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The UK's Financial Conduct Authority (FCA) has put out a new consultation confirming its Consumer Duty rules will be in place by July 2022.
New plans to reduce consumer harm will “fundamentally shift the mindset of firms”, according to the UK’s financial watchdog.
The FCA has said that previous interventions have exposed practices that cause harm; for example, firms presenting information in a way that exploits consumer behavioural biases, selling products or services that are not fit for purpose, and/or providing poor customer support.
In its consultation document, the FCA has said this may include a lack of transparency, such as not providing all information to the consumer, and situations whereby firms can introduce excessive friction to their processes that prevent consumers from making decisions in their best interest.
The city watchdog said it has a particular interest in monitoring where this occurs online and in mobile apps because of their increasing prevalence and the potential effects they have on consumer decision-making.
Alongside the consultation, which is open until February 15, 2022, the FCA has published draft guidance to help firms prepare before the introduction of the new duty.
The FCA expects to confirm any final rules by the end of July 2022.
Parliament has also called strongly for a change to the standard of protection for consumers, and the publication of the consultation meets the FCA’s obligations under the Financial Services Act 2021.
"It’s not surprising the FCA has pushed ahead with its proposed new Consumer Duty, which the regulator believes will raise the bar on consumer protection,” Gavin Stewart, director of Grant Thornton’s financial services group and a former regulator, told VIXIO. “However, assuming they become rules next July as planned, there will be challenges around the implementation of what are quite complicated proposals, as well as around how successfully the FCA can supervise and enforce them in practice.”
Making the right decision
“Making good financial decisions is vital to financial well-being and trust, but too often consumers are not given the information they need to make good decisions and are sold products or services that do not offer the benefits they might expect,” said Sheldon Mills, consumer and competition chief at the FCA.
The FCA wants to change that, he continued. “We’ve been working to set a higher standard for firms, to put more of the onus on them to act in their customers’ interests and get their products and services right.”
However, this strive for good outcomes has raised some eyebrows.
The intention to further strengthen consumer protection under the proposed new duty is laudable but is not without challenges, said Tim Jenkins, director at Jencap Partners, a firm that advises the financial services sector on dealing with complaints.
“The FCA hasn't taken on board concerns that a fair outcome isn't always a good outcome from a customer's perspective,” said Jenny Stainsby, a partner at Herbert Smith Freehills.
There will continue to be situations in which a client is disappointed by the performance of an investment for instance, even where the firm has complied with both the letter and the spirit of the duty, she said.
"Good practices do not always result in good outcomes and it will be incumbent on the FCA and the Financial Ombudsman Service to distinguish between good outcomes and fair outcomes, regardless of the wording of the duty,” she cautioned.
The proposals lack enough detail and, without clarity, this could give rise to confusion, agreed Jenkins.
"Against a backdrop of increasing pressure on firms, especially considering the growth in complaints, whether justified or not, insurers may see this as a cue to further harden an already tough market and as a result, some firms will simply fail," he speculated.
Accountability
Firms will be expected to step up and put consumers at the heart of what they do and, if they do not, senior managers will be held accountable, the FCA has said.
However, according to Frank Brown, practice lead at Bovill, for some firms, this may present an existential threat. “Unfortunately, there are still a number of organisations whose business model is based on information asymmetries, customer vulnerabilities and time pressures,” he pointed out.
These are used to exploit to sell poor value and unsuitable products to consumers, he said. “These are the kind of behaviours Consumer Duty is designed to deter, as the FCA describes it stamping out sludge practices.”
“Clearly something as wide-ranging as this change will require a coordinated effort across the whole firm, to deliver the requirements,” said Brown. “Organisations will fail if they simply leave it to compliance to implement and police.”
There is a clear expectation that there will be tone from the top, from boards and senior management, but also that risk-owners in first-line functions will be driving change, Brown pointed out.
Within the first line, this is not just the customer-facing elements. “There is a clear expectation that those involved in product design, pricing and channel management will be playing their parts too,” he said.
The new rules
Taking on feedback from the initial proposals that were published in May this year, the new consultation sets out more developed proposals for new rules to tackle the causes of harmful practices.
These new rules will raise industry standards by putting the emphasis on firms to get products and services right in the first place.
Rules will require firms to focus on supporting and empowering their customers to make good financial decisions, avoiding foreseeable harm at every stage of the customer relationship.
Firms will also have to provide consumers with information that they can understand, offer products and services that are fit for purpose and provide helpful customer service.
Assertive supervision and a data-led approach will be used to intervene quickly when practices are identified that do not deliver for consumers, according to the FCA.
Consumer and accountability concerns have been a running theme for the FCA this year.
In September, the FCA’s outgoing chair, Charles Randell, called on the government to incorporate financial scams into its Online Harms Bill.
Senior officials at the regulator have also suggested that payment service providers should be incorporated into the Senior Managers and Certification Regime (SM&CR), considering that e-money and payment firms currently do not have to comply.
