What is the FCA Consumer Duty?
The Consumer Duty sets the standard of care that firms should provide customers. It sets expectations that apply to services, products and business models and aims to protect consumers from harm whilst driving business innovation, competition and new ways of serving customers.
What does the Consumer Duty comprise?
The Consumer Duty is comprised of the following:
1. Consumer Principle - this reflects the overall standard of behaviour the FCA expects from firms.
2. The cross-cutting rules - These set out the three requirements that explain how firms should act to deliver good customer outcomes. The cross-cutting rules also aim to help firms interpret the four outcomes.
3. The four outcomes - these are a set of rules setting out the expectations on a more detailed basis, across the four areas of
a. governance of products and services
b. price and value
c. consumer understanding, and
d. consumer support
Consumer Duty and ‘reasonableness’
Reasonableness is a key and underlying aspect of the Consumer Duty. It is an objective test and means that standards are to be applied as you would reasonably expect from a prudent firm.
The FCA’s expectations from firms under the Consumer Duty
firms are required to put customers at the heart and centre of their business, ensuring good customer outcomes
ensure that their products and services are designed to meet the needs of their customers.
communicate and engage with customers so that they can make informed and better decisions about financial products and services
not seek to exploit customers' lack of knowledge or vulnerability
help the customer understand the benefits and features of products and services
ensure that customer interests are central to the firm’s culture
regularly monitor and review the customer outcomes
What type of firms the Consumer Duty applies to
The Consumer Duty applies across retail financial services. It applies to the regulated activities of all firms authorised under the Financial Services and markets Act 2000 (FSMA), the Payment Services Regulations 2017 (PSRs) and E-money Regulations 2011 (EMRs, with regards to products and services for customers.
consumer credit firms providing credit-related activities
deposit-taking firms e.g. banks and charities
payment service providers e.g. payment institutions
electronic money institutions e.g. e-money issuers
Consumer Duty application outside the UK
The Consumer Duty only applies to firms conducting regulated activities in the UK.
How the Consumer Dut applies to unregulated activities
The Consumer Duty applies to firms regulated by the FCA. It will therefore not apply to unregulated businesses. For example, it will not apply to business lending as business lending is outside the scope of FCA’s supervision and regulations.
Application to products and services sold before the Consumer Duty comes into force
The Consumer Duty does not have a retrospective effect. That means, that it does not apply to products or services sold in the past.
The Consumer duty applies to:
existing products and services
closed book products and services I.e. products and services that are no longer on sale to new customers or available for renewal by existing customers
Accordingly, firms must review and identify issues with their existing products and services and ensure that any problems are addressed before they are sold to customers. For example, you may need to amend your existing contract before selling to customers. Firms are also required to address any harm to customers with existing contacts.
The Consumer Principle
The Consumer Principle, Principle 12, requires firms to act to deliver good outcomes for retail customers. It sets a higher standard than both principle 6 and principle 7.
Principle 12 requires firms to:
pro-actively delivering good outcomes for customers
ensure they have a sufficient understanding of customer behaviour and how products and services function
regularly review themselves to ensure that their actions are compatible with delivering good outcomes for customers
The FCA’s cross-cutting rules
The Consumer Duty imposes three cross-cutting rules setting out how firms should act in delivering good outcomes or customers.
They require firms to:
act in good faith toward retail customers
avoid causing foreseeable harm to retail customers
enable and support retail customers to pursue their financial objectives
The cross-cutting rules set out the standards of conduct the FCA expects from firms in delivering good outcomes.
Acting in good faith
Firms are required to act in good faith toward customers. This is demonstrated through firms being honest, fair and open in their dealing with customers. For example, a firm would not be acting in good faith if it fails to take account of customers' interests, perhaps in the way a product is designed, or the way information is presented to them. Exploiting customers’ lack of knowledge is a clear sign of a firm not acting in good faith.
Avoid causing foreseeable harm
Firms are required to avoid foreseeable harm to customers. Harm can be caused by a firm’s actions or omissions. This can occur either directly I.e. a direct relationship with a customer or through their distribution chain. Consumer Duty also applies across the distribution chain.
Examples of foreseeable harm include:
consumers are unable to cancel a product or service that isn’t right for them because the firm’s processes are unclear
poor performance of products and services due to a lack of appropriate product testing
vulnerable customers being unable to access or use a product or service due to poor customer support
product switching is difficult due to the firm’s onerous or unclear switching processes
The product and services outcome
Firms must ensure that their products and services are well-designed. Accordingly, Firms acting in good faith should design and distribute their products and services to meet this aim.
ensure the design of the product or service meets the needs, characteristics and objectives of customers
ensure their distribution strategy is appropriate for the target market
carry out periodic reviews to ensure that their products and services continue to meet the needs, characteristics and objectives of the target market
The price and value outcome
Retail customers experience harm when they do not receive value for their money. A lack of fair value essentially results in customers not realising their financial objectives whereas firms cannot act in good faith if they are knowingly creating or distributing poor-value products or services. Fair value is more than price. It could include products with unsuitable features that can lead to foreseeable harm.
Accordingly, firms should ensure that the price is reasonable compared to the overall benefits I.e. product features and benefits.
Questions firms should ask themselves about the price and value duty of the Consumer Duty:
are elements of the pricing structure in such a way that it could lead to foreseeable harm to the customer?
are fees or charges justifiable or are they high compared to the benefits and features of the product or services?
should any changes in the product benefits be reflected in the pricing?
In assessing whether a product or service provides value, firms must consider at least the following:
the nature of the product or service, including its benefits and qualities
any product or service limitations
the expected total price the customer will pay over the lifetime of the relationship between the customer and the firm
Where a product or service does not provide value to customers, then firms must take appropriate actions to mitigate this and prevent harm. The value should be assessed at the product design stage. The value must also be assessed on an ongoing basis. When a firm identifies that it is not offering fair value it must take appropriate actions to address this issue.
The consumer understanding outcome
Firms are encouraged to support their customers by helping them make informed decisions about financial products and services. Firms should be given the information they need, at the right time, and presented in an understandable way.
Under Principle 7, firms are required to communicate with customers in a clear, fair and not misleading manner. In addition to this, under Principle 7, firms are required to:
support their customers' understanding by ensuring that their communication meets the communication needs of the customers
tailor communication to the customer, taking into account the characteristics of the customers, their vulnerability, the complexity of the product and the communication channel used
when interacting directly with a customer on a one-to-one basis, tailor communications to meet their information needs
test, monitor and adapt communications to support good customer outcomes
Summary of the FCA’s Consumer Duty
The consumer support outcome
Firms are required to provide the support that meets customer needs. The support should enable customers to realise the benefits of the products and services they buy. In assessing whether firms are applying good customer support standards, they should:
make it easy for customers to switch products
ensure post-sale support is well designed
ensure the post-sale support is as good as the pre-sale support
not make it difficult for customers to contact firms. For example, should review their call waiting times
ensure that the service is not slow
ensure that the channels of support meet the needs of the customers
ensure that the customer helpline is well-resourced
have a well-designed website that makes it easy for customers to navigate and find key information online
Culture and the Consumer Outcome
Firms are required to ensure that their customers' interests are central to their culture and embedded throughout the business. A firm’s board and senior management should review and approve an assessment of whether the firm is delivering good outcomes for its customers, at least annually.
There are four key components of culture are:
Purpose – a firm’s purpose should be consistent with the Consumer Duty. Staff should understand how the firm’s purpose is relevant to delivering good outcomes for customers.
Leadership – a firm’s leaders should be competent and accountable, and they should be able to demonstrate commitment to delivering good customer outcomes.
People – delivering good outcomes should be reflected in the way people are being managed and rewarded. Training should be provided to staff to ensure that they are able to deliver good customer outcomes.
Governance – a firm’s internal controls and processes should be able to identify where it is not delivering good outcomes for its customers and it should have a strategy to work on those areas and tackle areas where poor outcomes are being delivered.
Consumer Duty monitoring outcomes
Firms are required to assess, test, understand and evidence the outcomes their customers are receiving. This is important as it enables firms to assess the effectiveness of how well their products and services are working and are in line with the Consumer Duty.
Firms are expected to review and identify poor outcomes and take appropriate actions to rectify and correct the causes of the poor outcomes.
Accordingly, firms are expected to:
monitor and review their customer outcomes
ensure products and services are delivering outcomes consistent with the Consumer Duty
identify customers who are not receiving good outcomes
have internal controls and processes to adapt accordingly and address any poot outcomes or risks and mitigate such outcomes
FCA Consumer Duty timeline
Firms are required to implement the new rules for all new and existing products and services within 12 months. Firms have until 31 July 2023 to implement the Consumer Duty for all new and existing products and services.
How Regulatory Counsel can help
In helping firms implement the Consumer Duty requirements, we are helping firms in a number of ways from complete project management and providing specialist project resources to adding consulting and advisory expertise as an external specialist partner.
We are one of the UK's leading regulatory consulting firms, helping companies with regulatory authorisations (licencing), compliance and consulting. Our focus and expertise have enabled us to work closely with regulators and understand the regulatory standards which are required from regulated firms.
Contact us by email at email@example.com or call us on 0203 6274 724.