A new consumer duty

Question 1

What is the new consumer duty?

Answer 1

The Duty represents a further move towards outcome-based regulation and away from a process-focused ‘tick box’ mentality. Senior management are required to take a proactive approach, with a focus on ensuring products and services really meet the needs of customers who buy them. It aims to “ensure a higher and more consistent standard of consumer protection for users of financial services and help to stop harm before it happens” (FCA, 2021).

Question 2

Who does this duty apply too?

Answer 2

The Duty applies to products and services offered to ‘retail customers’ and applies to firms forming part of the distribution chain, whether or not there is a direct relationship with the buyer. It does not apply to institutional investors, professional clients or eligible counterparts.

Question 3

What is a retail customer?

Answer 3

“Any person who is advised by a firm on the merits of opening or buying a stakeholder product where the advice is given in the course of a business carried on by that firm” (FCA, no date). This could include anyone from individual consumers, micro enterprises, SMEs or charities, depending on the financial service offered.

Question 4

What is the duty based on?

Answer 4

The Duty is based on an overarching new principle, three cross-cutting rules and four outcomes.

Question 5

What is The Consumer Principle (principle 12)?

Answer 5

“A firm must act to deliver good outcomes for retail customers.”

In order for firms to deliver good outcomes, the FCA has set out a list of clear expectations in the finalised non-Handbook guidance (FG22/5).

Examples include:

• “put[ting] consumers at the heart of their business and focus[ing] on delivering good outcomes for customers; and
• provid[ing] products and services that are designed to meet customers’ needs, that they know provide fair value, that help customers achieve their financial objectives and which do not cause them harm”.
  (FCA, 2022a)

Question 6

What are the Three Cross Cutting Rules?

Answer 6

The FCA has provided three cross-cutting rules setting out how firms should act to deliver good outcomes.

Firms must:

• “act ingood faithtowards retail customers;
• avoid causingforeseeable harm; and
• enable and support retail customers to pursue theirfinancial objectives”.

(FCA, 2022b, p37)

Question 7

What are the four outcomes?

Answer 7

1. Products and services
2. Price and value
3. Consumer Understanding
4. Consumer support

Question 8

Explain the product and service outcome?

Answer 8

These must be specifically designed to meet the needs of consumers and only sold to those whose needs they meet. This includes processes for the testing and approval of new products, a requirement for products to meet the needs of target markets, reviews of products and their risk to the target market, and distribution channel arrangements.

Question 9

Explain the price and value outcome?

Answer 9

Firms must ensure products provide fair value for customers. This means firms need to evaluate their offerings to “ensure there is a reasonable relationship between the price paid for a product or service and the overall benefit a consumer receives from it” (FCA, 2022b).

Question 10

Explain the consumer understanding outcome?

Answer 10

Communications equip consumers to make effective, timely and properly informed decisions about financial products and services. At all stages of the product cycle, firms must consider customer characteristics and information needs, customer understanding, product complexity, accuracy, relevance and timeliness.

Question 11

Explain the consumer support outcome?

Answer 11

Firms must ensure an appropriate standard of support to meet the needs of retail customers, so they can realise the benefits of products and services they buy and act in their interests without undue hindrance. Firms must ensure that customers can use the product as reasonably anticipated and ensure they do not face unreasonable barriers when they want to make changes, transfer to a new provider, make a claim, cancel or complain.

Question 12

What is the individual conduct rules (COCON)?

Answer 12

To support the Consumer Duty, the FCA has added a new individual conduct rule. Rule 6 states that “you must act to deliver good outcomes for retail customers” (FCA, 2022b). The rules go on to require firms to interpret the obligation in line with the standard that could reasonably be expected of a prudent person carrying out the same activity with the same product, taking account of the needs and characteristics of customers.

The new rule takes effect from 1 August 2023. As with the new Principle 12 for businesses, where Individual Conduct Rule 6 applies, Individual Conduct Rule 4 will be disapplied, as Rule 6 includes and extends the obligations of Rule 4.

Question 13

What are the 8 implications for firms?

Answer 13

1. Existing contracts
2. Reasonableness
3. Product Design
4. Responsibility
5. Client Information
6. Pricing
7. Systems
8. Resources

Question 14

Explain the implication for existing contracts?

Answer 14

As well as new contracts, the Consumer Duty applies to all contracts in existence on 31 July 2023. Firms will not be required to relinquish or change any contractual rights in order to meet the obligations, although they can choose to do so. In this case, where appropriate, firms will need to find other ways to ensure they prevent harm to the customer.

Question 15

Explain the implication for reasonableness?

Answer 15

The Consumer Duty obligations are based on what it is reasonable to expect from firms, based on the average customer and what is known at the time.

Example : reasonable conduct and distribution fees

“Mortgage lender: The firm must be able to demonstrate that their product and any associated charges provide fair value for the target market. This includes making consideration of the overall charges that the customer might pay, including any that might be levied as a result of the firm’s distribution strategy. Firms should factor such average intermediary fees in their value assessments and must also ensure that distributors have the necessary information to carry out their own assessment of value.

Mortgage broker:The firm must obtain information from the manufacturer such as a high-level summary of the benefits to the target market, information on overall prices or fees and confirmation that the manufacturer considers that total benefits are proportionate to the total costs. The firm must also ensure that its own fees and charges are fair value and that payment of these does not result in the product or service ceasing to be fair value overall.”

Question 16

Explain the implication for product design?

Answer 16

When designing a product, providers must identify the target market for the product, taking into account the type of product and the risks it presents. They must also consider potentially vulnerable customers at the design stage.

Question 17

Explain the implication for responsibility?

Answer 17

For compliance with the Consumer Duty lies with all senior management; there is no requirement for a single manager to have overall responsibility. Each senior manager is responsible for the elements of the duty that fall within their area of responsibility.

Example: responsibility and investment products

“The fund manager: the firm must develop a fund to meet the needs, characteristics and objectives of a target market of customers. It must develop an appropriate distribution strategy and set charges to provide fair value to customers. The firm must also communicate in a way that customers can understand and offer appropriate customer support standards. It must review the fund regularly to assess whether it meets the needs of the target market, offers fair value and has been distributed appropriately.

The platform provider: as a manufacturer, the firm must develop the platform, including decisions over the range of investments it provides, to meet the needs and characteristics of a target market. It must set charges to ensure that its service provides fair value. As a distributor of the fund, the platform provider must obtain sufficient information to understand the value assessment and whether any remuneration it receives would result in the product no longer providing fair value. It must design an appropriate distribution strategy, provide appropriate customer service standards and regularly monitor how the platform is used in practice.

The financial adviser: the firm must consider how it meets the Duty in the design and delivery of its initial and ongoing advisory services (where relevant). This includes, for example, considering the needs of the target market, following the consumer understanding rules for its communications and considering if its charges provide fair value.”

(FCA, 2022a, p12)

Question 18

Explain the implication for client information?

Answer 18

Firms may need to revisit client documents to ensure they are clear, with fair and simple explanations of key facts to help customers to understand and make informed decisions.

Example: client information good practice

“A product manufacturer designs a complicated investment product. Its target market is sophisticated investors seeking capital growth and who are willing and able to take significant investment risk. The manufacturer identifies that the product could cause significant harm if bought by customers outside of the target market who may not understand the risks or be able to afford the potential losses.

The manufacturer develops a distribution strategy in which the product can only be sold with advice. The manufacturer identifies a distributor with the appropriate skill and experience to advise on and sell the product. It provides all relevant information about the product and its target market to the distributor. This enables the distributor to assess whether the product is suitable for particular customers and ensure it is only sold to customers in the target market. The manufacturer also monitors on an ongoing basis whether the product is distributed to customers in the target market.

This is also likely to be consistent with the cross-cutting rules, showing the firm is taking steps to act in good faith and avoid foreseeable harm.”

(FCA, 2022a, p47)

Question 19

Explain in the implication for pricing?

Answer 19

Firms may need to review their pricing models, charges and policies to meet the price and value outcome. This includes potentially unfair charges such as exit fees and termination charges, where any charge should reflect the firm’s underlying cost.

Example: mortgages and good practice

“Most mortgages have an initial incentivised rate (either fixed or variable) that reverts to a variable rate after a period of time. The standard variable rate (SVR) is the most common reversion rate. When considering whether a mortgage offers fair value, firms should consider the overall price of a mortgage including any initial discounted rate, fees and charges and the reversion rate applicable at the end of a fixed rate period. This does not require firms to move away from designing products that revert to a variable rate (such as an SVR), and fair value can still be delivered by an approach in which introductory rates are lower than the rates that borrowers later pay.”

(FCA, 2022a, p65)

Question 20

Explain the implication for systems?

Answer 20

Firms may need to review and adapt servicing systems and processes, and provide additional staff training on the changes and the Consumer Duty in general.

Example: systems poor practice

“A firm distributed a packaged bank account that included a range of additional features, such as travel insurance. When distributing the product, the firm did not have sufficient controls to prevent the product being marketed to customers who would be unlikely to use the additional features. As well as being likely to be an inappropriate distribution strategy, this could mean the firm is not acting to avoid foreseeable harm.”

(FCA, 2022a, p49)

Question 21

Explain the implication for resources?

Answer 21

Firms will need to ensure there are adequate resources to monitor compliance with the Consumer Duty. This could include reviews of processes and seeking feedback from customers.

Example: resources good practice

“A consumer credit firm designed a lending product with late payment fees. The target market included customers who are likely to be less financially resilient. In its review of the product, the firm identified that a sizeable proportion of its customers were not making payments on time and were paying substantial sums in late payment fees. The firm investigated why this was the case and took action to mitigate the situation and prevent further harm. The firm reconsidered its approach to assessing creditworthiness and made its payment terms more flexible, to help make payments more manageable.”

(FCA, 2022a, p51)