The FCA’s new consumer duty

The FCA’s new consumer duty

The FCA has launched a consultation called A new Consumer Duty.  This post covers the reasons why the Regulator feels the new consultation is required, its areas of focus and explains why we believe all firms involved in the manufacture or supply of products and services to retail clients, should engage positively with the consultation, even if they do not have a direct relationship with the end customer.

What is it?

In a nutshell, the new Consumer Duty is intended to raise the standards of care that firms provide for consumers.  We already have the Treating Customers Fairly (TCF) framework, but the proposed new Consumer Duty sets higher standards than the existing TCF framework.

What problems is this intended to fix? 

Well, quite a long list of problems apparently, which the FCA sums up with the general statement:

We know that due to the way that financial services markets operate, consumers don’t always get the products and services that meet their needs or the outcomes they might reasonably expect.

The FCA goes on to list a number of areas that it believes need to be addressed, including providing information that is misleadingly presented or difficult for consumers to understand, products and services that are not fit for purpose, and poor customer service that hinders consumers from taking timely action.  Price gets a mention too with products and services that do not represent fair value.

Haven’t we heard all this before?

If any of this is starting to sound familiar, it’s because this is not the first time the FCA has attempted to bring about a change in the way firms deal with customers. A quick glance at some of the Treating Customers Fairly (TCF) work  from 2006 will show very similar sentiment.  For example:

Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture.

The sentiment from the existing framework does sound remarkably familiar to the new consultation.  However, the FCA explains the difference in two ways.  Firstly, the new consultation is about raising the bar higher than before.  More importantly, in the latest consultation, the FCA goes on to explain that Compliance cannot just be a tick-box exercise, suggesting the current framework has become a hygiene factor for firms, rather than something that is central to an organisation’s DNA.

In short, the FCA is looking to effect cultural change, moving to a reality where dealing fairly with customers is seen as part of the reason for existing.

One final point on the reasons the FCA is undertaking this work.  The TCF paper referenced above was written in 2006, and time has moved on.  The latest consultation makes particular mention of online and digital services, so you can take that as a clear steer where some of the focus will be.

How is the FCA going to do this – in brief?

The FCA proposes the new Consumer Duty has three tiers:

1. An overall Consumer Principle reflecting the standards and behaviours it wants from firms. The exact wording is part of the consultation, but it really boils down to; Am I treating my customers as I would expect to be treated?

2. Cross Cutting Rules that set expectations for common themes for all areas of firm’s conduct. These develop and amplify the standards set in the Consumer Principle and require the three key behaviours, shown in the diagram from firms.

3. Four Outcomes: The FCA believes the four Outcomes in the diagram are the main components of a firm’s relationship with its customers.  In other words, how it designs and sells products and services, how it services them and the key contact points along the customer journey.  In each area, how the firm treats its customers is fundamental in enabling customers to meet their financial needs.

The key take from this approach is the guiding principle Am I treating customers as I would expect to be treated?  Everything else flows from that statement and while the detail is still to be consulted on and worked out, it focuses on the consumer outcomes from all areas of a firms relationship with its customers.

The Devil’s in the detail outcome

Using an outcomes-based approach to set out expectations for a firm’s conduct does have practical benefits.  After all, if you asked a consumer what they wanted from their financial needs, its highly likely the response would be described in terms of an outcome.

In addition, the FCA is clear in the definition of the firm’s role and how far this extends.  Likewise, it is equally clear on customers being ultimately responsible for their own informed decisions.  Doubling down on the point, the FCA also calls out that the proposals will not mean customers will be protected from all bad outcomes.  All of which is broadly positive and should mean the door remains firmly closed to regulation by hindsight.

Open minded to change

On a final and positive note, The FCA acknowledges poor outcomes are not universal and it recognises and calls out the good.  However, when it states market conditions can be exploited by firms to consumers’ detriment, then clearly it believes there is a lot that needs to be addressed.

If we want more consumers to engage with their finances, then firms should join the consultation and help the journey.


Photo by Roman Kraft on Unsplash