The FCA has introduced a new consumer duty which will require businesses to consider their products’ impact on consumers before and after financial product sales. These stricter rules are aimed at increasing protection for shoppers in retail financial service markets, setting more transparent standards than ever before so we can all feel confident when purchasing any form of financial product from banks or lenders.
The FCA proposes a new consumer principle requiring firms to act in customers’ best interests. The rules under this principle provide greater clarity on what consumers can expect from their financial service providers. The core idea behind this proposal, called “The Consumer Principle,” has four outcomes: clarity on expectations from the regulator; fair value without hidden cost factors or fees tacked onto loans; adequate customer support when needed, as well as the need for customers to truly understand all information related to the financial product they are purchasing and their rights.
Which activities/organisations are in scope?
The Financial Conduct Authority (FCA) has announced proposals for new consumer protection rules that will apply to all financial services organisations selling products and services to “retail clients”. The FCA defines “retail clients” as any client other than professional parties like large corporations or government bodies; this term includes eligible counterparties. The FCA’s proposals extend to firms involved in the manufacture or supply of products and services sold, even if said companies do not have a direct relationship with end customers.
Why is New Consumer Duty important?
The Financial Conduct Authority (FCA) has signalled that it thinks the new Consumer Duty will lead to a significant shift in how financial services are delivered, and an increasing number of firms might be affected.
There is a need for financial services providers to focus more on compliance than ever before, ensuring that they meet the requirements of New Consumer Duty. Later in this blog, we have provided an overview of what this means for UK companies that offer such products.
What are the key pillars of Consumer Duty?
The New Consumer Principle
The FCA aims to strengthen Principle 6 by applying an enhanced level of care by introducing a Consumer Duty. This principle currently reads firms must have due regard for their customers’ interests and treat them fairly, but on implementation, this will become an objective standard requiring companies to consider what the reasonable expectations would be in fulfilling these duties. The term ‘reasonable’ can be subjective, so we’ve provided an explanation:
Value and price of products and services
Consumer Duty places a responsibility on businesses to ensure that they are providing consumers with goods and services at an appropriate price. This can be done by considering the nature, limitations, fees paid by customers, and any vulnerability characteristics amongst your target audience. Additionally, there must be evidence produced by senior management that regularly assesses whether they are delivering on this value and, if not, what changes must be made and when they will be delivered.
Consumers must have a complete understanding of the financial products or services that they are taking out. Communications that are too complex will confuse customers and give them little value or insight into what product or service is offered. Due to this, firms are expected to tailor communications to the characteristics and complexity of products in an easy-to-understand manner on the right channel for the targeted audience. This helps to ensure the information provided is not misleading or inaccurate. They also need to ensure these messages are clear and fair-priced with accurate information so consumers can decide if the product is the right fit for them.
The objectives of consumers should be met throughout their relationship with the firm. Firms must not disadvantage retail customers, including those in vulnerable circumstances; ensure that products are reasonably anticipated and that customers do not face unreasonable barriers when pursuing these goals (including costs). All financial services firms are expected to offer sufficient customer support, accessible to the consumer when required.
Senior management will have responsibility for commissioning regular reviews, which analyse customer satisfaction levels through complaints analysis or call monitoring. This enables them to be aware of any issues within the business model, ensuring a plan is in place to rectify any identified areas of concern.
What is reasonableness?
The concept of reasonableness has been an integral part of the development and implementation of Consumer Duty. This standard reflects how a reasonable firm would act, which can be applied to all elements within this particular duty, including the consumer’s principle as discussed above; it does not give firms themselves control over what they should do to meet these expectations but instead expects them to know this through their existing everyday law duties.
… so, how does this affect financial services firms?
To better serve their customers, firms must now consider Consumer Duty at every stage, in every business process and at all staffing levels. Firms should live and breathe Consumer Duty and ensure every process meets the regulatory requirements. Senior Managers will ensure this duty is met across all business areas. They must be aware of their responsibilities, ensure all reviews and improvements are documented, and ensure other team members know what is expected from them regarding compliance with these regulations.
The key to meeting customer outcomes is evidence. Firms must have the correct information in good time and accurately recorded to show how satisfied their customers are with the products and services provided -and whether the firm is meeting their needs appropriately. Firms must have accurate and appropriate management information (MI) and evidence that “reasonable steps” have been taken.
The FCA requires financial services organisations to adopt a “get it right in the first place” approach when designing products and services. The FCA also expects that companies will put greater emphasis on ensuring the customer understands the products or services available, putting customers in a position to make informed decisions to meet their needs and pursue their financial objectives.
The FCA requires all firms to monitor their practices and processes to ensure they meet internal company requirements and regulators’ expectations. They expect regular documented reviews, accurate MI, and POA for any identified risks or issues.
Financial services organisations will need to focus more on regular staff training and development, which their senior management team should oversee.
A firm’s governing body must ensure that it is delivering good outcomes for its customers. They must conduct reviews at least annually on this.
So, what now?
Don’t panic! The new rules are being implemented on a phased basis.
For new and existing products or services that are open to sale or renewal, the rules come into force on 31 July 2023
The closed product or service regulations come into force on 31 July 2024.
The FCA has recognised that these deadlines, although longer than what was initially consulted on, will still be challenging for many firms.
The good news?
Marsh Finance can help! Marsh offers a FREE compliance consultancy service to all partners (Yes… FREE). We’ve been in the industry for almost 50 years, so it’s no surprise that we know a thing or two about compliance and operational efficiencies. Our team knows how to make your company’s operations run smoothly and efficiently, so you can focus on what matters most: growing your business!
At Marsh Finance, we offer a variety of compliance solutions tailored to meet the needs of car dealerships and brokers of all sizes. Contact us today to learn more about how we can help you stay compliant.