As summer holidays are fast approaching for some, for others 31 July signals a looming deadline for consumer duty. The Financial Conduct Authority (FCA) describes the new consumer duty as a ‘paradigm shift’ in its expectations of firms and how they treat customers going forwards.
The new consumer duty has been introduced by the FCA and is a new Principle in the FCA Handbook, namely ‘Principle 12’.
The purpose of it is to require a higher level of consumer protection in retail financial markets than currently exists and means putting customers in a position where they can make informed decisions; where they are presented with appropriate products and services and where they receive fair value for those products.
Who does the Consumer Duty apply to?
The consumer duty applies to all FCA regulated firms (e.g. banks, insurance companies, e-money platforms).
The duty is far-reaching, as it includes personal and commercial customers. It relates to any products/services FCA regulated firms provide to retail clients (which includes individuals and SMEs), for example mortgages, deposit accounts and insurance products.
The FCA is trying to ensure that individuals and small firms are treated fairly by firms that provide finance.
Who does the Consumer Duty apply to?
The consumer duty applies to all FCA regulated firms (e.g. banks, insurance companies, e-money platforms).
The duty is far-reaching, as it includes personal and commercial customers. It relates to any products/services FCA regulated firms provide to retail clients (which includes individuals and SMEs), for example mortgages, deposit accounts and insurance products.
The FCA is trying to ensure that individuals and small firms are treated fairly by firms that provide finance.
What do firms have to do to comply with the Consumer Duty?
Firms need to comply with the four outcomes and the cross-cutting rules (set out below) in order to comply with the Consumer Duty and deliver good outcomes for retail customers.
There are four outcomes which the FCA wants to see under the Consumer Duty. These outcomes relate to:
- Products and Services – The firm’s products and services should be designed to meet the customers’ needs, characteristics and objectives and should work as expected.
- Price and Value – Products and services should be sold at prices that reflect their value and there should be no excessively high fees.
- Consumer Understanding – Consumers should be provided with sufficient information in order to make good decisions and information should be made available at the right time and be understandable.
- Consumer Support – Customer service should be responsive and helpful, and it should be as easy to complain about or switch and cancel products or services as it is to buy them.
There are also ‘cross-cutting rules’ which help firms interpret these four outcomes. The cross-cutting rules require firms to:
- Act in good faith
- Avoid causing foreseeable harm
- Enable and support retail customers to pursue their financial objectives
- Firms will need to be able to produce evidence to show where those outcomes are being met.
The FCA’s rules require firms to consider the needs, characteristics and objectives of their customers, with a particular focus on vulnerable customers, in relation to all of the products and services they offer.
Firms will need to assess any new existing products/services they offer in light of the four outcomes and cross-cutting rules.
Some of the changes required will be in relation to the documentation provided by firms to their retail clients. Other changes will concern the potentially penal nature of charges which relate to some products.
For all FCA regulated firms, it will mean reviewing their existing products and documentation to assess where changes are required.
When does the new Consumer Duty have to be implemented by?
The implementation deadline for new and existing products or services that are open to sale or renewal is 31 July 2023. For closed products or services, the duty will apply from 31 July 2024.
If existing products or services do not meet the needs of the target market, then the firm needs to change the product/service by the 31 July 2023 deadline or stop distributing the product/providing the service, which could cause difficulties for some firms.
Firms that are affected by the consumer duty rules have been ramping up efforts to get to a suitable position by the deadline, while also making a longer-term plan for new products going forward. For any companies considering making products available to individuals/SMEs, there are a number of factors to consider. Please do get in touch if you would like to discuss.
