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With the implementation of a new Principle 12, the Financial Conduct Authority (FCA) is aiming to improve the protection of retail customers through an outcome-focused approach. Principle 12 states that ‘a firm must act to deliver good outcomes for retail customers’. The new Consumer Duty encompasses this new principle, cross-cutting rules and four outcomes rules. It is expected that firms will have to assess and evidence how they are acting to deliver good outcomes for their retail customers throughout the lifecycle of the products and services.
This major reform will impact the whole financial services industry. The FCA has laid out final rules and guidance for the Consumer Duty that will set more stringent standards of consumer protection. By the FCA’s own estimate, implementation costs to the industry could be as high as £2.4bn.
What are the FCA’s main expectations?
As the new rules place a higher standard of conduct on firms, many firms will have to make fundamental changes to their policies and practices in order to comply. The FCA expects the firm’s board or its equivalent to be responsible when assessing whether the new Consumer Duty is complied with. This means that fundamental cultural changes will have to be made so that not one individual is responsible for the compliance of the Consumer Duty, but rather, accountability will be distributed throughout management. The FCA’s goal is to ‘fundamentally shift the mindset of firms’. Therefore, the implementation of this new Consumer Duty will require firms to embed changes across their organisations.
When will the Consumer Duty come into effect?
Since 31 July 2023, the Consumer Duty applies to all new products and services and all existing products and services that remain on sale or open for renewal.
On 31 July 2024, the new Consumer Duty will apply to all closed products and services. Closed products refer to those which are no longer marketed or distributed to retail customers or are open to renewal. Simply put, if the product or service is not available for new customers, and existing customers can still continue to pay and use the product or service under existing terms, then it would be considered a closed product. An example would be an insurance policy, where existing customers continue to pay for it but it is no longer available for new customers to purchase.
What happens to firms’ previous obligations?
Previous obligations were mainly related to the following FCA principles:
- Principle 6: a firm must pay due regard to the interests of its customers and treat them fairly
- Principle 7: a firm must pay due regard to the information needs of its clients and communicate information to them in a way which is clear, fair and not misleading
These two principles will remain with the introduction of the new Consumer Duty. The new principle extends the old principles and will be implemented in phases. The FCA confirms that there is an overlap, but principle 6 and 7 will not be removed.
Principle 12 will apply to ‘in-scope’ products and services, which refer to products and services relating to a firm’s ‘retail market business’. Principle 6 and 7 will only be applicable for out-of-scope products and services.
What are the main elements of the Duty?
A new principle: delivery of good outcomes
Principle 12 states that “a firm must act to deliver good outcomes for retail customers.” This means firms will have to ensure that ‘good outcomes’ are provided for their retail customers. Whilst the term ‘good outcomes’ may be vague, as the definition of ‘good’ will depend on the sector/segment and circumstances of the firm, the general expectation is that firms will have to hold what they deliver to a higher standard as opposed to what is stated in Principle 6, treating customers ‘fairly’.
Cross-cutting rules
There are three overarching, cross-cutting rules that apply to firms’ standard of conduct:
- act in good faith toward retail customers;
- avoid foreseeable harm to retail customers;
- enable and support retail customers to pursue their financial objectives.
The Four Outcomes
These outcomes are read alongside the principles and help establish the suite of more detailed rules and guidance setting the FCA’s expectations of firms in respect of their consumer relationships under the Consumer Duty.
- Products and Services
- Price and Value
- Consumer Understanding
- Consumer Support
Are there any additional obligations with respect to vulnerable customers?
According to the FCA, vulnerable customers are: “someone who, due to their personal circumstances, is especially susceptible to harm, particularly when a firm is not acting with appropriate levels of care.” The FCA has issued previous guidance on the fair treatment of vulnerable customers. It is crucial to recognise that vulnerability is not always a lasting condition. It can be widespread, temporary, or dependent on specific situations. In fact, any individual can become a vulnerable consumer. The Consumer Duty aims to secure good outcomes for all consumers. Vulnerable consumers are expected to gain from the Duty’s comprehensive framework. The Final non-Handbook Guidance for firms on the Consumer Duty states that: “consumers with characteristics of vulnerability [will be expected] to benefit from the overall improvements in outcomes delivered as a result of the new Duty…”
Furthermore, the FCA has removed reference to serving a hypothetical ‘average customer’, but required firms to serve ‘customers in their target market’. As a result, firms are held to a higher standard than previously. When any customer has the potential to be vulnerable, the goal is to prevent foreseeable harm to each and every customer in the target market.
What will firms need to do to monitor outcomes and evidence compliance?
Firms will have to provide an annual board report on compliance with the Duty. The first board report is expected to be finalised before the end of July 2024, within 12 months of the rules coming into effect. Overall, firms cannot view this reporting as a tick box requirement, but will have to implement long-lasting changes to ensure good outcomes are delivered to customers.
The FCA expects firms to collect a wide range of data to evidence that they are providing the ‘best outcome’ for their retail customers. The FCA’s Final Guidance for Firms on the Consumer Duty provides a list of different types of information firms could use to monitor outcomes:
- Business persistence
- Distribution of products/pricing and fees and charges
- Behavioural insights
- Training and competence records
- File reviews
- Customer feedback
- Numbers of complaints
- Complaints root cause analysis
- Results of the regular testing and monitoring required under the outcome rules
- Feedback from other parties in the distribution chain
- Compliance reports
- Researching or testing customer experiences
- Allowing staff to give feedback honestly
- Reviewing whether processes and policies are effective
- Drawing on external sources of data about consumer outcomes
It may not be sufficient for firms only to analyse direct customer inquiries but would have to analyse other forms of customer feedback, which could be obtained through many different channels including social media and review websites.
Some firms will be able to transition into complying with these regulations easier than others as they should already have tools in place. However, it would be relatively more difficult for some firms that have previously manually gathered and analysed relevant data points. There will be a greater need for technology-driven tools that will help with helping firms test and monitor relevant data, come up with the evidence and action plans to meaningfully implement the Duty.
Conclusion
The Consumer Duty will be fully in force by the end of July 2024. The FCA is expecting a significant change in a short period of time. The Consumer Duty is not only a ‘compliance’ issue but presents firms with opportunities for innovation in their approaches to customer relationships. New technology solutions can support this process and help firms deliver good customer outcomes with robust monitoring and evidence.
