Consumer Duty to encourage innovation

Transparent services to customers and clients sit high on the agenda for regulators. Through greater transparency, there comes a greater level of trust in a firm’s products and services – this sparks increased growth, competitiveness, profits and innovation for financial institutions.

It’s more essential than ever for senior managers and firms to be transparent about their product offering, its benefits and disadvantages – so consumers, investors and asset managers can make informed financial decisions.

The Financial Conduct Authority (FCA) found that over 9 million people were over-indebted and finding it difficult to pay household bills – up by over 2 million since 2010. Factors such as the looming recession, the pound going down and the cost of living becoming more difficult, are bringing economic distress. The Consumer Duty has been created to help firms to act honestly and responsibly to protect consumers and their funds during a time of economic uncertainty.

Whilst some believe that regulatory change can stagnate innovation and growth, in a recent speech, FCA Executive Director, Sheldon Mills made it clear that he believes the FCA’s new Consumer Duty will do the opposite and inspire innovation.

What is the Consumer Duty?

The Consumer Duty’s final rules and guidance were published by the FCA in July 2022, outlining 5 milestones that firms need to prepare for. It aims to set higher and clearer standards of consumer protection across the financial industry.

The FCA wants firms to put themselves in customers’ shoes when deciding what product information to provide customers with. As a result, firms can avoid causing harm and instead provide support to customers to reach financial objectives.

Sheldon Mills, Executive Director of Consumers and Competition, said: 

“The Consumer Duty will lead to a major shift in financial services and will promote competition and growth based on high standards. As the Duty raises the bar for the firms we regulate, it will prevent some harm from happening and will make it easier for us to act quickly and assertively when we spot new problems.”

The FCA has recognised the efforts firms are already making to meet the obligations under the Duty. To ensure the Duty is implemented correctly, the FCA has extended the deadline.

Why the Consumer Duty will benefit consumers and firms?

The Consumer Duty uses an “outcomes-focused approach” and provides a “fairer basis for competition.”

In his speech, delivered on ‘What firms and customers can expect from the consumer duty and other regulatory reforms,’ Mills cites that, “consumers should come away satisfied and confident; their needs met and understanding the product or service they’ve got.” In order to achieve this, firms need to empower consumers to make informed decisions when deciding on products to use – especially when individuals are struggling with finances.

FCA data has shown that during financial interactions, 36% of consumers saw financial firms as honest and transparent – connoting that 64% thought they weren’t transparent. For greater transparency and consumer trust, firms should put customer needs first when designing, selling or advising on products and services.

To help do this, the Consumer Duty provides standards for firms to follow – higher standards lead to healthy competition and innovation with consumer interest at heart. The FCA believes that by protecting consumers and offering product advice that benefits them, customers will begin to trust firms more.

The FCA has already informed lenders that they are expected to support customers when they see warning signs. For those whose fixed rate mortgage deals are expiring, where available, firms should help customers find a less costly option. They have also liaised with Buy Now, Pay Later (BNPL) firms to stop spreading misleading information on marketing adverts and are collaborating on how they can assist struggling customers.  

“Good consumer outcomes and a focus on the consumer proposition should be commercially positive, attracting new business to firms and supporting growth domestically and globally, and we expect firms, as well as consumers, to benefit from the Duty.”

What the Consumer Duty means for firms

1. Consumer understanding

Mortgages, pensions, investments etc can all get a bit confusing for consumers. With the rising living costs, companies must ensure “they have the key product information, such as its features and charges, easily accessible and understandable.” This refers to the entire customer journey, digital experience and disclosure of contract terms – properly informed customers can make improved financial decisions.  

2. Products and services

The FCA has witnessed customers being pushed to take high-risk investments, unaffordable high-cost credit and debt products that don’t meet consumer needs. Firms should take their time in understanding individual situations and suggest a solution that aims to solve their problems rather than choosing an option that benefits the firm.

3. Consumer support

Customers want to solve their issues efficiently and effectively. The FCA expects firms to ensure they provide sufficient support digitally and non-digitally. It also would like to see firms making the process to switch, cancel or complain about a product or service easier, as well as having reasonable exit fees.

4. Price and value

The FCA expects firms to provide fair value to customers – where the prices charged reflect the benefits delivered. The Consumer Duty will not be setting any prices, it simply requires firms to ensure products are properly priced and not just to create profits.

Whilst the Consumer Duty is not in force yet, the FCA expects to see firms supporting customers during these tough times and helping them make safer financial decisions.

How to implement the Consumer Duty

Any changes from the Consumer Duty need to be implemented from the top down and through strong leadership and management – the FCA itself is working to become “operationally efficient and service orientated.”

For the successful implementation of the Duty, senior managers and executives should continually review their plans to ensure they are on track to achieving goals and remaining regulatory compliant.

The FCA has started strengthening governance and individual accountability regulations – ensuring that senior employees are also being held accountable for their wrongdoings.

The first milestone of the Consumer Duty will need to be put into effect by the end of October which isn’t too far away! This doesn’t mean firms need to have all regulatory updates completed by then, but firms will need to assure governing bodies and the FCA that the Duty will be implemented by July 2023.

The FCA believes that the Duty will transform regulatory attitudes to boost long-term growth and innovation. They aim to move towards a much more flexible regulatory approach, with fewer rule changes and fewer compliance costs for firms.

The FCA will be supervising firms by looking at data focused on consumer outcomes, product life cycles, evidence of consumer outcomes being achieved and how firms are meeting these outcomes. The effort must be put in now by firms to ensure there are fewer regulatory updates in the future.

“Ultimately, when we get this right, we all win: consumers – who will get the right products and services at the price that is fair; firms, who will retain customers and attract new ones; regulators – who will need to step in less often – and most importantly, the wider economy.”

CUBE comment

By having clear regulatory frameworks in place to understand requirements for products and services, the economy can be at its best – building a trusted financial industry.

The Consumer Duty is clear in its title – it expects firms to uphold their side of the relationship with consumers by ensuring that they are put first. With more trust in financial services, consumers will be empowered to make well-informed decisions and businesses can innovate to attract and retain customers based on the quality of services.

While the Duty is a great initiative, it will require a reworking of regulatory expectations as well as more work for compliance teams and their firms. Approaches will need to be evolved so that they consolidate the Duty’s requirements across the board.

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