This article was first published on 23 February 2023. Last updated on 01 August 2023.
The Financial Conduct Authority’s new Consumer Duty took effect in the UK on 31 July 2023. With it comes increased regulatory risk for financial institutions which provide products and services to retail customers (directly or otherwise), at a time when both consumers and businesses face increasingly challenging economic conditions. While the Duty imposes higher and clearer standards of consumer protections across financial services, how firms are to meet the Duty is open to interpretation.
Customers come first
To recap, the Duty rests on three core components:
The ‘Consumer Principle’, requiring firms to deliver good outcomes for retail customers.
‘Cross-cutting rules’ developing/supplementing the FCA’s expectations for behaviour through three overarching requirements: to act in good faith, to avoid causing foreseeable harm, and to enable and support customers to pursue their financial objectives.
The ‘four outcomes’: firms must ensure that consumers receive communications they can understand, products and services to meet their needs, fair value, and adequate support.
To achieve the above, the Duty imposes several obligations on firms. These include:
Ending unjustified and unreasonably high charges and fees
Making it as easy to switch or cancel products as it was to take them out in the first place
Providing helpful and accessible customer support
Providing timely and clear information that people can understand about products and services, so that customers can make good financial decisions
Providing products and services that are right for customers
Focussing on the real and diverse needs of customers, including those in vulnerable circumstances, in each interaction
Assessing, testing, understanding, and evidencing the outcomes which customers are achieving
The Duty applies to the regulated activities and ancillary activities of all firms authorised under the Financial Services and Markets Act 2000, the Payment Services Regulations 2017 and E-Money Regulations 2011, in respect of products and services for prospective and actual retail customers.
For new and existing products or services that are open to sale or renewal, the rules came into force on 31 July 2023. This stretches to 31 July 2024 for closed products or services, to give firms more time to bring older products up to the new standards. While firms must consider how best to implement the new duty and achieve the stated outcomes, guidance issued by the FCA makes clear that:
The concept of reasonableness will apply, meaning that the standard which can reasonably be expected of a prudent firm will be key
While firms must deliver good outcomes, there will be differences in what a firm can achieve depending on its size and activities
Heightened regulatory risk
For financial services firms which provide products and/or services to retail customers (wherever in the distribution chain the firm sits), the introduction of the new Consumer Duty represents a heightened risk, both from a regulatory and consumer complaint perspective, for example:
The FCA expects a firm’s board or equivalent governing body to take full responsibility for embedding the Consumer Duty within the firm, with senior managers being accountable for customer outcomes
It is not possible to delegate responsibilities under the new duty when outsourcing activities to third parties; firms will therefore need to ensure that outsourced services comply with the new duty
In Policy Statement (PS22/9) (opens a new window), the FCA makes clear that the duty will focus on detecting breaches and acting on them, which could include use of fines
Challenging economic conditions, coupled with publicity surrounding the new duty, mean it is reasonable to expect an uptick in consumer related complaints, if only those generated by claims management companies
Firms’ ability to comply with the Duty, however, may be hindered by complications within the Duty itself. For instance, judgements regarding the behaviour of firms should be interpreted in line with the standard that could ‘reasonably be expected of a prudent firm’. The regulator’s expectations of firms will therefore likely vary, depending on factors such as the nature of the product being offered, the characteristics of the retail customer(s), and a firm’s role in relation to the product or service in question. To prevent misconduct, firms need to be acutely aware of how the Duty applies to their unique position and ensure that they take appropriate action. Failure to do so may result in the FCA investigating the position, issuing fines and/or ensuring redress for customers who have suffered harm because of a firm’s breach of the Duty.
Mitigating against risk
To help mitigate the position, steps that firms can take to reduce the likelihood and/or potential impact of a claim or investigation include:
Develop an understanding of how the Duty applies to your unique position, including considering the potential scope of ‘reasonableness’ in relation to your operations
Ensure communications focusing on supporting customers are of equal standard to those focused on selling products
Ensure that the quality of pre-sales support is reflected in the quality of post-sales support
Consider if outsourcing customer servicing could have a negative impact for customers; ensure appropriate outsourcing arrangements are in place, reviewing KPIs and other terms as appropriate
Monitor and collect evidence of action taken, including cultural commitment to positive outcomes, and the identification of poor actions leading to a process of continual learning
Take preparatory steps to manage increased workloads due to claims or monitoring processes, to protect against errors
Ensure sufficient Professional Indemnity and Directors’ & Officers’ Liability coverage is in place (both in terms of limit purchased and breadth of cover), to respond at an early stage in the event of a potential issue, providing peace of mind for both the organisation and its key individuals
The full version of the FCA’s finalised guidance for firms on the Consumer Duty (FG22/5) can be found here (opens a new window).
For further information, please visit our Financial Institutions (opens a new window) page, or contact:
Laura Skaanild, Senior Vice President, Global Professional & Financial Risks
T: +44 207 933 1677
E: laura.skaanild@lockton.com
Paul Afteni, Senior Vice President, Global Professional & Financial Risks
T: +44 207 933 1498
E: paul.afteni@lockton.com
