The Financial Conduct Authority (FCA) is currently working through what is believed to be the biggest overhaul of regulatory approach since 2013’s Retail Distribution Review. As a result, a new consumer duty for the Financial Services sector is set to be introduced by April 2023, with a second and final consultation closing on February 15.
The onset of the consumer duty marks a shift from a rules-based regulatory approach to one based on outcomes. In the FCA’s own words, it seeks to ensure companies “put themselves in customers’ shoes” when communicating and designing products.
This is because the FCA believes that consumers are too often not provided with the information they need to make good decisions and are sold products or services that do not offer the benefits they might expect.
It is hoped that the new duty will drive a change in culture at firms, where consumers are at the heart of what they do. Senior managers will be held accountable if they fail to meet these requirements.
The duty will also help to create an environment for healthy competition between firms, encouraging them to be innovative in developing products and services that meet consumers’ needs.
What is the consumer duty replacing?
The consumer duty will replace two key FCA principles for regulated businesses. However, these two principles will not be removed from the regulatory landscape altogether:
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
The duty incorporates a central consumer principle that a business "must act to deliver good outcomes for the retail consumers of its products".
Achieving 'good outcomes' is intended to be a clear step up from treating customers fairly. The practical application of this will be something to monitor as the duty is rolled out, and we’re likely to see significant debate over what ‘good’ looks like across different industries and in different circumstances.
Underpinning this consumer principle will be three "cross-cutting" rules setting out how businesses should act to deliver good outcomes for customers. These say that businesses must:
Act in good faith toward retail customers
Avoid foreseeable harm to retail customers
Enable and support retail customers to pursue their financial objectives
The good outcomes the FCA wants to see relate to four areas:
Products and services
Price and value
Most well-run businesses across Financial Services will support the overarching aims behind the consumer duty and most already largely demonstrate the behaviours the regulator is seeking to encourage.
When you consider the investment platform market, for example, customers are able to switch providers as and when they choose, with healthy competition for business between a large and growing number of companies.
Any platforms that fail to put themselves in customers’ shoes when designing products, customer journeys and ongoing communications risk seeing those customers walk out the door to a rival. In addition, they will almost certainly fail to grow by attracting new business.
Similarly, any company that does not consistently provide value for money risks being exposed via price comparison websites, which are regularly reported on in the mainstream trade and consumer financial press.
Failing to comply with the three proposed cross-cutting rules would likely see any business face a barrage of complaints.
If you’d like to know more about the new regulations, simply get in touch with our team.