The new Consumer Duty

In July 2022 the Financial Conduct Authority (FCA) set out its final rules and guidance for the New Consumer Duty. This is a cornerstone of a three-year strategy to set and test higher standards for consumer protection across financial services and require firms to deliver good outcomes for customers.

The Duty affects: 

1. Regulated firms, including those in the e-money and payments sector
2. Consumer organisations and individual consumers
3. Industry groups and trade bodies
4. Policy makers and regulatory bodies
5. Industry experts and commentators
6. Academics and think tanks

When do these rules come into effect?

A. For new or existing products or services that are open for sale or renewal, the rules come into force on 31 July 2023.

B. For closed products or services, the rules come into force on 31 July 2024.

The implementation period is ticking. The FCA expected that by October 2022 a firm’s board or management body should have agreed plans for implementing the Duty and have evidence that shows scrutiny and stress testing and challenges to those plans that they are “deliverable and robust enough to meet the new standard”.

Can your agreed plans withstand the incoming challenges?

The January 2023 review by the FCA found some products and services wanting and some far behind in their thinking and planning for the Duty.

On 10 May 2023 the FCA announced that findings from its review of “fair value” frameworks included:

i. that firms had a single generalised template for assessing fair value and it was not always clear how the template would apply to products with very different characteristics and which may serve different market sectors

ii. that some firms’ assessments did not make reference to the firms’ profit margins on different products and services

iii. that some firms did not consider the types of non-financial costs and benefits that retails customers may reasonably be expected to receive

The implication is that several firms were not ready for these forthcoming changes.

On 10 May 2023 the FCA warned of the impending Consumer Duty Deadline. Sheldon Mills, Executive Director of Consumers and Competition at the FCA, warned that firms who ignore the duty can expect swift action: “In some case, firms can expect us to take robust action such as intervention or investigations, along with possible disciplinary sanctions …”.

How does it affect firms?

a. Introduces a Principle that requires firms to act to deliver good outcomes for retail customers, Principle 12. There is a new Chapter PRIN 2A: The Consumer Duty

b. Cross-cutting rules will provide greater clarity on the FCA’s expectations under the new Principle and help firms to consider the four outcomes the FCA want to see under the Consumer Duty.

c. Rules relating to the four outcomes:

1. 1. products and services
   2. price and value
   3. consumer understanding
   4. consumer support.

1.9 of the Finalised Guidance  FG22/5 sets out at page 4:

“Our expectations of firms under the Duty

1.9 Firms should: • put consumers at the heart of their business and focus on delivering good outcomes for customers • provide products and services that are designed to meet customers’ needs, that they know provide fair value, that help customers achieve their financial objectives and which do not cause them harm • communicate and engage with customers so that they can make effective, timely and properly informed decisions about financial products and services and can take responsibility for their actions and decisions • not seek to exploit customers’ behavioural biases, lack of knowledge or characteristics of vulnerability • support their customers in realising the benefits of the products and services they buy and acting in their interests without unreasonable barriers • consistently consider the needs of their customers, and how they behave, at every stage of the product/service lifecycle • continuously learn from their growing focus and awareness of real customer outcomes • ensure that the interests of their customers are central to their culture and purpose and embedded throughout the organisation • monitor and regularly review the outcomes that their customers are experiencing in practice and take action to address any risks to good customer outcomes • ensure that their board or equivalent governing body takes full responsibility for ensuring that the Duty is properly embedded within the firm, and senior managers are accountable for the outcomes their customers are experiencing, in line with their accountability under the Senior Managers and Certification Regime (SM&CR)”

What action is required?

The Consumer Duty cross-cutting rules define the standards of the “outcomes” a reasonably prudent firm is expected to deliver by acting in good faith, avoiding foreseeable harm, and helping consumers achieve their financial objectives.

Here are some of the questions your firm needs to have addressed:

Products and services

1. Are these fit for purpose?
2. Do the terms match the target consumer’s needs?
3. Do the products and services work as expected?

Price and value

1. Are the products being sold at a price that reflects their value?
2. Are you confident you are not charging excessively high fees?

Consumer understanding

1. Are consumers made equipped to make good decisions?
2. Does your firm make information available at the right time?
3. Is the information made available to the consumer understandable?
4. Are the needs of vulnerable customers also being met?

Consumer support

1. Is your customer service responsive and helpful?
2. Is it easy for your customer to make a complaint?
3. Is it as easy for your customer to switch or cancel products or services as it was to purchase them?

How can these questions be addressed?

• Boards are required to take responsibility for assessing that the firm is achieving these outcomes. Periodic assessment required at least once a year.
• Firms should have or need to apply the four outcomes to their customers’ products and services. This means analysing the journey of a customer so that the firm can assess how and where the customer has reached in their journey and how this journey interacts with the four outcomes.
• In assessing the journey, consideration must be given to matters such as information asymmetry, decision-making bias and inertia of consumers, and how these affect and influence outcomes.
• Having completed this mapping exercise, the firm must then objectively test the results against the four outcomes = outcome testing.
• Review for existing open products should have been completed by 30 April 2023!

If you have any questions concerning this new Duty or are facing challenges in implementing the reviews and structural changes required by the new Duty please contact Jennifer Donohue.