The New Consumer Duty: Make Sure You’re Up To Date

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    In May, the Financial Conduct Authority (FCA) set out their proposals for a new Consumer Duty. As such, they laid out their argument for the changes in a detailed format, addressing potential concerns businesses and individuals may have over the structure and its impact going forward. The full consultation papers were then made publicly available online for all to read and analyse.

    Following this, they welcomed public responses via their website and hosted a webinar, allowing firms to learn what the Consumer Duty would require and the outcomes needed from them. FCA officials Stephen Humphreys, Sheldon Mills, Nisha Arora, Robin Finer, David Geale, and Gareth Thomas were all in attendance, where they answered questions during a Q&A segment. Topics included: why they are proposing it, the outcomes for consumers, key elements and next steps.

    There was public scrutiny in the aftermath of these events, however. For example, the head of the Emerging Payments Association (EPA) is urging the FCA to make an exemption for retail companies that are not consumer-facing. Fears have also been made heard for the unintended consequences these proposals could elicit. So, as you can see, not everyone is entirely on board.

    Why are these changes being made in the first place?

    The FCA made it clear early on as to the reasoning behind the new Consumer Duty. They state that the operation of financial service markets impact consumers who ‘don’t always get the products and services that meet their needs or the outcomes they might reasonably expect.’ As such, their ability to make good decisions is impaired by various factors – weaker bargaining position, asymmetries of information, lack of understanding or behavioural biases.

    The FCA positions themselves clearly on the consumer’s side and therefore against retail firms, hence the backlash received. However, they do state that many retail firms abide by these rules and regulations while putting the consumer first. But they also single out those who exploit the current market conditions to their own advantage and detriment of said consumer. 

    During the webinar, the FCA said they are ‘working to improve standards in the sector,’ and ‘all firms should ask themselves if they would be happy to be treated the same as consumers.’ Furthermore, they added that there is evidence of practices that are causing consumer harm.

    Sheldon Mills, Executive Director of Consumers and Competition at the FCA, said that firms ‘have a much greater ability to analyse consumer behaviour and monitor exactly how they respond to different prompts and information.’ Through this, he says, benefits are made available, but firms could take advantage of consumers’ behaviour where they are vulnerable.

    What does this all mean for retail firms now?

    The proposals have vast scope. They apply to financial services and products provided to ‘retail clients.’ This differs from customers who are referred to as ‘consumers.’ In consumer protection legislation, this term is defined as ‘an individual acting for purposes that are wholly or mainly outside that individual’s trade, business craft or profession.’

    ‘Retail clients’ include corporate entities such as Small and Medium-sized Enterprises (SMEs), large organisations, and other entities like local authorities. As such, how can the new Consumer Duty be interpreted if there are so many separate groups to account for?

    The current laws relating to consumer protection are already sophisticated and well-developed enough as they are, so adding to that could prove to be complex and confusing for retail firms. The FCA aims to create clarity, yes, but they could easily run into a stumbling block that is too tough to overcome. However, if it is made contextual to understand, the legal baseline could help establish the new requirements for retail clients in terms of consumer protection.

    As has been stated, the FCA’s new Consumer Duty will set clear standards for firm behaviour. Therefore, organisations should be preparing for a period of change in their business with retail clients, meaning they can establish projects to understand the full extent of the rules’ impacts.

    Furthermore, firms will need to assess the potential detriment retail clients could suffer. Steps should then be outlined and taken to mitigate these risks and, in turn, the impact on retail clients. In terms of fair value, firms may consider how the FCA’s expectations should be met and delivered within existing product governance processes and where changes can thus be made.

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