In July 2022 the Financial Conduct Authority (FCA) introduced the 'Consumer Duty', which set out new rules to enhance consumer protection within financial services. These rules, which applied to open products and services since July 2023, extended to closed products and services on 31 July 2024. The Duty requires firms to actively work for their customers' best interests, raising the standard of care.
In May 2024, the FCA sent out 'Dear CEO' letters, formal notices outlining critical compliance requirements, to firms with closed products. These letters stressed the urgency of adjusting practices to meet Consumer Duty standards before the July 2024 deadline.
In this guide, we’ll cover the Consumer Duty rules, their ongoing impact, and the necessary adjustments firms should ensure are integrated into their approaches.
Contents:
What is the Consumer Duty?
The 'Consumer Duty' demands that regulated firms (and certain other entities in the 'supply chain') conduct themselves with a new level of responsibility for the outcomes experienced by retail customers when dealing with, and buying products from, these firms.
What does it involve?
This “new level of responsibility” requires firms to take account of 3 cross-cutting rules which set out how they should act to deliver good outcomes for retail customers:
- Avoid causing reasonably foreseeable harm to retail customers.
- Take reasonable steps to enable retail customers to pursue their own financial objectives.
- Act in good faith towards retail customers.
The FCA intends that these actions will lead to 4 key outcomes for customers:
- Products and services that are designed to meet the needs, characteristics and objectives of customers in the identified target market.
- Prices of products and services that represent 'fair value' for customers.
- Consumer understanding is promoted by communications that are clear, enabling retail customers to make informed decisions about their financial products and services.
- Customer support that meets the needs of retail customers and avoids putting obstacles in the way of their wishes (such as slow response times, or high exit fees leading to customer inertia).
Who will it affect?
The rules apply to all FCA-regulated institutions, but they also extend beyond direct consumer interactions to include entities in the 'supply chain', such as intermediaries, asset managers and insurance companies – even if they do not deal directly with consumers.
FCA insights on Consumer Duty implementation
In February 2024, the FCA published insights on the implementation to date, including areas of good practice and areas for improvement. In the publication, the FCA stated that there has been a marked shift in consumer protection since the introduction of the Consumer Duty, with many firms significantly improving how they engage with and serve their customers.
However, the FCA also stated that some firms are still lagging, highlighting a need for ongoing vigilance and continuous improvement.
Recommended good practices:
The FCA highlighted the following as examples of ‘good practice’:
- Company purpose: firms are redefining their core objectives to prioritise customer outcomes, aligning with Consumer Duty expectations.
- Data and metrics: firms are now using improved data tools to quickly identify problems and tailor their services to more effectively meet customer needs.
- Governance: many firms have integrated consumer protection into their governance frameworks, ensuring customer interests drive board-level decisions.
Areas for improvement:
While noting that progress has been significant, the FCA has identified several areas that require further attention:
- Data and monitoring: some firms need to develop more robust mechanisms for monitoring and data analysis to proactively identify and address potential consumer harm before it escalates.
- Proactive issue resolution: there is a need for firms to adopt a more proactive approach to resolving issues. Waiting for regulatory interventions is not only reactive but also detrimental to consumer trust and outcomes.
- Understanding at all levels: ensuring that all staff, not just those at the executive or board level, understand and prioritise good customer outcomes is an essential cultural shift needed for the Consumer Duty to be effective across all operations.
What do you need to do?
Here are some essential actions to ensure the Consumer Duty is embedded into your firm’s approach and that you align with the FCA’s recommended practices:
- Conduct regular reviews of your procedures and policies related to products and make any necessary adjustments to align with the Consumer Duty requirements.
- Audit all products if they have not already been, identifying areas that do not meet the new standards. This involves assessing the fairness, value, and accessibility of these products to ensure they comply with the updated requirements.
- Assign a board-level executive specifically to oversee compliance for the Consumer Duty.
- Upgrade monitoring systems to ensure that the adjustments for closed products are on track and effectively promote good customer outcomes. This should include regular reviews and feedback mechanisms.
- Ensure cooperation between your project and business teams.
The FCA's feedback highlights key areas of focus: improving data and monitoring, proactively resolving issues, and embedding a deep understanding of the Consumer Duty across all levels of operation. Continuous review and adjustment will be essential.
As a firm, you need to reflect the Duty in your strategies, governance, leadership, and people policies, this ongoing project may seem daunting. However, our financial services solicitors are on hand to provide expert advice and prompt assistance should you require it.
