Consumer Duty and cultural change

August 2022 | EXPERT BRIEFING | BANKING & FINANCE

financierworldwide.com

On 7 December 2021, the Financial Conduct Authority (FCA) published its feedback and second consultation paper on the proposed introduction of a new regime, which will set clearer and higher expectations for firms’ standards of care toward customers: the Consumer Duty. This follows the FCA’s first consultation paper in May 2021.

It is the intention of the FCA to finalise its rules on the Consumer Duty by 31 July 2022, with firms expected to implement the Consumer Duty in full by 30 April 2023. All firms affected by the introduction of the new regime will be required to carefully consider the products and services they offer to ensure that they are consistent with the Consumer Duty.

The Consumer Duty will set higher expectations for the standard of care that firms provide to retail customers. In essence, the FCA want to see firms putting themselves in their customers’ shoes and asking themselves whether they would be happy to be treated in that way. Firms will need to focus on proactively seeking to deliver good customer outcomes. For some firms, this will require a significant shift in culture.

What is the Consumer Duty?

The Consumer Duty comprises of three elements: (i) the Consumer Principle; (ii) overarching cross cutting rules; and (iii) four outcomes. The Consumer Principle states that: “A firm must act to deliver good outcomes for retail customers”. It will apply only in relation to “retail customers”. Unfortunately, there is no single definition for “retail customers”; instead firms will need to consult the FCA sectoral sourcebooks for the applicable definition for each product and service.

The Consumer Principle will be introduced as Principle 12 of the FCA Principles for Business. Where the Consumer Principle applies, it will disapply: Principle 6 (A firm must pay due regard to the interests of its customers and treat them fairly); and Principle 7 (A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading). This is because the Consumer Principle will apply higher standards of conduct than Principles 6 and 7. Principles 6 and 7 will, however, still apply to firms that are not dealing with retail customers, in accordance with the existing rules and guidance in the FCA Handbook.

The Consumer Principle means the FCA expects firms to consistently focus on customer outcomes and on putting customers in a position where they can act and make decisions in their own interests. This should be reflected in every stage in the product lifecycle, including the firms’ governance, product development, the promotion of products, the sale of products and services, monitoring of outcomes and the handling of complaints.

The cross-cutting rules

The cross-cutting rules inform and support the four outcomes set out below. The cross-cutting rules require firms to act in good faith toward retail customers, avoid foreseeable harm to retail customers, and enable and support retail customers to pursue their financial objectives.

The FCA’s analysis in the second consultation paper, as well as the draft Handbook rules and the FCA’s draft guidance, provide more information about what these mean in practice, and give examples of when firms would and would not be complying with the cross-cutting rules.

The four outcomes

The four outcomes represent the key elements of the firm and consumer relationship. The four proposed outcomes are as follows.

First, the products and services outcome, whereby products and services are specifically designed to meet the needs of consumers and sold to those whose needs they meet. This will require firms to consider the needs, characteristics and objectives of customers in the identified target market.

Second, the price and value outcome, whereby the price of products and services represents fair value for customers taking into account the nature of the product or service, including the benefits and their quality, any limitations that are part of the product or service, the expected total price customers will pay, and any characteristics of vulnerability in the target market for the product or service.

Third, the consumer understanding outcome, whereby communications equip customers to make effective, timely and properly informed decisions about financial products and services.

Fourth, the consumer support outcome, whereby customer service meets the needs of customers, enabling them to realise the benefits of products and services and act in their interests without undue hindrance.

What should firms do to prepare for the introduction of the Consumer Duty?

The short time between the rules being finalised in July 2022 and implementation in April 2023 has been the subject of criticism, and there is a real danger that many firms will not have sufficient time to implement necessary changes. Accordingly, time is of the essence.

To properly implement necessary changes, firms will need to carefully consider the suite of products and services they offer and the nature of the customer journey. They will need to consider how they design, sell and promote products and services and the value provided. They will also need to consider key contact points during the customer journey and the extent to which the experience can be improved.

In practice, the starting point for most firms will be to undertake a gap analysis to identify where current practice may be falling short in terms of customer outcomes. When this analysis has been undertaken, firms will then need to take steps to remedy those deficiencies. In some cases, this may require products and services to be discontinued or significantly changed. Further, certain practices which appear designed to, for example, discourage a customer from exiting or switching products, referred to as sludge practices by the FCA, will need to be discontinued.

What will the introduction of the Consumer Duty achieve?

For many years, the FCA has referred to the need for cultural change within firms. The introduction of the Consumer Duty is a clear indication of the approach expected of firms when dealing with retail customers. Implementation will only be successful if it is considered holistically and results in a cultural shift within organisations. Firms that fail to embrace cultural change and fail to provide good outcomes to customers, in line with the Consumer Duty, may find themselves the subject of regulatory sanctions.

Daren Allen is a partner at Shoosmiths. He can be contacted on +44 (0)20 7282 4129 or by email: daren.allen@shoosmiths.co.uk.

Daren Allen

Shoosmiths