What are the remaining sticking points with the consumer duty?

In line with its outcomes-based approach, the regulator hopes it will encourage businesses to be more proactive in empowering their clients to make sound financial decisions, all while better protecting them from harm.

The initiative builds on the Financial Conduct Authority’s previous treating customers fairly requirement – bringing with it significant new obligations for each step of the client journey.

The industry has been supportive of the consumer duty's core goal. After all, it is fair to say that all advisers want to do right by their clients. But there are still some concerns over both a perceived lack of clarity as well as the feeling that certain new requirements are being applied with too broad a brush.

So with implementation less than a year away, what potential complications do businesses need to be aware of?

Last-minute changes to the policy statement

The FCA’s earliest consultation paper from May 2021 left several key terms vaguely defined, sparking much debate over the proposals’ true reach until further explanations were issued. For example, what exactly was meant by a "retail client" was ambiguous before the FCA clarified that the consumer duty definition would align with that of its existing handbook.

The original paper also seemed to use the phrases "reasonable steps" and "all reasonable steps" interchangeably when describing businesses’ obligations. Later clarification from the FCA, published in its second consultation paper in December 2021, suggests that the former standard of care would be used going forward.

While we welcome the regulator addressing some of these uncertainties, the main concern for businesses is likely to be what specific wording makes it into the final policy statement in July.

Balancing protection with flexibility

The duty’s aim of reinforcing consumer protections is doubtlessly well intentioned. But there is potential that these new safeguards could add several new layers to businesses’ compliance burdens – and this could have some serious unintended consequences.

For one thing, how will "fair value" be assessed for brand new, first-to-market products that have no precedent to follow? And more generally, mounting product governance requirements on compliance teams could make diverse offerings unsustainable, stalling innovation and causing the market to shrink in the long term.

If choice is restricted too much, it would ultimately have a negative impact on client outcomes. Businesses will need to think carefully about how they integrate the consumer duty’s requirements into product and service development.

‘Fair pricing’ judgements

The consumer duty's four outcomes – which mandates that the price of products and services represents fair value for consumers – represents a significant evolution in the regulator’s attitude to supervision and an even greater challenge for businesses. Indeed, some industry commentators have questioned how a ‘fair’ price for a particular product or service can be accurately quantified in a dynamic market.

At the very least, it is likely that the new rules will require businesses to re-tool their product governance process to make sure pricing and fair value considerations are given ample thought, and charges are proportionate.

The main concern for businesses is likely to be what specific wording makes it into the final policy statement

And while the FCA has stressed it has no intention of becoming a price regulator – and so will not be explicitly intervening on pricing matters for the time being – it is also possible this issue could be subject to a dedicated thematic review further down the line.

In fact, we are already seeing the impact of this move in the insurance and intermediary markets, with the FCA’s new rules on general insurance pricing practices. These include assurances that existing customers are not quoted prices higher than those offered to newcomers – constituting a de facto ban on ‘price walking’ – as well as making it easier for customers to stop automatic policy renewals.

Not only that, but the GI guidance eliminates some of the perceived ambiguity by setting out a specific set of criteria for businesses to follow during value assessments. And crucially, it also reminds businesses of their obligations under the Equalities Act 2010 to ensure they do not discriminate on the basis of protected characteristics with their products or pricing.

Know-your-client mission creep

The duty puts a lot of emphasis on consumer support. Many of the proposed rules are geared towards understanding your clients’ common characteristics and anticipating situations where they may be exposed to risk.

And ultimately, this means greater care will need to be taken throughout the client lifecycle – beginning with how your products are designed and marketed, right up to ongoing support.

But what is not immediately apparent is just how much more due diligence will be expected under the incoming rules.

As we learn more about what the consumer duty will entail, it becomes clearer that having an implementation plan ready when the final rules arrive will be absolutely crucial to nailing the transition.

Ideally, you will want to ensure you are prepared to hit the ground running with your new obligations, while leaving enough flexibility to adapt to future updates.

Neil Dethick is associate director at TCC Group