The FCA’s new consumer duty has now been published following a comprehensive consultation process.
As predicted in our article last year, the potential implications of the Consumer Duty are significant. Therefore, we’ve produced this update – providing an overview of the final guidelines and what these mean for firms.
We hope you find it useful.
What is the aim of the new Consumer Duty:
The aim of the new Consumer Duty is to set higher and clearer standards of consumer protection across financial services, and requires firms to put their customers’ needs first.
The new Consumer Duty is broken down into three key elements:
- Consumer Principles: These encompass fairness, transparency, and accountability, serving as the foundation of the Act and guiding regulatory compliance.
- Cross-cutting Rules: These overarching regulations permeate various aspects of the Act, ensuring consistency, integration, and effective communication of the principles across a firm’s operations.
- The Four Outcomes: The Act defines four key outcomes that financial service firms must strive for in their customer interactions, focusing on meeting customer needs, providing clear information, delivering reliable products, and eliminating post-sale obstacles.
How do these requirements differ from previous regulations?
The new Consumer Duty is an outcomes-based regulatory approach. This represents a departure from traditional regulatory approaches, which were rules-based and principle-based.
The differences can be explained using the analogy of a classroom:
- Rules-based: Strict classroom rules everyone must follow.
- Principle-based: General guidelines. For example, a teacher saying, “Do your best.”
- Outcomes-based: This checks the actual results. Imagine a teacher wanting everyone to get A’s. They check report cards to see how well students are doing and where they can improve.
With rules and principles-based regulation, companies could say they were good without proving it. By enforcing an outcome-based approach, companies must prove that they are helping their customers. It’s the same as achieving good grades, not just saying you studied.
Which firms are affected by the new Consumer Duty?
The new Consumer Duty applies to all firms manufacturing or supplying financial products and services to “retail clients”.
Essentially, retail clients as defined by the FCA are all private individuals as well as small and medium-sized businesses.
What’s more, this definition applies even if the relationship between the firm and the client is not direct – such as a mortgage lender distributing exclusively through third-party businesses.
Any firm selling or servicing financial products and services through a contact centre to UK retail clients will certainly be affected by the new Consumer Duty.
What does the new Consumer Duty expect firms to do?
FG22/5 Final non-Handbook Guidance for firms on the Consumer Duty.
You can consult this document (121 pages) for any further information you require on any aspect of this update.
The key expectations for firms are set out very clearly near the beginning of the Final Guidance. These are highly important and are shown in full below:
The FCA’s expectations of firms under the Duty
- Put consumers at the heart of their business and focus on delivering good outcomes for customers.
- Provide products and services that are designed to meet customers’ needs, that they know provide fair value, that help customers achieve their financial objectives and which do not cause them harm.
- Communicate and engage with customers so that they can make effective, timely and properly informed decisions about financial products and services and can take responsibility for their actions and decisions
- Not seek to exploit customers’ behavioural biases, lack of knowledge or characteristics of vulnerability.
- Support their customers in realising the benefits of the products and services they buy and acting in their interests without unreasonable barriers.
- Consistently consider the needs of their customers, and how they behave, at every stage of the product/service lifecycle.
- Continuously learn from their growing focus and awareness of real customer outcomes.
- Ensure that the interests of their customers are central to their culture and purpose and embedded throughout the organisation.
- Monitor and regularly review the outcomes that their customers are experiencing in practice and take action to address any risks to good customer outcomes.
- Ensure that their board or equivalent governing body takes full responsibility for ensuring that the Duty is properly embedded within the firm, and senior managers are accountable for the outcomes their customers are experiencing, in line with their accountability under the Senior Managers and Certification Regime (SM&CR). (Section 1:9. FG22/5 Final non-Handbook Guidance for firms on the Consumer Duty)
Throughout these expectations, there is a clear and consistent focus on the best interests of customers and a need to see things at all times from the viewpoint of the customer, rather than the firm. At Voyc, we welcome this clarity and direction – a view that we are sure is shared by the vast majority of firms operating in the UK financial services sector.
There’s also emphasis here on the need to identify and protect vulnerable customers. This has been a key focus of the FCA for some considerable time now and is a subject that we cover in detail for UK financial services companies in this white paper from Voyc. With the now widely anticipated cost of living crisis over the coming months, the need for firms to be vigilant and supportive with regard to customers demonstrating high levels of vulnerability is likely to be particularly acute.
Furthermore, the final two bullet points in the list above highlight – in our view – particular areas for firms to be aware of and consider. There’s a clear expectation that firms will carefully monitor customer experience so that any appropriate actions can be taken and recorded – and a requirement to ensure, at the most senior level, full compliance with the principles contained in the new Consumer Duty.
The Key Elements of the new Consumer Duty
Our previous article set out the key elements of the new Consumer Duty:
- The Consumer Principle
- The Cross-cutting Rules
- The Four Outcomes
When we published that article, the details of these key elements were all subject to change during the consultation process. That process has now come to a close and the final agreement for these elements is clear.
Understanding these elements provides a clear understanding of the nature and goals of the final Consumer Duty:
The Consumer Principle
The Consumer Principle requires firms to:
‘act to deliver good outcomes for retail customers’.
A key consideration here is that firms should at all times consider what constitutes a good outcome from the viewpoint of the customer as opposed to the firm.
What’s more, the viewpoint of the customer applies to the individual customer in each case. Therefore, for example, under the Consumer Principle, firms would be expected to take account of the vulnerabilities of any customer in assessing what constitutes a good outcome for that customer.
The Cross-cutting Rules
The three Cross-cutting Rules define the key behaviours that the FCA requires firms to adopt and demonstrate under the Consumer Duty.
Under these Rules, firms are required to:
Act in good faith towards retail customers: This essentially means taking full account of the actual needs and circumstances of the individual customer and making the best efforts to provide the best outcome using that knowledge.
Avoid causing foreseeable harm to retail customers: Firms should think through and fully understand the complete customer experience, relating to product features and benefits as well as all aspects of customer services. In so doing, they should aim to identify and remove the potential for customer harm or dissatisfaction wherever possible.
Enable and support retail customers to pursue their financial objectives: Customers should be provided with products, service and communications that enable them to take positive action and make sound decisions and choices in line with the financial objectives they have chosen for themselves.
The Four Outcomes
The Four Outcomes describe four key areas of a firm’s business in which the new Consumer Duty can be seen to be delivered. Each of these outcomes can be monitored and tested by firms to assess compliance with the Consumer Principle and the Cross-cutting rules outlined above:
Products and Services: For example, are the products and services offered and sold to customers suitable for their individual needs. Are they designed to offer good outcomes?
Price and Value: Are the products and services priced in a way that avoids causing harm to the customers they offered to. Are they designed to offer features and benefits that enable customers to pursue their financial objectives, without unnecessary complexity?
Customer Understanding: Firms should ensure that all their customer communications enable customers to pursue their financial objectives effectively. Communications should provide relevant information at the right time on the features and risks of products and services. And they should be readily understood by the specific customers for whom they are intended – in whatever form they are delivered, whether in writing or in speech.
Consumer support: This outcome covers the entire area of what is widely known as customer service in financial firms and is closely linked to Customer Understanding. Firms are required to provide support that takes full account of the particular needs and circumstances of the customers they serve – at every touch point and throughout the entire customer relationship period. Particular focus is given in the Final Guidance to supporting customers making an enquiry, claim, complaint or seeking to switch provider – as well as the need to ensure that the needs of vulnerable customers are met.
Other key aspects for firms to consider
The Final Guidance closes with two sections that are highly important for forms to understand and observe:
Culture, Governance and Accountability
The Final Guidance makes it clear that the new Consumer Duty sets higher standards than were previously expected for consumer care across the UK financial services industry.
This means that firms are required to put customer care at the very heart of their business, both culturally and practically.
The board, or equivalent governing body of every firm covered by the Consumer Duty should implement a means of assessing whether the firm is complying with the expectations of the Duty, at least annually and set high standards of individual accountability and personal conduct throughout the firm as appropriate.
Firms will be required to monitor their compliance with the new Consumer Duty and to provide evidence of this when requested by the regulator.
The rules are clearly set out in the Final Guidance.
Firms are required to:
- Monitor and regularly review the outcomes their customers are experiencing to ensure that the products and services that firms provide are delivering outcomes consistent with the Duty.
- Identify where customers or groups of customers are not getting good outcomes and understand why.
- Have processes in place to adapt and change products and services, or policies and practices, to address any risks or issues identified and stop it occurring again in the future.
(Section 11.4. FG22/5 Final non-Handbook Guidance for firms on the Consumer Duty)
The FCA does not underestimate the magnitude of the change they want to bring about with the new Consumer Duty. Indeed, they acknowledge that, for many firms, compliance will require a significant shift in culture and behaviour.
As we’ve shown in this article, the new Consumer Duty introduces significant new regulatory requirements for the UK financial services sector.
These requirements and the level of change they will mean for many firms, should not be underestimated.
With that in mind, the FCA recently extended the period for firms to implement the requirements of the new Consumer Duty by three months to 31st July 2023 for existing and new products and services.
In respect of products and services held in closed books, the implementation period is 12 months longer – 31st July 2024.
Furthermore, firms’ boards or equivalent governing bodies are expected to agree on plans for implementation – by the end of October 2022.
Conclusion – and how Voyc can help
Without a doubt, the new Consumer Duty amounts to a significant change in approach to customer care and support across the UK financial services landscape.
Its effect on individual firms will vary widely, depending on the extent to which each firm’s current governance and practices are already compatible with the new rules. However, every firm will certainly be affected to some extent.
“At Voyc, we welcome any new initiative that seeks to improve and uphold good standards of customer care in financial services and that certainly includes the new Consumer Duty”, comments Matthew Westaway, Voyc’s Co-founder and CEO.
“Our solutions are all about caring for financial services customers – but also the firms serving them through customer contact centres using voice and email communications. By monitoring 100% of customer interactions, we can help our clients ensure that they are delivering the highest standards of customer care in a way that can also demonstrate full compliance with the regulator.
“What’s more, Voyc supports firms seeking to deliver additional care to customers with vulnerabilities – as well as team members exposed to the frequent challenges of handling difficult situations”.
A high proportion of total customer experience in the UK financial services sector is delivered through contact centres. This is where regulated firms and consumers fully engage and interact – providing a real test of compliance with the new Consumer Duty.
At Voyc, we can help you prepare and manage your contact centre to work successfully within the full scope of the new requirements.
If you’d like to learn more, or have any questions on the particular application of the Consumer Duty in contact centres, please don’t hesitate to contact us.