New Consumer Duty – what do we need to know?

The Financial Conduct Authority (FCA) aims to lift consumers’ expectations of the standard of care they’ll get from firms, and to prevent consumers from suffering harm.

The Consumer Duty was initially proposed in May 2021 as a way of meeting those goals. The consultation period has now closed. The FCA is expected to publish the final regulation by 31 July 2022, with full implementation be completed by 30 April 2023.

While the FCA’s consultation papers do not contain the proposed rules in detail, they do highlight that the Consumer Duty will consist of three key elements to ensure that it is flexible, adaptable, and understandable. They are:

1. A Consumer Principle, to set a clear tone that reflects the standard of behaviour expected from firms

2. The Three Cross-cutting Rules, that set out key behaviours required by the Consumer Duty, requiring firms to:

• act in good faith;
• take all reasonable steps to avoid foreseeable harm to consumers; and
• take all reasonable steps to enable consumers to pursue their financial objectives; and
  
  

3. The Four Outcomes that establish the conditions needed to ensure that the financial needs and wellbeing of consumers are being met:

1. communications;
2. products and services;
3. customer service; and
4. price and value.

Why the Consumer Duty?

The FCA has continued to see practices in the financial services market that are ineffective and have been causing consumer harm. These include:

products and services that are not fit for purpose to deliver their expected benefits;
poor customer service that hinders or prevents consumers from either taking timely action on their finances, or from being able to use certain products and services;
firms providing misleading or unclear information that makes it difficult for consumers to understand or appropriately assess the service or product on offer.

As a result of such harm, consumers may:

• incur monetary and non-monetary losses;
• receive sub-standard treatments from firms; and
• purchase products and services that are inappropriate for their needs.

Aside from consumer harm, other drivers have prompted the FCA to consult on the new Consumer Duty, including the impact of poor consumer outcomes as a result of the coronavirus pandemic and the increase in digitalisation. These drivers include the fact that firms are tapping into technological advances and innovating at a rate that requires more flexible and robust regulatory frameworks.

The FCA believes that the Consumer Duty will lead to better outcomes for consumers, as the new rules will require firms to focus on supporting and empowering their customers to avoid harm, and to make informed financial decisions at every stage of the consumer relationship.

This is expected to lead to greater consumer confidence in retail markets and financial services, as consumers can be certain that they have received sufficient and relevant information they need to select products and services that meet their needs.

Who will the new Consumer Duty apply to?

The FCA proposes that the Consumer Duty would apply in relation to financial products and services sold to retail clients by financial services firms, with the view to extending this to the wider retail market, including firms that have a material influence over their manufacture, design, operation or supply – even if the relationship with the end customer is indirect.

The FCA’s latest consultation paper, CP21/36: A new Consumer Duty – Feedback to CP21/13 and further consultation considers the potential overlap of the new Consumer Duty with the existing 11 Principles for Businesses (PRIN) and the six consumer outcomes to ensure the fair treatment of customers (TCF).

As mentioned, the Consumer Duty will apply only to conduct within retail markets, so where there is overlap with existing Principles, namely Principle 6 (Customers’ interest) and Principle 7 (Communications with clients), these will continue to apply to conduct outside the scope of the Consumer Duty.

Proactive steps

The Consumer Duty is more than a repackaging of existing requirements – it signals the FCA’s desire to increase standards in terms of the standard of care afforded to consumers in the retail sector. These clearer and higher standards will set expectations not only for conduct, but for the fundamental culture of firms in the retail market.

Some firms may already be meeting these higher expectations and engaging in good practices to deliver the right outcomes for consumers. However, the FCA acknowledges that other firms may require significant changes to meet these expectations.

Proactive steps must be taken by leadership to ensure that the products and services their firms offer appropriately meet the needs of consumers. This requires a more deliberate focus on consumer outcomes, and a clear consideration of the Consumer Duty at each step of the customer’s journey and at every level of the organisation.

There is a clear link between the requirement of the Senior Managers and Certification Regime (SMCR) and the Consumer Duty for senior managers to evidence that they have taken all ‘reasonable steps’ to manage their business effectively. This clearly indicates what a senior manager’s individual responsibilities are, and will make individuals more accountable for their conduct and the outcomes they achieve for consumers.

In its latest consultation paper, CP21/36: A new Consumer Duty – Feedback to CP21/13 and further consultation, the FCA has suggested that firms should ensure they are in a position to provide information and data around consumer outcomes when called on. The FCA’s approach to monitoring signals a shift from standard regulatory reporting and allows firms to define what good outcomes are, based on their business strategy, control environment and culture.

In light of this, firms should ensure that consumer outcomes, insights and evidence are appropriately tracked and measured. This will enable review and analysis, which could be fed back and used to effect change within the business, and will also ensure that the FCA can review the implementation and effectiveness of the approach.

Firms should also review their internal processes (such as complaints handling), to ensure that potential issues are identified and managed effectively and efficiently. Trends that could inform the firm’s decisions around product and service offerings should also be identified during the review. In addition, firms should consider the Consumer Duty in line with their internal governance processes to ensure that responsibilities are appropriately allocated.

Next steps

While the specific rules of the new Consumer Duty are yet to be published, the FCA’s consultation papers have provided sufficient information for firms to consider and start implementing now.

Improving consumer experiences and outcomes can generate positive branding for an individual firm, and greater consumer confidence in the wider retail market and financial services as a whole.

With firms expected to provide evidence that their products and services consistently achieve good outcomes for consumers, they will need to consider how to demonstrate that they proactively monitor and assess whether their products and services are doing that.

This may generate an increase in operating costs, because of the need for enhanced reporting and testing and associated IT systems, and increased resources to manage the new framework.

How RSM can help

Please contact Paul Jennings to discuss how we can work together to ensure your business is prepared for the new Consumer Duty, including developing practical steps towards:

• implementation governance and strategy;
• risk identification; and
• monitoring and oversight.