identify and address any emerging risks. Firms should be prepared for FCA scrutiny and take proactive steps to mitigate any risks of poor consumer outcomes.

Raising the Bar for Customer Protection

The Consumer Duty represents a fundamental shift in how payments firms must approach customer outcomes. By focusing on good governance, fair value, and customer-centric practices, firms can not only meet regulatory requirements but also build long-term trust and loyalty with their customers.

Firms that embrace these higher standards will be better positioned to thrive in a competitive, consumer-driven financial landscape. Now is the time for firms to reflect on the FCA’s review, identify any shortfalls, and take the necessary actions to embed the Duty across their operations. Compliance with the Consumer Duty is not just a regulatory requirement but an opportunity for firms to lead the way in delivering exceptional consumer outcomes.