The Financial Conduct Authority has outlined why it is consulting on a new consumer duty as well as how this will differ from its treating customers fairly principle.
In a webinar hosted by the regulator yesterday (June 10), it said that given its responsibility for ensuring consumers are properly protected, it is working to improve standards in the financial services sector.
With more financial decisions now in consumers’ hands and the changing digital landscape, now is the time to set a higher standard of consumer protection, it explained.
Plans for a new consumer duty were first set out by the FCA last month after it found current principles were not working efficiently to protect consumers.
Currently, firms are bound by FCA rules and principles to treat customers fairly which include offering products and services at fair prices.
However, the regulator said it had seen evidence of practices that caused consumer harm, including firms providing information which is misleadingly presented or difficult for consumers to understand.
Today the FCA said while many firms are delivering the right outcomes for consumers, they should ask themselves if they would be happy to be treated in the same way they treat their customers.
Sheldon Mills, executive director of consumers and competition at the FCA, said: “We know that consumers don't always get the products and services that meet their needs, or the outcomes they might reasonably expect and that's because of the way that financial services markets might operate.
“Consumers' ability to make good decisions can be affected by a range of factors. They might not be able to exert influence on firms, or perhaps they don't have the same level of information as those they're purchasing from.
“It's also affected by consumer behavioural biases and as we see more firms use of online marketing and advertising become more prevalent and sophisticated, and their use of data, there's increasing risk of consumer exploitation or harm.”
Mills explained that firms had a much greater ability to analyse consumer behaviour and monitor exactly how they respond to different prompts and information, and while there were major benefits of this such as improving the customer experience and offer, it could also be used to take advantage of consumers' behaviour which can be intensified where they are vulnerable.
Consumer duty vs TCF
A recurring theme throughout the webinar was looking at how the consumer duty is different from the regulator’s current principles of treating customers fairly.
The consumer duty will require firms to ask themselves what outcomes consumers should be able to expect from their products and services, act to enable rather than hinder these outcomes and assess the effectiveness of their actions.
It will include three key elements:
- The consumer principle, which will reflect the overall standards of behaviour the FCA expects from firms. The wording being consulted on is: 'a firm must act in the best interests of retail clients' or 'a firm must act to deliver good outcomes for retail clients';
- Cross-cutting rules which would require three key behaviours from firms: taking all reasonable steps to avoid foreseeable harm to customers, taking all reasonable steps to enable customers to pursue their financial objectives, and to act in good faith;
- It will also be underpinned by a suite of rules and guidance that set more detailed expectations for firm conduct in relation to four specific outcomes – communications, products and services, customer service and price and value.
Nisha Arora, director of consumer and retail policy, said: “Our proposals will set out explicitly, a higher standard than we've done previously.
“Second, our proposals will be set out in a package of measures. It's a package of measures that consists of a new principle, rules, and guidance, and that will provide greater clarity on our expectations to drive a higher consistent level of protection across all financial services sectors, by ensuring that firms get it right the first time, so that consumer harm doesn't arise in the first place.