The new Consumer Duty is a new initiative from the FCA. Its purpose is to set higher expectations for the standards of care that UK financial services firms provide to consumers. The potential implications for those firms are significant.
The Consumer Duty is still going through the consultation process. However, the general intent and principles are now reasonably clear.
We’ve produced this high-level overview to help you prepare in advance for the potential changes sought by the new rules when they are finally made by 31 July 2022.
Please note that the overview reflects Voyc’s best current expectations of the likely final content of the new Consumer Duty. Of course, nothing is definite until the final new rules are published.
We intend to produce further updates as and when further clarification emerges during the consultation process.
1. The need for a new Consumer Duty
The FCA already provides guidelines for the protection of customers. In particular, Principle 6, in the FCA’s Principles for Business, covers the area of Customers’ Interests.
However, the FCA considers that even with this Principle in place, retail customers don’t always receive the products, services and outcomes they have a right to expect.
The New Consumer Duty seeks to address this deficit through requiring firms to focus consistently on the reasonable expectations of their customers: seeing things clearly from the viewpoint of the customer, rather than the firm.
This emphasis on the customer’s viewpoint is fundamental to the principles of the new Consumer Duty.
2. The businesses that will be affected by the new Consumer Duty
The FCA’s proposals relate to all regulated products and services sold by FCA registered firms to ‘retail clients’.
This encompasses all customers other than ‘professional clients’, such as large corporate organisations and government bodies.
Essentially, ‘retail’ clients are all private individuals as well as small and medium-sized businesses (SMEs).
The proposals apply to all firms involved in manufacturing or supplying products or services to retail clients, even if their relationship with these clients is not direct. For example, a mortgage lender distributing exclusively through brokers.
3. The essence of the new Consumer Duty
Through the new Consumer Duty, the FCA is expecting firms to see things from the customer’s viewpoint – in all matters relating to products and services, communication, customer service and financial value.
Specifically, firms will be required to:
- consider carefully what consumers really should be able to expect from the products and services offered, and in their dealings with the firm.
- take clear actions to enable these expectations to be fully delivered.
- monitor the outcome of these actions and take further steps if required.
The FCA also highlights that firms should take particular care to ensure that consumers in vulnerable circumstances receive outcomes that are as good as for other consumers.
This accords with the FCA’s recently published guidance on the fair treatment of vulnerable consumers. More detailed information for UK financial services companies on vulnerable customers is available in this white paper from Voyc.
The FCA does not underestimate the magnitude of the change they want to bring about with the new Consumer Duty. Indeed, they acknowledge that, for many firms, compliance will require a significant shift in culture and behaviour.
4. The key elements of the new Consumer Duty
Three hierarchical elements will form the “building blocks” of the new Consumer Duty:
Sets out the overall standards expected from firms.
- Act in good faith
- Avoid foreseeable harm
- Enable consumers to pursue their financial objectives
- Products and Services
- Customer Service
- Price and Value
5. The Consumer Principle: an overview
The Consumer Principle will be a short clear statement of the FCA’s overarching intent for the new Consumer Duty – using words that reflect the standards of behaviour that firms are required to deliver.
The FCA has produced the following two options for the wording of the Consumer Principle:
Option 1: ‘A firm must act to deliver good outcomes for retail clients’
Option 2: ‘A firm must act in the best interests of retail clients’
The current consultation paper is seeking views on these options, prior to finalising the wording. However, both clearly demonstrate the focus on seeing things from the customer’s viewpoint.
6. The Cross-cutting Rules: an overview
The Cross-cutting Rules will set out the key behaviours that the FCA requires of firms under the new Consumer Duty.
These rules will focus on the need for firms to:
- act in good faith.
- take all reasonable steps to avoid foreseeable harm to consumers.
- take all reasonable steps to enable consumers to pursue their financial objectives.
Again, this highlights a strong focus from the FCA on the customer’s real best interests. These key behaviours will help firms to ensure they live up to the Consumer Principle.
7. The Four Outcomes: an overview
The FCA has identified four key outcomes that will support compliance with the new Consumer Duty. In the consultation paper, they have also drafted a description for each of these outcomes to help firms know if they are delivering on the outcome as required.
Outcome 1: Communications
The FCA’s draft description:
Communications equip consumers to make effective, timely and properly informed decisions about financial products and services.
Firms will be required to ensure that their communications are written and presented to consumers in a way that will achieve this outcome as described.
Outcome 2: Products and Services
The FCA’s draft description:
Products and services are specifically designed to meet the needs of consumers, and sold to those whose needs they meet.
Examples of product features that might fail to deliver on this outcome are credit offers that might encourage over-borrowing – or barriers to exit that could be harmful to vulnerable customers.
Outcome 3: Customer Service
The FCA’s draft description:
Customer service meets the needs of consumers, enabling them to realise the benefits of products and services and act in their interests without undue hindrance.
Firms must manage their customer service operations to deliver fully for the benefit of consumers – over the full lifetime of their relationship with the firm.
Outcome 4: Price and value
The FCA’s draft description:
The price of products and services represents fair value for consumers.
It’s sometimes not easy for consumers to assess the value represented by the price of financial products and services and this outcome seeks to address this issue.
8. The potential private right of action for breaches of FCA Principles
The FCA is currently considering the introduction of a new private right of action, through which consumers can seek redress in the event of breaches of FCA Principles, including the eventual new Consumer Duty.
This would potentially provide consumers with a clearer route to taking action against firms which fail to abide by the FCA’s Principles.
Although this is not directly part of the New Consumer Duty, the FCA is seeking views, through this consultation process, on how a private right of action could support or hinder the current proposals.
9. The remaining steps to finalisation
The second stage of consultation has now closed.
The FCA will publish the proposed text for any new rules or guidance to implement their proposals in a further consultation by 31 December 2021.
This next stage will include a cost benefit analysis and an update on the consideration of a private right of action.
With the next consultation, the FCA will also provide their views on the impact of the new Consumer Duty on the existing Principles – as well as information on how they intend to supervise and embed the Consumer Duty.
Following the publication of the next consultation by 31 December 2021, the FCA expects to make any new rules by 31 July 2022.
10. Actions to take in advance of the new Consumer Duty rules
31 July 2022 will soon be here. Although nothing will be final before publication, it’s fair to assume that the new rules will be very much in line with the overview we’ve provided here.
So it certainly makes sense for retail financial services firms to start considering now how the new Consumer Duty could affect them.
Here are some suggestions for early preparations that could be valuable for firms now:
- Appraise existing customer communications against the new requirements across all touchpoints, from website and digital content to sales literature and advertising.
- Assess whether your products deliver in the way your customers really expect them to, both at the outset and over time.
- Evaluate current customer service processes and standards through all channels, digital and offline. Can you correctly track and respond to service cases across different touchpoints?
- Check that your product pricing is transparent and represents good value against the real expectations of customers. Are any costs associated with switching or ending product holdings fair and reasonable?
A high proportion of total customer experience in the UK financial services sector is delivered through contact centres. This is where regulated firms and consumers fully engage and interact – providing a real test of compliance with the new Consumer Duty.
At Voyc, we can help you prepare your contact centre to work successfully with these important new Principles.
We have extensive experience in supporting regulatory compliance in contact centres – for example, through highlighting unfair treatment of customers and identifying vulnerable callers in real time.
If you’d like to learn more, simply complete our contact form and we’ll get back to you without delay.
You can find more detail on the FCA’s New Consumer Duty in the FCA’s own latest update here.