When the Financial Conduct Authority (FCA) confirmed at the end of 2021 that it would introduce the consumer’s duty, there was little rejection by companies. Perhaps this was because they thought it was an inconsequential development that would have little impact on the way they do business. However, the new duty, proposed in 2017 by the Financial Services Consumer Panel – is one of the most extensive reforms the FCA has overseen.
The basic requirement for businesses to “focus on supporting and empowering their customers to make good financial decisions” sounds simple, and most businesses will say they already do. But dig deeper and the ambition for change is evident.
Joanne Owens is Regulatory Partner for Consumer Finance and Retail Financial Services at Eversheds Sutherland. She says consumer duty is a seismic shift and “possibly the most significant shake-up of FCA regulation since the introduction of the Financial Services and Markets Act 2000”.
Principle 6 of the FCA Business Principles obliges companies to pay “due attention to the interests of customers and treat them fairly”, while Principle 7 refers to “due attention to the information needs of their customers and communicate information to them in a clear, fair and not misleading. . The new duty replaces those principles with one that applies higher standards of conduct: “A business must act to deliver good results to retail customers.”
The duty lists four key outcomes: clients are equipped to make informed decisions; the products and services are fit for purpose; the service meets customer needs; and the products and services represent fair value. “This is a sea change in the way the FCA regulates, as companies have to demonstrate on an ongoing basis that they are delivering good results to clients,” says Fairer Finance chief executive James Daley. “It could spur a race to the top of quality.”
But with the FCA expecting the new duty to be fully implemented by April 30, 2023, companies need to act quickly. “Certainly the entire retail financial services industry is hard at work on initial assessments and gap analysis to understand where the current delta is between existing policies and procedures and the new higher standards,” says Owens.
This is a considerable task, given the wide scope and application of the right to new and existing products. The new rules make it clear that companies must not continue with business models that are based on poor results. This jeopardizes certain product lines; 0% no-fee credit cards, for example, rely on some customers not paying off their balance and paying higher interest rates as a result. Similarly, it will be more difficult to justify leaving mortgage customers with high standard variable rates.
The extent to which customer choice could be reduced in some product areas due to reforms will depend in part on how companies judge whether they can still offer value for money under duty, says Neil Mitchell, head of customer risk at TSB Bank. . “There is also a risk of a lack of consistency in approach, with companies following their business models the way they do.”
It may be necessary to increase prices to cover the costs of enforcing the duty. The FCA estimated one-time direct costs at up to £2.4 billion and ongoing annual direct costs at between £74 million and £176.2 million. Companies can change the way they price products, as prices must be proportional to the overall benefit to the consumer.
“It’s not just about evaluating the financial cost, but other non-financial costs to the consumer, including the use of their data,” explains Owens. “This could have an impact on the length of distribution chains for some introduced products, particularly when a commission is charged.” The scale of the challenge means that some companies will see consumer duty as a threat, while others will see an opportunity, says Owens.
“This is an opportunity (for companies) to shape and define their products and services and think about how they deliver the right results for their current and future customers.”
TSB Bank set up a program to meet the new requirements in January 2022, Mitchell says. “We are assessing all business units in TSB where they currently stand against the consultation and draft rules – this is our discovery phase. Once the rules are finalized, we move on to our delivery phase.”
Much of the early work of companies focuses on communications. Providers often write their terms and conditions through the lens of compliance: if the FCA approves it, that’s fine. But the duty will require them to make sure customers can understand what is being said to them.
“The customer understanding result means customers need to understand communications, and we know that people can’t understand the terms and conditions (T&Cs) in documents or letters they receive from companies,” says Daley.
“We’ve been helping companies rewrite charters and terms and conditions for years, but we’re seeing an uptick in interest.” The challenge for banks is the tension between the outcome of understanding the customer and compliance with existing consumer credit regulations that require them to include prescribed disclosures in communications with customers.
The cross-cutting nature of the duty gives it the potential to be a catalyst for cultural change in banks and across the industry. It is likely to change how customers are treated, what and how retail products are sold, and to whom they are sold.
The desired long-term result from a regulatory perspective is a more stable market that needs less intervention and fewer rule changes.
“From a consumer perspective, we won’t see a big change overnight, but over time it has the potential to improve the standards and quality of financial services,” says Daley.
With final rules due in July 2022 and companies expected to be fully compliant by April 2023, businesses have no time to waste.