Financial Conduct Authority  

Will the consumer duty improve outcomes or cause more confusion?

Will the consumer duty improve outcomes or cause more confusion?

Banks were born, in their very simplest form, to safeguard customers' money and provide capital for those looking to invest.

But, crucially, only a small proportion of society – typically merchants and landowners – sought the services of a bank.  

While the concept of traditional banking remains largely unchanged, financial institutions now serve more people than ever before, with around 98 per cent of the UK population thought to have at least one bank account.

As the prominence of banks in society has grown, so too has the need to ensure that the societies they serve are treated fairly. 

The fair treatment of customers has been a concern for banks and regulators for some time now, exacerbated by events such as the financial crash and the payment protection insurance scandal. 

A string of consumer-centric initiatives have been introduced by the Financial Conduct Authority, which itself states it was conceived in order to ensure consumers get a fair deal.

The FCA reinvigorated this mantra in June, when it launched a consultation that is expected to have far-reaching and potentially onerous implications for UK banks – an all-new 'consumer duty'. 

The consumer duty sets out to achieve "a higher level of consumer protection in retail financial markets, where firms are competing vigorously in the interests of consumers".  

The consumer duty is designed to enhance existing conduct standards in retail markets, drive culture change and instil consumer trust. The regulator wants companies to put consumers at the heart of their business by proactively avoiding consumer harm at every level, and through every stage of the customer journey.

It will place the onus on businesses to abide by a new Principle for Business and to aim to deliver specific outcomes when designing, advising on or distributing products and services to retail clients. Importantly, all businesses will be subject to rules specifically requiring them to take all reasonable steps to avoid causing foreseeable harm to consumers.  

For the first time, the FCA proposes that businesses should ask themselves what outcomes consumers should be able to expect from their products and services. Companies will need to act to enable rather than hinder these outcomes and will have an ongoing obligation to assess the effectiveness of their actions.

These proposals are a seismic shift away from the current state-of-play. Instead of creating financial products to appeal to one type of customer or another, banks must now endeavour to achieve a single outcome for all customers: fair treatment. 

The statement in itself is slightly ambiguous. What constitutes fair treatment? And how might fairness manifest itself from one lender to the next? While the FCA's consultation is clear that it wants to see a behaviour change in banks, its principles-based approach leaves these questions – and many others – open-ended.

The banks themselves must interpret the semantics of exactly what consumer duty means in real terms, and there is a real risk that this could be lost in translation.