.svg)
The UK’s financial watchdog has said it will give companies a year to get ready for the new Consumer Duty rules - which require firms to put “customers' needs first.”
“The Consumer Duty will lead to a major shift in financial services and will promote competition and growth based on high standards,” said Sheldon Mills, consumers and competition director at the Financial Conduct Authority (FCA).
According to Mills, the new compliance requirement for financial firms, including those in payments, raises the bar. “It will prevent some harm from happening and will make it easier for us to act quickly and assertively when we spot new problems.”
Among the different rules included in the Consumer Duty are requirements for firms to make it easier to switch or cancel products, and provide helpful and accessible customer support.
Firms will also need to provide timely and clear information that people can understand about products and services, rather than burying key information in lengthy terms and conditions that consumers may not have the time to read.
Other principles require firms to get rid of so-called rip-off charges, and provide products and services that are right for their customers.
“The current economic climate means it’s more important than ever that consumers are able to make good financial decisions,” said Mills. “The financial services industry needs to give people the support and information they need and put their customers first.”
The FCA is giving firms 12 months to implement the new rules for all new and existing products and services that are currently on sale - which is more than the previous deadline that was expected to be March 2023.
The rules will be extended to closed book products 12 months later, to give firms more time to bring these older products, that are no longer on sale, up to the new standards.
"This is a continued shift towards an outcomes-based approach to regulation and a drive toward a culture of consumer first," said Wayne Green, financial services consultant at FinServ Dynamics.
"These rules give firms a clearer idea of how that should look. It also creates a more level playing field among different regulated firms providing different services."
He told VIXIO that how hard it will be to implement will depend on each firm, where they are culturally and the extent to which they already think about end consumers.
"Firms that are customer centric with a culture that reflects that will find this easier to implement than those that are not.”
Green added that those that already face existing requirements like the Assessment of Value regulation will meet some of the requirements.
“This is because the real challenge will not be in reading the rules and creating new Management Information, but the challenging questions that senior managers will need to ask themselves in the middle.
"For me, this is a positive set of new requirements and the cross-cutting nature of them shows the regulator is thinking in a more joined-up manner than they have in the past."
Implementation challenge
The Consumer Duty has proven controversial in the financial sector. There have been concerns that it will stifle innovation and that it will be confusing for companies to comply with.
"This is perhaps the biggest change to retail regulation since the FCA was incepted and is likely to lead to material changes in the way in which firms think about conducting their business,” said Jake Green, financial regulatory partner at Ashurst.
“Firms need to focus on vulnerability and for some, this will require material implementation projects.”
According to Green, the delay shows how serious the FCA is. “However, the implementation time is not going to be long enough for most. Many will think the FCA has gone too far, and will question if it is now the most protective regulator in Europe.”
Payments institutions are, according to the UK’s Payments Association, “very concerned” about the implementation of the new regulation.
Tony Craddock, the Payment Association’s director-general, told VIXIO in June: “While the purpose of Consumer Duty is to protect consumers, we believe that the additional compliance burden on payments firms could actually prevent consumers from getting the best products, because payments firms will have lower profitability, and this will feed through into less investment in new and better products."
“Most regulated firms in the payments sector will be affected by the duty and the detailed rules under it, even if they do not run consumer-facing businesses,” said Max Savoie, partner at Sidley Austin, pointing out that this is because the FCA has made clear that any firm whose activities could impact outcomes for consumers will be subject to the rules.
The rules on manufacturing and distributing products could also have broad application to payment service providers, particularly to e-money issuers and in relation to intermediation in payment chains, Savoie warned, adding that it is noteworthy that the FCA’s guidance also refers to credit institutions that safeguard the funds of payments and e-money institutions.
Definition of consumer is also wide. “It will also be important for payment service providers to note that micro-enterprises and small charities fall within the scope of the rules,” he said.
Savoie told VIXIO that payment service providers should now conduct a mapping exercise of the rules and a gap analysis of existing policies and procedures.
“Firms will need to embed consumer duty assessments within their product development and change management processes, and senior management will be expected to take responsibility for that,” he said.
“A key point to remember here is that the FCA is likely to see the consumer duty as being a matter for a firm’s business as much as it is for a firm’s legal and compliance functions.”
While payments insiders may be concerned with what is to come, the financial services lobby group, Personal Investment Management & Financial Advice Association (PIMFA), was welcoming of the announcement.
“The Consumer Duty has the potential to be a transformative piece of regulation which will, we hope, substantially improve how firms serve consumers and work towards ensuring they receive superior financial outcomes,” said Simon Harrington, the public affairs head at PIMFA.
Such a transformative piece of regulation does indeed require additional time for firms to implement new systems and processes to comply with it, he added.
“The decision to extend the implementation of the Consumer Duty is broadly in keeping with our recommendations to the FCA.
“We are pleased the Regulator has listened to the industry and demonstrated a willingness to work with us to ensure this new regulation works well from the very beginning. Our focus now will be on supporting firms to implement the Duty.”
