Consumer duty  

Three themes to help advisers evidence their consumer duty actions

Three themes to help advisers evidence their consumer duty actions

The FCA released the final guidance on its consumer duty at the end of July 2022. Initial industry reaction was mixed, with some taking the view that it is more work to achieve the same results as existing regulations like treating customers fairly.

However, now that several months have passed and we have all had time to digest the guidance, it is has become clear that this has been created to bring about significant change.

The consumer duty includes some nuanced language, which some felt was lacking in clear direction, but it is a regulation that aims to do good and help companies account for social risks.

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And when you consider what it is trying to achieve – the betterment of outcomes for retail customers and the evolution of culture in the industry – its alignment with the social element of environmental, social and governance can be seen. 

The FCA and ESG

At the end of 2021 the FCA shared its ESG strategy and headlined the release: A strategy for positive change. As may be expected, it mainly covered in detail its approach to environmental issues. However, there were several mentions of the importance of recognising the role of social issues in ESG.

In the strategy, the FCA says: “We will leverage the extensive work we have already done recently, and over the year, on governance and diversity, culture and purpose. This is essential as listed companies and the financial sector respond to society’s evolving expectations on environment and social matters.” 

Considering it in that context, the link between the consumer duty and the social element in ESG, does not seem too much of a leap. Indeed, when translated into operational language it is a tool to support the management of social risks. 

There is no strict definition of what constitutes a “social” risk, but the UN-backed Principles for Responsible Investments has one, and says they are “Issues relating to the rights, well-being and interests of people and communities, identified or assessed in responsible investment processes”.

By applying this definition to the consumer duty, managing social risk will mean all companies will need to operate in a way that aims to maintain the well-being of customers and acts in the “interests of people”.

This behaviour is also very much aligned with the consumer duty’s consumer principle, and should then help them meet the expectation of delivering “good outcomes for retail customers”. 

So what does this mean for advisers and investment providers?

By aiming to minimise the negative outcomes for retail customers and raise the bar for culture in the financial services sector, the consumer duty goes some way to regulate for the ‘S’ in ESG. However, there remains the question of exactly how companies best meet the guidance. 

The consumer duty applies to all companies. It is clear that it represents a significant regulatory step aimed at getting market participants to not just integrate it into their daily operations, but also evidence how they are doing this.