The new consumer duty is being introduced to tackle what the Financial Conduct Authority sees as too many instances of businesses exploiting the behavioural biases of their customers.
This relates specifically to the way they present information, exploiting customer loyalty or inertia, selling products or services that are not fit for purpose or do not give value for money, and providing poor customer support.
Pitched as setting a higher bar for consumer protection than the current legal and regulatory framework, there is no doubt that it will be core to financial regulation in the retail financial services sector for years to come, with far-reaching consequences for non-compliant companies.
Certainly, with the cost-benefit analysis estimating somewhere near a £3.6bn cost of implementation across the financial services sector as a whole, the FCA is expecting businesses to take significant steps to embed the duty into their organisation's culture.
So, as businesses begin to consider how to translate the latest proposals into practical actions, and how to respond to a regulator that intends to be more assertive in its supervisory approach, will the duty represent the radical shift that some commentators suggest?
And what areas should companies be focusing on now, to help assess the likely impact on their business?
More than treating customers fairly?
The new consumer principle will set an overarching standard requiring businesses to “act to deliver good outcomes for retail clients”.
New cross-cutting rules will require businesses to “act in good faith”, “avoid foreseeable harm" and “enable and support retail customers to pursue their financial objectives”.
The FCA will focus on four key areas in particular:
- Information provided to customers to enable them to make informed decisions.
- Fair value pricing.
- Quality of customer service.
- Ensuring products are designed appropriately for the target market and work as expected.
The FCA pitches the consumer duty as a ‘reset’, requiring more from businesses; “a significant shift in both culture and behaviour, so they consistently focus on consumer outcomes, and put customers in a position where they can make effective decisions”.
Yet, the FCA rules and principles already require regulated financial services companies to treat customers fairly and communicate in a way that is clear, fair and not misleading.
In places, the FCA notes that it is not intending to significantly change its expectations under the existing principles, but is instead intending to provide a clear signal to the industry about how central it sees delivering good customer outcomes to a business's culture and behaviour.
This is nevertheless a significant message.
Where to focus
The latest consultation paper sets out – within the draft rules and draft non-handbook guidance – some case studies showing good and poor practice, and guidance that includes some important clarifications.
Helpfully, the FCA has also aligned the definition of a “retail customer”, which is key to defining the scope of the duty, to that in each sector’s conduct of business sourcebook.
The concept of reasonableness underpins the consumer duty, like the senior managers and certification regime (SMCR).