On the 20 September 2023, the FCA published its first “Dear CEO” letter to the funeral plan sector. The 6 page letter outlines the Regulator’s current concerns and its enforcement priorities for the next two years. AKA “portfolio letters”, the Dear CEO typically contains the FCA’s expectations of and instructions to a particular sector. Often couched in terse language, the letter is a formal communication from the Regulator that must be acted on. Portfolio letters typically lay out the Regulator’s sector-specific priorities and concerns for the next two years. Dear CEO letters tend to be more urgent, focussing on particular areas of concern to be addressed. – little side box Jack? It is of course vital that all recipients, read the letter carefully, act on it where appropriate and evidence both. At the very least, this will involve the firm’s board taking note of the letter, reviewing the areas it covers and fixing any shortcomings. This note is a brief summary of the letter’s themes and cannot substitute for detailed and multiple re-readings of the document. That said, the letter has one insistent theme- Consumer, Consumer, Consumer. A simple word count makes the point clear, the term occurs 48 times in the letter. This should be no surprise to seasoned FCA watchers, the Agency has a broad remit: enhancing market integrity, promoting competition and protecting consumers. With the advent of the new Consumer Duty, it is clear that consumer protection is priority front and centre.
The letter begins with a general imprecation that firms must maintain adequate financial resources and manage risk prudentially. Unsurprisingly, the focus is on potential harm to consumers in the event of a firm or a plan’s failure. Whether trust or insurance backed, the FCA requires evidence of ongoing solvency and preparation for inflationary and macroeconomic risks- “Addressing these areas is paramount in preventing consumer harm, ensuring good consumer outcomes and building financial resilience and trust in the market.”
The sector-specific instructions constitute the “meat” of a Dear CEO letter.
• Embedding the consumer duty and consumer support.The FCA expects firms to take appropriate action to ensure that their products and services offer fair value and meet consumers’ needs, that communication to consumers is clear and easily-understandable, and they receive support if and when they need it. This applies to both open and closed products.
Firms should have appropriate policies, systems and controls in place to analyse complaints and respond accordingly. The FCA regards complaints data as a good indicator of whether firms are complying with the consumer duty.
• Improving oversight of appointed representatives (ARs). The FCA introduced new rules in December 2022, requiring principals to provide more information on Ars including Introducer Ars. These new requirements go hand-in-hand with the Consumer Duty rules. The FCA expects principal firms to have effective oversight of their ARs and ensure they are competent, financially stable and deliver good outcomes for consumers.
• Governance and culture. The FCA notes that poor governance and culture has been a causal factor in recent major conduct failings within the sector. It strongly reminds firms of the need for appropriate governance, controls and oversight, in accordance with the size and scale of their business.
• Operational resilience. The FCA is particularly concerned with the level of oversight and contingency planning in respect of outsourced services. Firms need to have credible plans in place to mitigate and recover from risks, they must take remedial action where necessary, and notify the FCA when appropriate.
The letter concludes with the stark warning that the FCA will be devoting a significant part of its resources over the next two years in testing firms against its priorities and expectations. It warns firms that it will take prompt action if they are found to fall short of its expectations and rules.
Given the cross-cutting centrality of the new Consumer Duty, it is no surprise that the FCA’s first letter to the sector is so firmly focussed on potential harm to Consumers. SM&CR compliance in all its aspects is a vital issue for FCA-regulated firms. Compliance with the Consumer Duty is very much the tip of the SMCR spear, failure to comply may well prove to be an existential issue. The Duty is of such paramount importance in the FCA’s priorities, that firms should do more than merely comply. Embracing the Consumer Duty in fulland comprehensively embedding it in every aspect of the firm’s culture and activities should be regarded as a key competitive advantage.