In July 2022, the Financial Conduct Authority (FCA) established the definitive regulations and advice pertaining to a fresh Consumer Duty, designed to instate elevated and more distinct standards of consumer protection across the sphere of financial services, whilst also necessitating firms to prioritise the needs of their clientele above all else. This new set of rules and guidelines was designed to be implemented in stages:

With regards to newly introduced or pre-existing products or services open for purchase or renewal, the regulations will become active from 31 July 2023.

In relation to products or services that are no longer available for purchase or renewal, the rules will be put into effect from 31 July 2024.

In their words, the FCA is launching regulations encompassing:

  • A Consumer Principle, which necessitates firms to operate in a manner that ensures favourable results for retail customers.
  • Overarching rules that enhance understanding of our anticipations under the fresh Principle and assist firms in deciphering the four outcomes (as specified below).
  • Rules connected with the four outcomes that depict essential aspects of the company-consumer relationship and play a pivotal role in steering towards positive outcomes for clients.

These outcomes relate to:

Products and Services

Companies must devise products that are fit for purpose, satisfying the needs of their target customers. The distribution strategy for a product must also be fitting for its target market. Firms can meet this FCA expectation by product and service testing, regular reviews, focus groups, information requests from manufacturers, and by addressing identified issues. Importantly, the FCA asserts that adherence to product governance rules, relevant to providers or distributors of financial instruments, structured deposits, insurance products and funeral plans, equates to compliance with the products and services outcome.

Price and Value

This focuses on firms’ pricing for products and services, customer benefits, and assessing non-financial costs. The FCA has clarified that equal pricing for all customers isn’t mandatory; differential pricing could be suitable.

Firms without direct customer interaction might have less concern with this, though they must consider their role in the overall value chain. It may be challenging for firms to confirm compliance with this outcome, as it’s unclear whether prices should be compared to other firms or to the revenue and profit margins of their products. This becomes particularly complex when considering wholesale products, often part of a larger platform.

Consumer Understanding

The aim is to enable customers to make informed decisions regarding their financial services and products. Firms must identify the information customers need for effective decision-making and provide it. Misleading information, exploiting customer behavioural biases, or hindering access to key information is forbidden. In areas like retail funds, where regulatory requirements demand standard disclosures, firms must evaluate whetherthe information is appropriate and fulfils this outcome.

Consumer Support

This must be viewed alongside FCA rules regarding customer complaints and dispute resolution. Firms need to tailor facilities to customer needs, guarantee products function as expected, and for high-risk products, ensure there is enough ‘customer journey friction’ (time to comprehend the product and reduce risk of harm). In adherence, the FCA anticipates firms to actively scrutinise data for potential customer risks, including monitoring support channels, analysing product and service usage, and evaluating contact resolution rates and resolution times.

Purpose and Direction

The Consumer Duty imposed by the FCA is set to enhance the existing degree of consumer protection within the retail financial services sector. The FCA, through this initiative, has signalled a ‘seismic shift in its expectations’, thus the impact of this undertaking should not be downplayed in terms of its regulatory objectives — and the implications for firms.

The FCA is instigating alterations in both culture and conduct within firms, by establishing an expectation that an organisation’s strategy to ensure favourable outcomes permeates throughout the entire customer journey, and within all relevant departments — and crucially, that firms can demonstrate this. The Consumer Duty is the projected culmination of the FCA’s journey towards regulation centred around outcomes.

When and Who?

Firms are obligated to enforce the rules for products and services that are currently available by the end of July 2023, and for business volumes that have ceased by the conclusion of July 2024. The FCA also additionally set provisional deadlines that firms had to adhere to, including for Boards to have ratified implementation plans by the 31st of October 2022, and for manufacturers to have finalised all necessary assessments for products and/or services that are presently available by April’s end 2023 and disseminated pertinent information to distributors.

he regulations have repercussions for all firms that distribute or manufacture products and/or services to retail clients, and constitute a vital component of the FCA’s strategy for the years 2022 through 2025.

Five Significant Challenges

1. Determining and Monitoring Satisfactory Client Results

Establishing a structure for observing client results, drawing upon suitable data and Machine Intelligence, will pose a formidable task. Incorporating the correct oversight to scrutinise data, pinpoint and address issues – as well as to preclude predictable detriment – will be of paramount importance.

2. Scrutiny of Personal Assessments

The regulations mandate that companies form opinions on several subjective FCA principles, such as ‘predictable damage’ and ‘equitable worth’. Companies need to delineate these concepts, adapted to their commerce as well as their products and services. The results-oriented character of the rules grants companies increased flexibility in how they interpret the requisite changes, however, the absence of explicit guidance can pose challenges.

3. Data

Data and KPIs should be employed to substantiate outcomes for consumers at every phase of the customer journey and product lifecycle. Substandard data will hinder the capacity to conduct thorough evaluations and demonstrate outcomes. Contemplating meticulously about data capabilities and where technology can be exploited to enhance consumer understanding is crucial.

4. Responsibility and Accountability

Companies need to contemplate the implications of the regulations on staff members (through the fresh conduct regulation) and on how senior managers execute their roles and meet their responsibilities. Companies should be ready to provide bespoke staff training, incorporate the changes into governance and responsibility frameworks, and guarantee that the interests of clients are at the heart of their culture and purpose throughout the enterprise.

5. Assisting and Empowering Consumers

Companies will need to assess how they aid customers through their financial trajectories, and enable them to make decisions in their interests and to chase their financial goals. Clear and punctual communications are indispensable to this.

Implementation

The FCA has made it clear that it will adopt an ‘assertive’ stance towards companies’ execution of the new regulations, and has strongly warned companies about their preparedness to meet the Consumer Duty. Companies should employ a risk-oriented approach to execution, prioritising initial work on the most intricate and risky products, and pay special heed to the bolstered requirements on governance and accountability.

Boards must assume total responsibility for delivering Consumer Duty, sustaining oversight and challenging appropriately. The Consumer Duty should become an integral part of the strategic planning for any financial services enterprise falling within the scope of the regulations.

Transforming Financial Regulation

The FCA’s ‘Consumer Duty’ regulations, whilst challenging, signify a pivotal shift towards increased transparency and consumer-centred operations in the financial sector. Their effective integration will serve as a test of firms’ adaptability and their commitment to prioritising consumer interests. The rules certainly represent a transformative step in financial regulation, increasing the onus on firms to prioritise consumer interests and bolster transparency.
 
If you want to know more about the Consumer Duty, you are welcome to attend our live online course on 17 October 2023. Please click here for detailed information on the course and how to register.