How to start preparing for the new consumer duty 

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How to start preparing for the new consumer duty 
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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. 

The new consumer principle will set an overarching standard requiring businesses to “act to deliver good outcomes for retail clients”. 

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). 

To determine whether the standard of reasonableness has been met, the FCA will apply an objective test, asking: “Has the firm met the standard that could reasonably be expected of a prudent firm carrying on the same activity in relation to the same product or service, and with the necessary understanding of the needs and characteristics of its customers?”

Despite these welcome clarifications, the draft rules still lack detail, so at this stage businesses may find it challenging to get to grips with the nuances of the new duty and decide what steps they should be taking before the final rules are published later next year. 

There are several areas businesses can focus on, depending on their role in the product development and distribution chain.

Fair value

Companies should consider how central a fair value assessment is to their product oversight and governance processes.

Fair value will need to become central to product oversight and governance processes and must be a key consideration for any business setting product pricing, product fees and charges, advice fees or platform fees. 

Businesses providing advice will need to look at their own advice charges (including website disclosures about fees), and consider a product’s overall cost to a customer by reference to all the product and distribution charges in the distribution chain. 

Feedback cycle

Businesses should consider if they can demonstrate how customer feedback (and testing customer understanding) is translated into continuous improvements in products and services.

Although businesses are already expected to ensure individual communications are fair, clear and not misleading, meeting the new communications outcome will require them to look again at their overall approach to communicating information. 

They will need to make sure they equip their customers to make effective, timely and properly informed decisions. 

Businesses should consider what proportion of their complaints relate to product switching, product cancellation and customer service levels.

Businesses must also monitor their communications on an ongoing basis, and tailor and adapt them where necessary to make sure they are suitable. 

Compliance monitoring

Businesses should review existing compliance monitoring frameworks to assess if there is sufficient focus on outcomes testing rather than narrow compliance with specific rules.

Across all areas of the product lifecycle, companies will be expected to monitor and regularly review the outcomes their customers are experiencing. 

Outcomes testing should form a key part of first and second-line compliance monitoring, alongside monitoring compliance with specific rules.

Complaint trends

Businesses should consider what proportion of their complaints relate to product switching, product cancellation and customer service levels.

It is clear that these continue to be key areas of interest for the FCA. Companies should ensure they are using complaints data appropriately to identify and address any concerns in these areas.

The implications of getting it wrong

The FCA has dropped from its proposals the idea of a private right of action, which would have enabled consumers to take legal action against businesses in breach of the new rules. 

However, compliance with the consumer duty will become central to the FCA’s authorisation, supervision, policy and enforcement processes, and the FCA positions the duty as fundamental to its “adaptable, innovative and assertive” approach to supervision.

The FCA has also indicated that it will work closely with the Financial Ombudsman Service to ensure the Ombudsman understands its expectations of businesses. 

What comes next?

The FCA’s latest consultation (CP21/36) runs until February 15 2022, and the FCA expects to create final rules by the end of July 2022. 

This means it will be a relatively tight nine-month implementation deadline, set at April 30 2023. 

Robin Penfold is a partner and Sara Evans is a senior professional support lawyer at UK law firm TLT