FCA Consumer Duty Update | October 2022

“A firm must act to deliver good outcomes for retail customers” is the principle which underpins the new Consumer Duty announced by the FCA on 27 July 2022.

The FCA’s new Consumer Duty will come into force completely on the 30^th April 2023 and is a critical development for the protection of consumers of financial services in the UK. The purpose of the duty is to fundamentally improve the way financial companies serve their customers by setting higher and clearer standards of protection for consumers across the sector. Firms will be required to put their customers’ needs first.

The duty is made up of an overarching principle and new rules that financial firms will have to follow when implemented.

The FCA has recently published its 5 milestones for implementation of the new Consumer Duty:

• 27 July 2022: final rules and guidance published

• 31 October 2022: firms’ boards (or equivalent management body) should have agreed on their implementation plans and be able to evidence they have scrutinised and challenged the plans to ensure they are deliverable and sufficiently robust to meet the new standards

• 30 April 2023: manufacturers should have completed all the reviews necessary to meet the outcome rules for their existing open products and services so they can share with distributors to meet their obligations under the Consumer Duty, and identify where changes need to be made

• 31 July 2023: implementation deadline for new and existing products or services that are open to sale or renewal

• 31 July 2024: implementation deadline for closed products or services

You can read the FCA detailed timeline here.

 What is the Consumer Duty?

The Consumer Duty means that financial companies should ensure that their customers receive communications they understand, products and services that meet their needs and offer fair value, and they receive the customer support they need, when needed. The FCA hopes that the duty will create a major shift in financial services by improving how firms serve their customers leading to more flexibility for firms to compete and innovate in the interests of consumers.

The Consumer Duty is comprised of the Consumer Principle, Cross-Cutting Rules and Four Outcomes. The overarching Consumer Principle reflects the overall standard of behaviour the FCA expects from firms and the tag line is that “firms must act to deliver good outcomes for retail customers”. This overarching principle is then backed up by The Cross-Cutting Rules which focus on the FCA’s expectations for behaviour through three underlying requirements for how firms should act to deliver good outcomes and apply across all areas of firm conduct:

• To act in good faith towards customers;
• To avoid causing foreseeable harm;
• To enable and support retail customers to pursue their financial objectives.

These three cross-cutting rules are meant to inform financial firms and help them interpret the Four Outcomes which are a suite of rules and guidance detailing expectations for firm conduct in four key areas that underpin the firm-consumer relationship:

• the governance of products and service;
• price and value;
• consumer understanding;
• consumer support.

The duty will reinforce and complement the existing FCA Handbook requirements and the FCA has stated that its new expectations would also be compatible with other consumer protection legislation such as the Consumer Rights Act 2015, the Enterprise Act 2022, and the Consumer Protection from Unfair Trading Regulations 2008.

The FCA has stated that it expects “the implementation of the duty to be iterative” and that the FCA itself will “learn more from firms’ implementation”. According to the FCA, there is also no fixed or “one size fits all” approach to monitoring by a firm to determine if it is compliant with the new Consumer Duty requirements. Firms will need to use their judgement.

There are examples of consumers being exposed to unscrupulous finance companies which the FCA have recorded in countless case studies. The new Consumer Duty aims to reduce these types of negative experiences for consumers. For instance, it will:

• Bring to an end the rip-off charges and fees imposed on consumers

• Make it easier for consumers to switch or cancel products

• Provide helpful and accessible customer support, reducing the wait consumers have regarding answers they require

• Provide timely and clear information that consumers can understand about products and services so that consumers can make good financial decisions, as opposed to burying key information in lengthy terms and conditions that few have time to read.

• Provide products and services that are right for their customers

• Focus on the real and diverse needs of their customers, including those in vulnerable circumstances, at every stage and in each interaction.

What is the impact on financial services companies?

The Duty is a massive boom for consumers, but what of the impact on financial companies?

The Duty will drive a change in culture at firms but will also exert additional pressures on senior managers from a compliance, IT and resourcing point of view. For some firms, they will already be up to speed with the requirements of the new Duty. However, for others, it will require significant time and resource to implement.

Firms need to consider each step of the customer journey throughout the product lifecycle, including design, communications, and customer service to assess any areas which may give rise to customer harm.

Internal compliance processes will need to be reviewed and updated with metrics put in place to understand Customer outcomes. Customer service procedures may need to be reviewed alongside existing complaints handling processes to ensure issues and trends are identified and reported with product changes implemented quickly.

From a profitability perspective, Outcome 3 provides that customer service should meet consumers’ reasonable needs and expectations. The new Duty aims to reduce ‘sludge’ tactics employed by unscrupulous financial services companies which see customer service processes hindering consumers from taking action that would benefit them, like switching to a more appropriate product, for example. Firms will now need to make leaving, cancelling, or transferring out of a product as easy as it is to buy. This may cause some firms to experience customer retention issues, and firms will need to carefully manage the impact on cash flows and profitability.

The “fair value” outcome (Outcome 4) requires firms to consider introducing triggers linked to profitability or commission rates to assess whether that product is still delivering fair value for the customer. This will require firms to put metrics in place to better understand and assess fair value in the pricing of their financial products.

Other points of note

The FCA is aiming for the new Consumer Duty to improve competition across the market with the hope that increased competition will deliver better consumer outcomes.

For instance, customers will be able to switch providers as and when they choose, with healthy competition for business between a large and growing number of companies. Any platform that fails to put themselves in customers’ shoes when designing products, customer journeys and ongoing communications, risks seeing those customers move to a competitor. This could make it difficult to attract new business and may lead to a downturn in profitability for that business. It could even mean the end of such a business that is incapable of compliance with the regime.

Similarly, any company that does not consistently provide value for money risks being exposed via price comparisons offered by businesses such as the Lang Cat, Boring Money and Platforum, which are regularly reported in the mainstream trade and consumer financial press.

The FCA has said that “as the Duty raises the bar for the firms we regulate, it will prevent some harm from happening and will make it easier for us to act quickly and assertively when we spot new problems.” The FCA has decided that it will not implement a private right of action for breaches of the Duty yet, as it wants to allow some bedding in time for firms to implement the necessary changes. Some consumer organisations have warned that this would undermine the impact of the Duty on the basis that the threat of private action would provide a strong incentive for firms to comply, which may otherwise be lacking. The FCA has responded to this warning by strengthening the governance, accountability requirements and redress requirements under the Duty. When firms cause customers harm, the FCA requires them to be proactive and take action to rectify the situation, including providing redress where appropriate, which the FCA sees as a crucial element of firms delivering good outcomes for their customers.

For institutions to support and empower consumers in making financial decisions, this will require a shift in approach and a change in culture. Communications around changes in interest rates or adverse charges will have to attract greater transparency.

The greater degree of accountability required will challenge certain providers as to whether they should remain in the sector. For the majority, however, this is an opportunity to cement connectivity between funder and consumer and is an opportunity to remove corrosive and unfair practices that have damaged the sector in the past.