Consumer duty is intended to bring about a heightened prioritisation of customer needs. If implemented and enforced robustly by the FCA as we expect, it will prove to be a significant event in the history of financial services regulation.
As a key priority of the FCA, therefore, it is important that firms are prepared to respond. While the final guidelines are not due until the end of this month, the FCA has provided sufficient detail in both consultations (CP21/131 and CP21/362) for firms to have a strong understanding of the requirements and expectations.
Our recent Consumer Duty benchmarking survey indicated that organisations are already planning their response. But there are challenges to overcome - accessing data on historic product sets, identifying the characteristics of end customers you may not have any connection with, and having the right skills, experience and resource to implement the changes needed, are all issues for many organisations.
The proposed rules under the Consumer Duty set out three key areas for firms:
- Ask themselves what outcomes consumers should be able to expect from their products and services.
- Act to enable rather than hinder these outcomes.
- Assess the effectiveness of their actions.
These rules are expected to be delivered as a package consisting of three elements: a Consumer Principle, cross-cutting rules and four outcomes.
The aim of the duty is to ensure the interests of consumers are at the forefront of all activities within financial services firms and carefully considered at each stage in the product lifecycle. For some firms, this may require a shift in culture, ways of working, and decision-making processes.
The feedback provided to the FCA, which consisted of consumer organisations and the industry, was that the success would be dependent on the supervision and enforcement by the FCA. However, generally responses were supportive of the Consumer Duty and the aims underlying it.
Feedback around the proposed structure was that it was simple and logical. However, some did challenge the structure with comments around complexity, clarity and whether the rules were something which could be measured objectively. Given that most respondents were satisfied with the overall structure of the Consumer Duty, it is not expected that the FCA will make meaningful changes.
The Consumer Principle
The aim of this is to set the tone and expectation of the behaviours the FCA would like to see from firms. The initial consultation paper proposed two alternate ways of phrasing the new principle and asked respondents for their preference between the following:
- A firm must act to deliver good outcomes for retail clients.
- A firm must act in the best interests of retail clients.
The majority of respondents to the feedback preferred Option 1. Reasons given for this included that it was more consistent with the overall tone of Consumer Duty and that it may encourage more monitoring and management. After considering the responses, the FCA have proposed Option 1.
Cross-cutting rules
These rules set the expectations of the conduct expected by the FCA from financial services providers. The original three key behaviours were:
- Take all reasonable steps to avoid causing foreseeable harm to customers.
- Take all reasonable steps to enable customers to pursue their financial objectives.
- Act in good faith.
The feedback on the cross-cutting rules was generally positive, however, the FCA stated that some respondents felt like they repeated existing FCA requirements. Other comments also included that they were ambiguous or could be misinterpreted. The ‘all reasonable steps’ part of key behaviour’s 1 and 2 was commented on, with some respondents noting that it was unachievable or unclear.
In response to the feedback, the FCA have revised the key behaviours. The cross-cutting rules which the FCA are proposing require firms to:
- Act in good faith towards retail customers.
- Avoid causing foreseeable harm to retail customers.
- Enable and support retail customers to pursue their financial objectives.
Four outcomes
The four outcomes are a set of rules which represent the key elements of the firm-consumer relationship. The first three represent provisions made by the firm to the consumer while the last is focused on the consumer to firm relationship. These further develop the cross-cutting rules. The four outcomes are as follows:
- Communications – Consumers should be given the information they require, and this should be presented in an easily understandable way.
- Products and services – Products should be designed so that they meet consumers needs and are fit for purpose.
- Customer service – Customer service which meets the needs of consumers should be provided throughout the consumers relationship with the firm.
- Price and value – In addition to meeting consumers’ needs, products and services should also be priced at a fair value.
The FCA requested feedback on the proposals under each outcome separately. We have summarised feedback and the response from the FCA for each below.
Communications
Respondents believed that this would help to encourage firms to provide simpler explanations of products, services and the risks involved, therefore, helping meet consumer needs. The FCA have proposed to rename this outcome the ‘consumer understanding’ outcome in order so firms can focus on this.
Products and services
Some responses suggested that by requiring firms to focus their products or services on a target market, they may restrict access to particular groups of people, for example, vulnerable customers. However, some suggested that the proposals would help organisations to better meet consumer needs for these groups of people. The FCA believe that this is the case and so have not suggested any revisions to the proposals under this outcome.
Customer service
The proposals under this outcome were generally supported with most respondents noting that the proposals would promote good outcomes. Similar to the ‘communications’ outcome, the FCA have proposed to rename this outcome to ‘consumer support’ to reflect on exactly what they want firms to focus on.
Price and value
Some concerns were raised about the proposals under this outcome. For example, there were concerns about the proposals potentially not having a meaningful impact or whether the fairness criteria should be considered for different groups of customers. Overall, the FCA made no major changes to the proposals as they believe that they will prevent harm to consumers.
Next steps
Given the far-reaching implications Consumer Duty may have on firms, many product providers will be looking at this important area now. With a team or product and consumer experts, we are well placed to support you in thinking through what this Duty means for your business. For a conversation on how we can help you please get in touch with one of our consumer duty experts: Karen Brolly, Fyona Murphy, Siobhan Lough and Kara Scott.
1 https://www.fca.org.uk/publication/consultation/cp21-13.pdf
2 https://www.fca.org.uk/publication/consultation/cp21-36.pdf