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A new ‘Consumer Duty’ for Financial Services

Adam Williams
3 Feb 2022

The FCA’s new Consumer Duty aims to enhance rules and make firms more accountable for supporting the lives of consumers across the UK.

The new Consumer Duty aims to make firms more accountable for supporting the lives of consumers across the UK.

The FCA published its second consultation paper on the introduction of a new ‘Consumer Duty’ on 7th December 2021. This follows a first consultation that took place earlier in 2021, the responses to which the FCA has considered within this latest release.

What does the Consumer Duty consultation paper say?

Based on the latest paper, the FCA shows no signs of changing its mind on the need for a specific new Consumer Duty. It intends to publish new rules by July 2022 and to then give firms until April 2023 to implement.

The changes will be delivered through a new Principle: to “act to deliver good outcomes for retail clients”, along with a set of cross-cutting rules and four targeted outcomes.

The second consultation sees some reining back on the breadth of the cross-cutting rules, but these firmly place the onus on firms to “avoid foreseeable harm” and to “enable and support [customers’ in their] pursuit of their financial objectives”.

The four targeted outcomes demonstrate a continuing trend from the UK regulator away from prescriptive rules, towards ‘outcome-focused’ regulation. In of themselves, there are no major surprises, targeting:

  • Product and Service manufacture and design (particularly where distribution chains are utilised),
  • Ensuring price is proportionate to value,
  • Improving consumer understanding,
  • Enhancing customer support through the end-to-end product and service lifecycle.

But throughout, the key shift is towards firms taking responsibility for helping their customers make the right decisions that are in their best interests, beyond the initial point of the sale of a regulated product or service.

Don’t we already have enough rules to protect consumers without a specific duty?

Many sectors will already feel like they’re already following very high standards, particularly those operating in areas covered by CONC, the Consumer Credit Sourcebook. The Handbook includes principles to treat customers fairly, as well as product rules for design, promotions, and communications. Over the last few years we’ve seen targeted action in areas where the FCA has identified increased risk of harm, for example in ‘high-cost credit’ and the guidance on customer vulnerability. So, it’s no surprise that some in the industry have resisted the call for more intervention.

However, the simple answer is, the FCA doesn’t believe the current regulatory framework is sufficient. In particular, where post-sale activity and poor customer servicing exposes the customer to both financial and non-financial harm, because of firm action or inaction. The FCA’s concern seems to be that many firms are still putting their own interests above the longer-term interests of their customers – even if unintentionally. So, it could be argued the FCA is introducing the new Duty to realise the intention behind previous regulatory interventions, including the CONC rules and before that the TCF initiative.

The Consumer Duty aims to create a culture within firms that improves customer decision-making and prevents harm, particularly where they are vulnerable.

The rules will cover any firm undertaking a regulated activity, across all FS sectors, for both individual consumers and most SMEs.

Across all the proposed rules is a theme of upfront analysis, to inform and evidence decision making. The idea being you only target products to those who need them – and will continue to find value in them for the life of that product. This may present a challenge to firms who’ve separated their products and servicing into separate business lines, each with distinct operating models, processes and KPIs. Firms also very often only have a limited view of their customer’s overall financial exposure, beyond their credit file.

The FCA also expects firms to make it easier to access services, with greater transparency in retentions, renewals, and pricing for new and existing customers.

And the new requirements will be ultimately underpinned by amendments to the SM&CR rules in COCON, which will place accountability firmly on all individuals and not just the organisation, to “‘act to deliver good outcomes for retail customers”.

Crucially, while there’s no intention for any new rules to be applied retrospectively, e.g. for closed relationships, the standards will likely be applicable for existing relationships and products.

What should firms be doing in preparation for the new rules?

Given the limited changes from first to second consultation, it’s safe to assume there will be a new Consumer Duty in roughly the shape proposed within the latest paper.

The biggest mistake firms can make now is to assume that they don’t need to change as they already have cultures, policies, procedures etc. in place to ‘put their customers at the heart of their business’.

Instead, they should use the time afforded to ask a few simple questions about their readiness:

  • Can we evidence that we understand our target markets and adapt product design to better suit the needs of potential customers?
  • Can we demonstrate a seamless customer journey from sales, servicing and exiting, where standards of service are consistently high and geared towards achieving good outcomes for our customers?
  • Is our firm’s culture genuinely geared towards helping our customers’ longer term financial ambitions?
  • Do we have the controls in place, along with the data, to evidence how we are monitoring outcomes and intervening where needed?

At Capgemini, we help our clients meet their strategic priorities, respond to regulatory developments, and deliver fairer and better outcomes for their customers. We’d be delighted to provide our expertise to help clients understand the impact of Consumer Duty to operating models and customer treatment strategies, and to help our clients prepare and deliver roadmaps to meet the challenges of Consumer Duty and future consumer regulations.