The FCA's new Consumer Duty will be coming into effect on 31st July. The Duty will introduce new FCA regulation designed to ensure that customer experience and outcomes are central to the activities of FCA regulated firms.
As is usually the case, the Duty's regulation and guidance is drafted very much with profit-making specialist financial services providers rather than charitable housing associations in mind. However, if your RP has FCA permissions – whether relating to debt advice, hire of telecare equipment, leaseholder loans, shared equity mortgages or any other aspect of consumer credit - the Duty will apply to your organisation.
Key features of the Duty
Under its existing regulatory framework, the FCA requires that regulated firms operate in accordance with 11 key overarching principles. The Duty introduces a new principle ("PRIN 12") which requires that firms "act to deliver good outcomes for retail customers". To determine whether firms are complying with PRIN 12, the FCA's guidance suggests that firms should ask themselves questions such as: "Am I treating my customers as I would expect to be treated in their circumstances?"; and "Are my customers getting the outcomes from my products and services that they would expect?".
The Duty introduces three new "cross-cutting rules". These require that firms:
- act in good faith towards retail customers ("retail customers" here meaning the recipients of the firm's FCA regulated products and/or services);
- avoid causing foreseeable harm to retail customers. Firms should proactively consider how their products or services might cause foreseeable harm; and
- enable and support retail customers to pursue their financial objectives. Firms are required to focus on putting customers in a better position to make decisions that align with their needs and financial objectives.
The Duty prescribes four outcomes that firms must deliver for customers. These are:
- the Products and Services Outcome. This requires that firms ensure that the design of the product or service and the way in which it is distributed is appropriate for its identified target market;
- the Price and Value Outcome. The price the customer pays for a product or service must be reasonable compared to the overall benefits the customer will experience;
- the Consumer Understanding Outcome. Firms must ensure that communications meet the information needs of customers, are likely to be understood by customers and equip them to make decisions that are effective, timely and properly informed; and
- the Consumer Support Outcome. Firms must design and deliver support that meets the needs of customers, ensuring that customers can use their products as reasonably anticipated and do not face unreasonable barriers during the lifecycle of a product or service.
Lastly the Duty introduces a new conduct rule to supplement those conduct rules introduced as part of the Senior Managers and Certification Regime. This requires that all staff subject to the conduct rules "act to deliver good outcomes for retail customers".
So what should RPs actually do?
It should be noted that the Duty applies to a firm's FCA regulated activities and activities that are ancillary to those regulated activities. It does not apply to an RP's wider business, so RPs will not be required to embed the requirements of the Duty throughout their entire operation.
RPs must though do what would reasonably be expected of a prudent firm to ensure that their strategies, governance, leadership, and people policies lead to good outcomes for their users of FCA regulated products and services. Boards must review and approve assessments of whether the organisation is delivering good outcomes that are consistent with the Duty at least annually. Firms are also expected to have a "champion" at board level who, along with the chair and chief executive, ensures that the Duty is being discussed regularly and raised in all discussions relevant to the organisation's FCA regulated work.
RPs should have product approval and review processes to assess whether products meet identified needs, characteristics and objectives of target markets. While RPs are not generally in the habit of devising new FCA regulated "products", they will need to keep these requirements of the Duty in mind if varying their FCA permissions to undertake new regulated activity. Existing regulated products and services should be kept under review to ensure that customer needs are met. In a similar vein, processes should be implemented that consistently and regularly challenge whether good outcomes are being delivered.
RPs will also need to ensure and be able to demonstrate to the FCA that products provide 'fair value'. Many RPs provide their FCA regulated services free of charge, so in many cases satisfying this requirement will be fairly straightforward. Those RPs that generate revenue from regulated activities such as telecare services will need to ensure that their service satisfies this fair value requirement.
All customer customer-facing should be monitored and kept under review to ensure that they meet and continue to meet customers' information needs and are likely to be understood by their target audience. This should not be difficult for RPs who already know their "market" well, typically only make their FCA regulated products and services available to their tenants and leaseholders and are used to tailoring their communications accordingly.
The Duty has a particular focus on ensuring that customers in vulnerable circumstances experience outcomes that are as good as those for other customers. This is of particular relevance for RPs because many of the recipients of their FCA products or services will be in some form of financial distress, and when designing or reviewing products or services RPs will need to bear this in mind.
Note that the 31 July deadline applies to new and existing products or services that are open to sale or renewal. For closed products that are no longer offered (such as back books of historical shared equity mortgages), the Duty will come into force on 31 July 2024. Clearly those aspects of the Duty that relate to marketing will not apply to closed products, but firms are still expected to keep those products under review under the cross-cutting rules and to ensure that they meet the consumer understanding requirements.
Conclusion
As (usually) charitable organisations that operate for a social purpose and are already subject to a considerable amount of customer-focused regulation, implementation of the Consumer Duty ought not to involve a particularly large shift in mindset and approach for RPs. RPs are well used to both operating in a highly regulated environment and to acting in good faith towards customers, communicating with them effectively and avoiding causing them foreseeable harm.
That said, RPs should not be complacent. While the ethos of RPs already aligns with what the Duty requires, there will still be some work to do to ensure and demonstrate compliance.
The FCA's full non-Handbook guidance on the Consumer Duty can be accessed here.
Sector-specific guidance letters for different activities (including debt advice firms and consumer credit lenders) can be accessed here.
