The Consumer Duty: The Three Key Elements
As of May this year, the FCA’s new Consumer Duty has been in hot debate. The EPA has been urging change for retail companies that are not consumer-facing, and fears have also been made heard for the unintended consequences these proposals could elicit. But what elements combine to make up this Consumer Duty? And how do they impact said Consumer Duty?
The three key elements are The Consumer Principle, Cross-Cutting Rules and The Four Outcomes. It is structured like a top-down pyramid which firstly sets a clear tone, then develops the overarching outcomes, and eventually finishes with a set of rules and guidance for firms to follow. This is to ensure that the Consumer Duty is understandable, flexible and adaptable.
1) The Consumer Principle
At the top of the pyramid sits The Consumer Principle. This is here to set a tone that utilises language reflective of the overall standards of behaviour the FCA demands from firms.
The FCA is looking to strengthen the existing requirement in their principles. In particular, Principle 6 states that a firm must have due regard to the interests of its customers and treat them fairly. They say compliance ‘cannot just be a tick-box exercise’. Instead, firms must challenge themselves to ensure their actions match that of consumer interests and objectives.
Views and opinions are being sought on two options for the wording of The Consumer Principle. Option one being ‘A firm must act to deliver good outcomes for retail clients’ and Option two being ‘A firm must act in the best interests of retail clients.’ The meaning will be clarified and amplified, through the Cost-Cutting Rules, with firms needing to take responsibility for judging whether their conduct serves consumer interests while delivering good outcomes.
The FCA does not expect firms to go above and beyond what is responsibly expected of them, however. They may have a limited role of responsibility, and external factors could also impact the outcomes that customers achieve.
2) Cross-Cutting Rules
Sandwiched in the middle of the pyramid is Cross-Cutting Rules. This is incorporated to develop the FCA’s overarching expectations for common themes applied to all areas of firm conduct.
They propose that the Cross-Cutting Rules would set out key behaviours required by the Consumer Duty, requiring firms to a) act in good faith; b) take all reasonable steps to avoid foreseeable harm to consumers; c) take all reasonable steps to enable consumers to pursue their financial objectives. Each is essential to the level of care firms should provide.
Also proposed is a concept of reasonableness in the Consumer Duty. This will clarify the objective standard of conduct firms would need to meet. The factors include: a) the nature of the product or service being offered (which itself contains the nature of the firm’s role and relationship with customers, the potential of the product or service to harm consumers, and the complexity of the product or service); b) the role of the firm in the distribution chain; c) the reasonable expectations of consumers; and d) the specific characteristics of customers, including characteristics of vulnerability.
Further, the FCA expects firms to be able to identify when particular groups of customers receive systematically poorer outcomes.
3) The Four Outcomes
At the bottom of the pyramid lies The Four Outcomes. This is a set of rules setting firm conduct expectations, the four outcomes representing the firm‑consumer relationship’s key elements.
They are: Communications, Products & Services, Customer Service, and Price & Value.
Communications – the FCA wants firms to consistently support consumers by enabling them to make informed decisions about financial products and services. They would like consumers to be given the information they need and for it to be presented in a way they can understand.
Products & Services – the FCA wants all products and services sold to consumers to be fit for their purpose. They want them to be designed to meet their needs. Therefore, they are making it an essential requirement for products and services to represent fair value for consumers.
Customer Service – the FCA wants firms to provide a level of customer service that meets the consumers’ needs throughout their relationship with the firm. Customer service should allow consumers to realise, not hinder, the benefits of the products and services they buy.
Price & Value – the FCA wants to ensure that products and services are fit for purpose and represent fair value. They want the price to represent fair value for the consumer better.
For more information on the new Consumer Duty, read the full consultation here.
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