The Financial Conduct Authority is in the midst of arguably the biggest overhaul of regulatory approach since the Retail Distribution Review in 2013.
A new consumer duty for financial services is set to be introduced by April 2023, with a second and final consultation on the plans closing on February 15.
The onset of the consumer duty marks a shift from a rules-based regulatory approach to one based on outcomes. It aims to, in the FCA’s own words, ensure companies “put themselves in customers’ shoes” when communicating and designing products.
Sheldon Mills, executive director of consumers and competition at the FCA, says the new duty is needed because consumers are too often “not given the information they need to make good decisions and are sold products or services that do not offer the benefits they might expect”.
He adds: “The new duty will drive a change in culture at firms. We expect firms to step up and put consumers at the heart of what they do and we’ll be holding senior managers accountable if they do not.
“The duty will also help create an environment for healthy competition between firms, encouraging them to be innovative in developing products and services that meet consumer's needs.”
What is the consumer duty replacing?
The consumer duty will replace two key FCA principles for regulated businesses (although these two principles will not be removed from the regulatory landscape altogether):
- Principle 6: A firm must pay due regard to the interests of its customers and treat them fairly.
- 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.
The duty incorporates a central consumer principle that a business "must act to deliver good outcomes for the retail consumers of its products".
Achieving ‘good outcomes’ is intended to be a clear step up from treating customers fairly. The practical application of this will be something to monitor as the duty is rolled out, and we are likely to see significant debate over what ‘good’ looks like across different industries and in different circumstances.
Underpinning this consumer principle will be three "cross-cutting" rules setting out how businesses should act to deliver good outcomes for customers. These say businesses must:
- Act in good faith toward retail customers.
- Avoid foreseeable harm to retail customers.
- Enable and support retail customers to pursue their financial objectives.
The good outcomes the FCA wants to see relate to four areas:
- Products and services.
- Price and value.
- Consumer understanding.
- Consumer support.
Most well-run advice businesses – and indeed well-run businesses across financial services – will support the overarching aims behind the consumer duty and most already largely demonstrate the behaviours the regulator is seeking to encourage.
When you consider the investment platform market, for example, customers are able to switch providers as and when they choose, with healthy competition for business between a large and growing number of companies.
Any platform that fails to put themselves in customers’ shoes when designing products, customer journeys and ongoing communications risks seeing those customers walk out the door to a rival. In addition, they will almost certainly fail to grow by attracting new business.
Similarly, any company that does not consistently provide value for money risks being exposed via price comparisons offered by businesses such as the Lang Cat, Boring Money and Platforum, which are regularly reported in the mainstream trade and consumer financial press.
