What is The FCA's 'Consumer Duty'?

Earlier today the FCA published refined 'Consumer Duty' proposals, which it hopes will better protect customers who deal with financial services firms

(Morningstar) The Financial Conduct Authority (FCA) has just published expanded plans for its new “Consumer Duty,” which would compel financial services firms to treat customers better. But what does that mean in practice, and, crucially, how will it be enforced? Our FAQ explainer tells you more.

Why a Consumer Duty, and Why Now?

The FCA is concerned about the standard of conduct displayed by the financial services firms it regulates. In its 2020 “Financial Lives” market research survey, the FCA found only 10% of respondents “strongly agreed” they had confidence in the UK financial services sector. Just 35% of participants agreed financial firms were honest and transparent with them.

What Kind of Bad Behaviour Are We Talking About?

The list is long. In a nutshell, the FCA has found certain businesses are a) exploiting consumers’ behavioural biases; b) selling products not actually suitable for the people buying them; c) selling products that do not represent fair value; d) failing to provide appropriate customer support enabling timely financial decisions; e) exploiting customer loyalty or inertia; and f) generally failing to be transparent in their dealings.

What Would a Consumer Duty Look Like?

The FCA already requires the businesses it regulates to "treat customers fairly" (TCF). However, its new proposals go somewhat further. A Consumer Duty of this kind would require financial services firms to “deliver good outcomes for retail clients”. Firms should “act in good faith,” “avoid foreseeable harm", and “enable and support retail customers to pursue their financial objectives.”

Who Would Be Affected by The New Rules?

The FCA regulates all kinds of businesses across different sub-sectors of the financial services. Those range from lenders and brokers, to banks, pension companies, and insurance providers. In terms of the people the regulator is trying to better protect, the FCA has proposed aligning the scope of the new rules with its existing “sectoral” sourcebooks. That means the Consumer Duty will adapt to the definition of a “retail customer” provided within each sector’s conduct of business sourcebook. The new rules will also protect prospective customers, who are perhaps encountering a business for the first time, but are not yet paying customers.

How Will The FCA Enforce Them?

The FCA says it will use its full range of powers to enforce the Consumer Duty. Where appropriate, it will use deterrent and “remedial” powers to bring businesses into line via fines and redress. It has also pledged to ensure its staff are fully trained to identify breaches within the new framework.

How Have Financial Services Firms Reacted?

Some businesses have expressed concern that additional Consumer Duty rules would layer further complication on firms’ already-heavy regulatory duties. Earlier today, pension and platform business AJ Bell highlighted that the FCA’s decision not to formally replace TCF with the Consumer Duty could cause confusion. However, it added that “good” firms are probably already obeying the spirit of the Consumer Duty before its official implementation anyway.

The FCA says that industry and consumer responses showed concerns about increased compliance costs, which could lead to products being withdrawn from the market, "impacting customers in vulnerable circumstances".

Another proposal baked into the FCA’s plans was the Private Right of Action (PROA), which would encourage consumers to take legal action against businesses in breach of the new rules. As the consultation noted, while most consumer groups were in favour of the policy, most industry stakeholders were against it. It has now been dropped from the FCA's plans.

What Will Happen Next?

The paper published today on the Consumer Duty marks a second round of consultation with stakeholders. Anyone interested in responding to it must do so by February 15, 2022. The FCA expects to publish its “policy statement” finalising the new rules by July 31, 2022.