The UK’s Financial Conduct Authority (FCA) is in the final stages of introducing a new UK consumer duty. The proposals are designed to force a ‘cultural reset’ of financial services firms’ approach to, and interactions with, their retail customers.

The latest consultation closed in mid-February, with the final rules due to be published in a policy statement at the end of July and an implementation date of April 30, 2023. Industry respondents have so far been generally supportive of the regulator’s aims, albeit they see the consumer duty and shift towards outcomes-based regulation as a significant undertaking, which will succeed or fail based on how it is supervised and enforced.

There is a long history in UK financial services of iterative requirements regarding a duty of care towards customers. Through evolving supervisory approaches, including ‘treating customers fairly’ and a focus on culture and conduct risk, the FCA has now reached the new consumer duty.

Consumer duty

The consumer duty, enshrined in a new principle 12, is intended to “fundamentally shift the mindset of firms.“ The FCA is concerned about practices by some firms that cause harm. These include presenting information in a way that exploits consumers’ behavioral biases, selling products or services that are not fit for purpose, or providing poor customer support.

The new rules seek to raise industry standards by putting the onus on firms to get products and services right in the first place. They will require them to focus on supporting and empowering their customers to make good financial decisions and avoiding foreseeable harm at every stage of the customer relationship. Firms will have to provide consumers with information they can understand, offer products and service that are fit for purpose, and provide helpful customer service.

Firms also need to be aware that the FCA intends to use ‘assertive supervision’ together with its new data-led approach to intervene quickly when it identifies practices that do not deliver for consumers.

“The new duty will drive a change in culture at firms. We expect firms to step up and put consumers at the heart of what they do and we’ll be holding senior managers accountable if they do not. The duty will also help create an environment for healthy competition between firms, encouraging them to be innovative in developing products and services that meet consumers’ needs.”

 Sheldon Mills, Executive Director of Consumers and Competition at the FCA, December 2021 

In terms of the rule changes, there are three main areas:

1. There is a new consumer principle (number 12) that would replace principles six and seven for retail business and require firms to act to deliver good outcomes for retail customers.
2. ‘Cross-cutting rules’ set out how firms should deliver good outcomes and therefore provide greater clarity on the regulatory expectations under the new principle. The cross-cutting rules require firms to:
3. act in good faith
4. avoid foreseeable harm
5. enable and support retail customers to pursue their financial objectives.
6. Rules relating to the four ‘outcomes’ that represent key elements of the firm-consumer relationship which are instrumental in helping to drive good outcomes for customers. These outcomes relate to:
7. the governance of products and services
8. price and value
9. consumer understanding
10. consumer support.

Practical implications

Firms with retail customers should not underestimate the likely work involved in being able to demonstrate compliance with the new requirements. Even a firm that already delivers consistently good customer outcomes will need a new suite of data to evidence compliance. The FCA has stated its expectation that firms both produce and regularly review management information on consumer outcomes, and that boards consider a report at least annually.

Firms would be well advised to undertake an immediate, board-endorsed review of all their retail customer interactions and, wherever possible, ensure that they meticulously document their approach to show compliance with the enhanced requirements. They should report any gaps to the board and remediate them as a matter of urgency.

Whilst the FCA does not propose to introduce new requirements to regularly report information on compliance with the consumer duty, it does expect firms to collect suitable data and information to assess consumer outcomes for themselves. It also expects firms to be able to share such evidence upon request.

The types of information firms may want to use to demonstrate compliance include:

• business persistence: analysis of customer retention records, for example claims and cancellation rates and details of why customers leave. This may flag where poor treatment is contributing to a high turnover of customers
• distribution of legacy products/pricing and fees and charges: review of whether these customers are more likely to pay particular fees and charges or are getting worse outcomes than others
• behavioral insights: consumer interactions and drop-off rates; use of different communication channels including digital; and consumer testing of financial promotions. This may flag where firms need to improve policies, processes, and systems, for instance where there are barriers to consumer engagement or understanding
• training and competence records: analysis of records of employee training, including remedial actions where team members’ knowledge or actions do not meet expectations
• file reviews: reviewing customer files and monitoring calls to check for errors and assess if customers received good outcomes; this is particularly useful for sales processes
• customer feedback: using formal and informal feedback from customers to identify trends and areas for improvement. For example, complaints and comments made directly to the firm and also on social media
• complaints data, together with ensuring it is easy for consumers to make complaints, and that they can make complaints through multiple channels; trends in numbers of complaints involving poor consumer outcomes; and complaint root cause analysis by investigating fully to understand the cause of complaints, rather than just dealing with the symptoms
• testing customer experiences through processes such as mystery shopping, auditing, focus groups, and deep dives
• allowing staff to feed back honestly when they think processes could be improved
• reviewing whether processes and policies are effective in delivering good outcomes for consumers.