Over the coming days we will hear a lot more about ‘Consumer Duty’ with regard to financial services companies and the products they offer. So what is happening, and why?
The Financial Conduct Authority (FCA), the UK’s financial regulator, is introducing ‘Consumer Duty’ requirements in the financial services market on 31 July 2023. These will require companies to “focus on supporting and empowering their customers to make good financial decisions”.
So far, this new regulation has attracted little attention outside the financial services industry. But Consumer Duty has the potential to be hugely influential. Commentators suggest it could trigger the overhaul of some retail banking products and prompt a review of how financial businesses treat their customers.
The FCA says that the Duty will help turn it into “a more assertive and data-led regulator” and expects a major shift in the financial services landscape that “will promote competition and growth based on high standards”.
Here’s a look at the key themes behind Consumer Duty and how they could affect consumers.
Consumer Duty at-a-glance
According to the FCA, the Duty will include requirements for companies to:
- End rip-off charges and fees
- Make it as easy to switch or cancel products as it was to take them out in the first place
- Provide helpful and accessible customer support – in other words, not make people wait so long for an answer that they give up trying
- Provide timely and clear information that people can understand about products and services so consumers can make good financial decisions – instead of burying key information in lengthy terms and conditions documents
- Provide products and services that are right for customers
- Focus on the “real and diverse” needs of their customers, including those in vulnerable circumstances
About 60,000 firms will be affected, spanning a broad range of categories and covering much of the UK’s financial services landscape – including banks, insurers, investment managers and other sectors.
Because neither the cryptocurrency industry nor buy-now-pay-later services are supervised by the FCA, these will fall outside the new rules.
What is Consumer Duty?
The Consumer Duty rules are designed to set a higher standard of consumer protection across the UK financial services sector. Rather than just chasing profits, businesses will be required to prove they are acting in the best interests of their customers.
By placing legal obligations on businesses, the aim of Consumer Duty is to head off fraudulent activity, prevent misleading adverts and the sale of defective or even unsafe financial products. It also seeks to ensure that consumers are not subjected to unfair contract terms, discriminatory practices, or unscrupulous business tactics (such as high-pressure selling).
Firms will have 12 months from July 2023 to implement the new rules for all new and existing products and services that are currently on sale. The rules also will be extended by a further 12 months when applied to products that are not currently on sale, providing firms with extra time to bring older products up to date.
The thinking is that Consumer Duty will play a key role in helping to establish a fair financial services market that promotes healthy competition while protecting consumers.
It is not an entirely new concept as it builds on the premise of ‘Treating Customers Fairly’ (TCF), a theme first introduced in 2006 that runs through the FCA’s rules handbook.
What are the benefits to consumers?
The Consumer Duty introduces an overarching Consumer Principle along with rules that firms will be expected to follow “to deliver good outcomes for retail customers”.
The FCA says the new regime means that “consumers should receive communications they can understand, products and services that meet their needs and offer fair value, and they get the customer support they need, when they need it”.
Venetia Jackson, financial services lawyer at Pinsent Masons, says: “The Consumer Duty puts consumers at the heart of a firm’s thinking. Implemented effectively, it should mean that consumers can have the same confidence in buying their financial products as they do in making purchases for their homes.
“Consumers should be able to choose from products designed for their needs, have assurance that it will provide fair value, understand what they are buying and get the support they need to use the product. Ultimately it should help consumers have trust in their financial services providers.”
Kate Troup, financial regulation partner at Fladgate, says: “The FCA’s aim in introducing the new consumer duty rules is to fundamentally shift the mindset of financial services firms. The new rules require firms to put their customers’ needs first and in so doing deliver good outcomes for retail customers.
“The new rules will not require firms to guarantee that all investments will be successful. Investors will still need to take ultimate responsibility for their financial decisions, but the rules should make this decision making slightly more informed.”
According to James Daley of Fairer Finance, the consumer group and ratings provider, one of the biggest areas of change will be in customer communications: “The Consumer Duty not only talks about firms needing to ensure all communication is clear but puts the onus on them to prove it too. It’s an open secret in most organisations that the terms and conditions, and even some of the day-to-day letters that go out, simply aren’t clear enough.
What will be expected of companies?
According to accountants PwC: “The wide-ranging proposals will require firms to review their product suite, communications and end-to-end customer journey, and to consider changes in areas including governance and accountability, product design, pricing, distribution, servicing and staff training – all within a challenging implementation timeframe”.
Gareth Mills, partner at Charles Russell Speechlys, says: “Consumers will have the right to expect clear and straightforward responses to their queries. This includes receiving pro-active engagement from their mortgage provider, bank and insurer on the products they have taken out, whether they would be better off switching to other products, and what represents fair value to them.”
Fewer complaints?
The FCA argues that, eventually, the Consumer Duty should lead to lower levels of complaints and fines. During 2022, the FCA fined companies just over £215 million for a range of failings, including inadequate risk management and rule breaches relating to financial crime.
The Financial Ombudsman Service, the UK’s main port of call for queries that have not been resolved directly between customers and financial providers, currently deals with around 165,000 complaints annually.
Pinsent Masons’ Venetia Jackson says: “In a new and important obligation, firms will be expected to take pro-active steps to ensure that, if there is a risk of consumer harm, it is identified and any remediation is calculated and paid without waiting for customer complaints.
“Firms will be expected to think about their customers, their needs and objectives, and act to support them. From a regulatory perspective, firms also need to be able to demonstrate they have done this through their monitoring and records.
“The FCA has indicated concrete expectations, for example, around removing what the FCA terms ‘sludge practices’, such as the ability to easily purchase a product while exiting the product is significantly more difficult. Firms will also be expected to review their products and services regularly and pick up issues such as customers regularly incurring unexpected fees and take steps to address this.”
What are the challenges for companies?
Fladgate’s Kate Troup says: “The FCA’s rules already contain detailed provisions about the content of certain investment and lending documents and an overarching requirement to ‘treat customers fairly’. But the new rules provide more detailed requirements for the wider range of activities carried out by financial services firms for retail customers.
“One area of focus which many customers will be pleased about is the requirement to provide helpful and accessible customer support and making it as easy to switch and cancel products as it was to take them out in the first place. Hopefully this will mean a reduction of the hours spent waiting to be put through on telephone helplines.”
Can businesses be punished for breaches of Consumer Duty?
Pinsent Masons’ Venetia Jackson says: “In the same way as any other failure to comply with FCA rules, the FCA has its usual range of supervisory and enforcement powers, including powers to compel firms to pay redress to customers and ultimately to fine firms.
“Senior managers of firms can also be held personally accountable by the FCA for their firm’s failure to comply with the duty. And customers have the ability to take their concerns to the Financial Ombudsman Service if they are not satisfied with a firm’s response to their complaint.
“We have already seen the FCA indicating it will be actively looking to see if firms have implemented the duty and it will be looking to take action if failures in implementation lead to consumer harm. In addition to seeing firms being more proactive in addressing issues, we expect to see from 31 July a proactive regulator looking to make the standard they have set clear.”
