Understanding Consumer Duty for the Financial Services Sector
In July 2022 the Financial Conduct Authority (FCA) is introducing a new Consumer Duty for Financial Services companies. What does this duty entail and how does it affect financial services and their consumers?
What the FCA is proposing
The FCA is concerned that financial services are not always working well for consumers. The new Consumer Duty is designed to provide a more consistent standard of consumer protection for users of financial services and prevent causing them harm before it happens.
The FCA is proposing an outcomes-based rather than a rules-based approach. They want to see financial services companies asking questions like ‘would I be happy to be treated in the way my firm treats its customers?’, or ‘would I recommend my firm’s products and services to my friends and family?’ Essentially the FCA is asking firms to put themselves in their customers’ shoes.
The FCA will actively monitor compliance with this new directive and, based on the data it collects, the FCA will intervene where it finds practices that fail to deliver for consumers.
Why introduce a Consumer Duty?
The FCA has identified key practices that are causing consumers harm. These include firms:
- Presenting information in a way that exploits consumers’ behavioural biases or market conditions
- Selling products or services that are not fit for purpose or represent poor value
- Providing inadequate levels of customer service and support
- Engaging in practices that exploit consumers’ vulnerability such as inertia or lack of information
Under the Consumer Duty, all firms will need to make their products and services fit for purpose and offer fair value. They should ensure their communications and customer services allow consumers to make well-informed decisions based on information they can understand. Above all, firms should be proactive by getting things right in the first instance to prevent harm before it occurs.
What’s in the Consumer Duty?
The new Consumer Duty introduces measures designed to raise standards of care and expectations of probity beyond the FCA’s current set of Principles and Rules. It comprises three key elements:
- A new Consumer Principle that provides a clear and overarching standard of conduct and behaviour expected from firms
- A set of Cross-cutting Rules designed to uphold those standards
- Four Outcomes that support the Consumer Principle by setting clear, detailed expectations governing companies’ relationship with their consumers
The Consumer Principle states that ‘a firm must act to deliver good outcomes for the retail consumers of its products’. New rules will ensure a cultural shift in how firms interact with consumers. The principle should guide firms in how they design products and services and how they communicate with consumers and provide customer service.
The FCA’s cross-cutting rules require firms to:
- 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 four outcomes are designed (in the FCA’s words) to ensure:
- Communications equip consumers to make effective, timely and properly informed decisions about financial products and services.
- Products and Services are specifically designed to meet the needs of consumers and sold to those whose needs they meet.
- Customer Service meets the needs of consumers, enabling them to realise the benefits of products and services and act in their interests without undue hindrance.
- The price of products and services represents fair value for consumers.
What it means for the consumer
The FCA is seeking better treatment of consumers. The Consumer Duty principles are focused on improving the financial well-being of consumers by encouraging financial services firms to put the consumer first.
The outcomes should make consumers better informed and more confident in their ability to make well-considered, better-informed decisions to achieve their financial objectives. Consumers will be able to compare products and services more easily and shop around for better deals. Consumers will have better information so that they can better determine which products and services best meet their individual needs.
In short, the Consumer duty is designed to offer consumers greater protection from harm and stop the risk of their being exploited by financial services companies.
How it impacts financial services
The FCA’s new Consumer Duty is designed to commit companies to improve standards and protect and promote consumers’ interests. Specifically, the FCA is requiring firms to:
- Think proactively about the intent behind Consumer rules.
- Actively consider the impact of their actions on their customers.
- Act in good faith to avoid causing harm.
- Offer fair value.
- Deliver to consumers the products and services they need via effective competition.
- Communicate and engage with consumers so that they can make effective choices about which products and services best suit their needs.
- Provide a level of customer service that enables consumers to realize the benefits of the products and services they buy.
- Empower consumers to make effective decisions, so that consumers can take responsibility for their own actions and decisions.
- Continually self-assess and test their offerings so that they can justify the appropriateness of their business models and their treatment of customers
The overriding expectation behind Consumer Duty is for companies to ‘get it right in the first place’ by seeing the products, services, and advice they offer from their consumers’ perspective.
The purpose of the Consumer Duty initiative is summed up by the FCA’s Executive Director of Consumers and Competition, Sheldon Mills:
“The new duty will drive a change in culture at firms. We expect firms to step up and put consumers at the heart of what they do and we’ll be holding senior managers accountable if they do not. The duty will also help create an environment for healthy competition between firms, encouraging them to be innovative in developing products and services that meet consumers’ needs.”
The FCA couldn’t be clearer: the duty of firms in the financial services sector is to put the consumer first.
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