What is the Consumer Duty?
The Consumer Duty is a regulatory reform implemented by the UK’s Financial Conduct Authority. Finalised in July 2022, the guidance is designed to ensure firms deliver good outcomes for their retail customers and act in their best interests at all times.
What do firms need to do to comply?
There are several deadlines for firms to work towards, the first being the end of this month (October 2022). By then, boards are expected to have agreed an implementation plan for the Duty and must be able to show they have “scrutinised and challenged these plans to ensure they are deliverable and robust to meet the new standards.”
What is actually changing?
Essentially, the Duty is made up of three key components:
- A Consumer Principle, which reflects the overall standard of behaviour expected of firms by the FCA.
- A set of “cross-cutting rules,” which involve three overarching requirements
- The Four Outcomes: a suite of new rules and guidance providing more detail on the regulator’s expectations around:
- the governance of products and services
- price and value
- consumer understanding
- consumer support.
Consumer Duty “champion”
Each firm is also expected to elect a Consumer Duty “champion” at board level (or equivalent) as part of the reforms. This individual should be responsible for ensuring the Duty is being raised regularly in all relevant discussions, and that the Board is challenging the firm’s governing body/management on how it is implementing the rules and prioritising consumer outcomes. The FCA says the Champion should be a Non-Executive Director, where possible.
Shouldn’t firms already be prioritising consumer outcomes?
Critics of the Duty have raised this question and the answer is yes, firms should already be prioritising the interest of their consumers. However, the new rules focus on providing evidence of this fact and ensuring firms keep up-to-date records which demonstrate they are continuing to implement their duty to customers.
The guidance is also very Board-led, perhaps with the aim of bridging the gap between those in the upper echelons of banks and the ordinary people who rely on their products and services every day.
A key focus for firms is levelling up the way they address profit-driven activities versus customer-focussed outcomes. The guidance tells firms to ask themselves whether they are applying “the same standards and capabilities to monitoring customer outcomes as they are to generating sales and revenue. For example, is the firm using the same levels of segmentation and analysis to monitor outcomes as they are to target sales?”
The retail banking sector has been heavily criticised for focusing on profits and meeting the demands of shareholders, rather than on the value it provides for consumers. In a recent open letter to CEOs, the FCA highlighted how decisions driven by dominant shareholders “independent of the firm’s governance structure” can lead to conflicts and “increase the risk of poor outcomes for investors.”
Banks have also been criticised for poor consumer signposting on websites for processes that aren’t profit-related, such as closing a bank account. The Duty outlines several ways financial institutions can enable and support customers to pursue their financial objectives, even when they are unable to provide the product or service themselves.
Key dates for the Duty:
- Implementation plans ready: End of October 2022
- Rules come into force for new and existing products open to sale or renewal: 31st July 2023
- Rules come into force for closed products or services (for example, pension schemes or bank accounts that are no longer recruiting new customers but are still in operation): 31st July 2024
You can read the final Consumer Duty guidance, here.