FCA Consumer Duty: adjusting the power balance for financial services

The Financial Conduct Authority (FCA) has confirmed its plans to introduce a new Consumer Duty to financial services, in a bid to put consumer protection and autonomy at the forefront of financial offerings.

As well as cementing plans for the new Consumer Duty, the FCA has extended the deadline for implementation from April 2023 to July 2023 – and July 2024 for closed-book products.

The FCA’s new plans signal a sea-change in focus for financial institutions and regulators alike. Financial services – once rife with malpractice – have slowly taken steps to improve the treatment and services offered to consumers over the years. The new Consumer Duty shows that the FCA now expects to see consumers proactively placed at the heart of all financial service decisions and purchases, not brought in as an afterthought.

What does the new Consumer Duty say?

The new Consumer Duty offers up 161 pages of new guidance for financial institutions, with an overarching goal of setting higher expectations for the standard of care that firms give to consumers. The FCA wants to see a “financial services system in which firms can thrive and consumers can make informed choices about financial products and services.” It aims to do this by supporting 4 key outcomes:

1. Fair value: ensuring consumers receive fair prices and quality
2. Suitability and treatment: consumers receive suitable products and services and receive good treatment
3. Confidence: consumers have strong confidence and levels of participation in markets
4. Access: diverse consumer needs are met

Of the 161 pages, there are a number of key provisions that will significantly change the power balance and potential profitability of financial institutions. These include:

• Moves to end what the FCA calls “rip-off” charges and fees for consumers
• Measures to make it as easy for consumers to switch or cancel products as it is for them to initially take them out
• Ensuring that firms provide consumers with timely and clear information that people can understand, allowing them to make informed decisions
• Moves to oblige firms to provide helpful and accessible customers support that does not act as a barrier or deterrent to seeking help
• Ensure firms provide products and services that are suitable for individual consumers
• Place a focus on the real and diverse needs of customers, including those that are vulnerable

When will the Consumer Duty be implemented?

Under initial proposals, firms were required to meet the FCA’s new Duty by April 2023. However, in their latest announcement, the FCA has extended that deadline meaning that firms will have 12 months from 31 July 2022 to implement the new rules for new and existing products and services on sale (be compliant by 31 July 2023).

Meanwhile, closed-book products (i.e. those that are no longer on sale) will be given until 31 July 2024 to implement the new Consumer Duty.

What is particularly important to note, however, is that while the above deadlines apply to “open” and “closed” products, the FCA expects new entrants to the market, (i.e. firms seeking authorisation) to show that they can meet the new requirements with immediate effect. Usually, all firms would need to show their ability to comply from the date that rules come into effect, however, under the Consumer Duty this isn’t the case.

What can firms do to prepare for the Consumer Duty?

Despite the FCA’s latest deadline extension, the breadth of the new Consumer Duty provisions will require many firms to shake up their consumer interactions across every stage of the relationship – from point of sale to exit. With that in mind, 12 months of implementation time will likely go incredibly fast and put significant pressure on financial services.

To prepare, firms should first move to understand the new Duty and obligations it introduces. They should ensure they have the technology required to capture all emerging regulatory changes. Once they have got to grips with what the new Duty means, they should then begin the process of mapping these obligations across their existing policies, procedures and controls in order to assess the amount of resource that will be expended. Once again, regulatory technology such as CUBE can be of assistance here in automating the change journey from capturing change through to automated mapping to internal systems.

In some instances, sales processes and considerations will need to be altered with all associated members requiring effective training. This extends to how financial institutions interact with consumers, how their communication channels operate, and how they consider different consumer needs.

As well as this, the FCA will require firms to submit annual reports regarding how they are meeting the Consumer Duty. Firms will need to ensure they have appropriate systems in place to record how they meet the new Duty, and that allow for efficient audit trails in the event of a regulatory inquiry.

Firms – especially senior managers – should also spare a thought for the cost implications of meeting the consumer duty and allocate sufficient resource to its implementation. It is likely that the provisions may also detrimentally affect profitability, which should also be considered in any accounting or budgeting decisions.

All of these actions, when looked at as a whole, touch all corners of financial institutions and will need careful consideration paired with swift implementation to avoid regulatory penalties.

For new entrants to the market – or those who are just starting on their path to FCA authorisation – they will need to take into account the obligations of the Consumer Duty and ask whether they are in a position to meet them. If not, they may have to go back to the drawing board.

CUBE comment

The FCA’s Consumer Duty rewrites the rule book for financial services on a number of levels. As well as looking to implement a consumer-first culture shift, it is also a divergence from traditional regulatory implementation. As mentioned above, the FCA would usually expect firms to adhere to regulatory obligations from the date of implementation. However, in this instance, implementation for new market entrants is effective immediately. The shift to a more pro–active regulator is slowly becoming clear.

Many have welcomed the FCA’s announcement that the overall implementation date of the Consumer Duty has been extended until July 2023/24. The changes place a significant burden on firms to assess how they are meeting the needs of their consumers. Changes such as these take time to implement and financial institutions are already struggling under the weight of broader market conditions paired with the increasing volume of the velocity of regulatory change.

The FCA hopes that the new Consumer Duty will promote “competition and growth based on high standards”. In the new–age of transparency for financial services, the consumer is king. While implementation may initially see a dent in profitability, in the long run, it will cement consumer confidence and save millions in unsuitable product claims and complaints.

As it stands, emerging products such as cryptocurrency and Buy Now, Pay Later (BNPL) do not fall within the remit of the new Duty. In time, this may expose itself as a gap – especially given recent media attention around the dangers of these products for vulnerable consumers.

Looking ahead, firms will need to work fast to ensure they have measures in place in order to comply in time. Those more cynical than I have expressed concern that the moving of goalposts could continue ad infinitum – firms can’t comply in time, the FCA extends the deadline etc, etc. What is undoubtedly true is that an overhaul of conduct within financial services is coming, you can see it in increasing regulation and enforcement action.

The Consumer Duty will come into force, and firms will need to overhaul the way they work. Those that are wise will act now to avoid punitive measures later down the line.  

CUBE automates the regulatory change journey, from capturing the change to automatically mapping to internal policies, procedures and controls.