Many financial service firms will be considering the implications of the recent Financial Conduct Authority’s (FCA) consultation regarding its proposed Consumer Duty. In this article we summarise the detail and consider what the next steps might be.

This new Duty will sit alongside the Principles in the FCA Handbook and is expected to come into effect from 31 July 2022. There will be a second consultation on the proposed rules and guidance by the end of this year, but at this stage, it is worth all firms considering now how they might make appropriate adjustments to ensure they are in line with the FCA’s heightened prioritisation of customer needs.

The proposed rules set out three key areas for firms:

1. Ask themselves what outcomes consumers should be able to expect from their products and services.
2. Act to enable rather than hinder these outcomes.
3. Assess the effectiveness of their actions.

It is proposed that the rules and guidance will be delivered as a package consisting of 3 main components explained in more detail below. These are ‘The Consumer Principle’ of acting to deliver good outcomes and in the best interest of retail clients; cross-cutting rules relating to avoiding harm and acting in good faith and four outcomes representing the key elements of the firm-consumer relationship.

The aim of this Duty is to ensure that 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. Although consumers are already at the heart of many firms’ activities, for some firms these new rules may require a shift in culture, ways of working, and decision-making processes.

When it comes into force, the Consumer Duty will have a broad ranging application in the financial services market. It is proposed that it will apply to all retail clients and eligible counterparties. This means that the Duty will also apply to companies who are involved in the design and supply of products and services, even if they are not directly client facing themselves.

The consultation paper states that the ‘Consumer Duty would set clearer and higher standards for the culture of firms and the conduct we expect of them.’ There is an objective to continue to build consumers' trust in the financial services market. As has been shown with past instances of mis-selling and poor customer service, the reputation of financial services players can quickly be diminished, especially with adverse press and media coverage, and takes longer to rebuild than it does to be reduced. To this effect, encouraging a culture of “putting themselves in their customers’ shoes”, the FCA hopes that future threats to reputation can be quashed by having firms focussing on doing the right thing first time around.

The FCA have a desire to future proof the Consumer Duty as best they can so that it remains relevant and applicable in the face of advances in technology. Indeed, advances in technology have been an important influence in the development of this Duty, especially the design and user experience in mobile applications used to purchase products and services. The consultation paper highlights ‘sludge’ practices in particular, which can make it difficult to find clear, easy to understand information in a timely manner. 

The FCA aims to bring a heightened awareness of the disadvantages a consumer has, regardless of how financially literate they may be, when buying a product or service from a financial services provider and so ensure a more level playing field between the firm and consumer. 

Looking at the 3 main components in a bit more detail:

The Consumer Principle

The purpose of the principle is to set the tone and expectation of the behaviours the FCA would like to see from firms. The consultation paper proposes two alternative ways of phrasing the new principle and ask respondents for their preference between the following:

1. A firm must act to deliver good outcomes for retail clients.
2. A firm must act in the best interests of retail clients.

This feels like an even stronger shift in mindset, from the FCA, to encourage providers to aim for best interests or good outcomes, not just avoiding bad outcomes or treating customers fairly.

Cross-cutting rules

These rules build on the Consumer Principle by setting expectations of the conduct the FCA expects from financial services providers. The three key behaviours are:

1. Take all reasonable steps to avoid causing foreseeable harm to customers.
2. Take all reasonable steps to enable customers to pursue their financial objectives.
3. Act in good faith.

The use of the phrase “all reasonable steps” here, as is used in the Senior Managers and Certification Regime (SMCR) indicates that this Duty will carry the same weight as the responsibilities Senior Managers hold under SMCR and that those holding SMF roles may be personally responsible for ensuring that the Duty is adhered to.

Four outcomes

The four outcomes are a set of rules that represent the key elements of the firm-consumer relationship. The first 3 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:

1. Communications.
2. Products and services.
3. Customer service.
4. Price and value.

The four areas chosen to form the outcomes demonstrate the FCA’s desire to ensure that consumers’ best interests are at the heart of every point of interaction between the firm and consumer.

Although the Duty is not enforceable yet, it feels like the FCA have shared enough detail in their consultation for firms to have a strong understanding of the requirements and expectations. As such, there is a lot of work that could be initiated at present to consider whether current practices are in line with the Duty. It would be good practice to begin incorporating the themes of the Duty into strategic thinking and day-to-day operations to start to transition the culture of firms ahead of the Duty being brought in.

The FCA expects firms to continually monitor their practices and activities in accordance with the Duty and be able to evidence, upon request, that they are monitoring, testing and adhering to the expected behaviours. If the result of monitoring on any of the four outcomes suggests that products, services or benefits may not be fair or represent good value for money, the FCA would expect firms to adapt their offerings or withdraw the product/service. In the consultation paper, the FCA state ’we propose to embed a concept of reasonableness in the Consumer Duty’ indicating that they expect firms to take a proportional and pragmatic approach in applying this new Duty to their activities.

Given the applicability of the Duty to all activities within a firm, there will be many areas to consider, even if change is not always required. The FCA has been building towards setting out its expectations with previous thematic reviews and guidance, including its important work on vulnerable customers which we explored in our recent report. With the potential for far reaching implications, many product providers will be starting to look at this important area now and with a team of product and consumer experts, we are well placed to support you in thinking through what this Duty means for your business. For a conversation around how we can help you in the three key areas of action required please get in touch with one of our consumer experts.