Consumer Duty: Putting yourself in the shoes of customers

The Financial Conduct Authority’s new Consumer Duty has been billed as a watershed for the financial services industry, providing a blueprint that will set higher expectations for the standard of care provided to customers. It places consumer protection at the heart of firms’ treatment of clients. ‘Customer first’ is the new mantra.

Under the proposed rules, all regulated firms will be required to put themselves “in the shoes of customers”, the FCA says, and to ask themselves:

• Would we like to be treated like this?
• Would we recommend our products and services to our friends and families?
• Do our products and services meet the needs of those they are sold to, and do they represent fair value?

Firms will have to answer these questions in the affirmative and show evidence to the regulator. If they fall short of the desired consumer outcomes, they will be expected to withdraw or change their product offering, or will face regulatory action.

The FCA set out its plans for the Consumer Duty in May this year, in which it sought to create a higher level of consumer protection in financial services. It says the new duty is an important safeguard for the 50 million customers who use a range of financial services and products, from banking to insurance.

The regulator warns that for many firms the new duty will “require a significant shift in culture and behaviour, where they consistently focus on consumer outcomes and put customers in a position where they can act and make decisions in their interests”.

It acknowledges firms are already bound by existing rules to ‘treat customers fairly’, with many delivering the right outcomes for consumers. But the industry still has some way to go to achieve this across the board.

Sludge practices

The FCA says it has seen evidence of practices in retail financial markets that cause consumer harm. These include firms providing information that is misleadingly presented or difficult for consumers to understand alongside products and services that are not fit for purpose or do not represent fair value.

It has also uncovered poor customer service that hindered consumers from taking timely action to manage their financial affairs. Other practices by firms exploited information asymmetries, or consumer inertia or vulnerability.

The regulator has coined a term for these: “sludge practices”. This roughly translates to behaviour whereby firms hinder consumers from making informed decisions by taking advantage of their behavioural biases.

One of the notable failings the FCA highlighted in retail markets was poor-value policies in general insurance, which disadvantaged loyal consumers. It is estimated the harm has amounted to billions of pounds over the past 10 years.

We think there has been a dilution of what parliament wanted

In the pensions market, meanwhile, contingent charges for defined benefit transfers are estimated to have cost consumers £2bn per annum before they were banned.

Similarly, the regulator’s high-cost credit review in the banking sector found a mix of charging structures, which made it difficult for consumers to grasp and compare overdraft costs. This disparity can cause significant harm and undermine consumer confidence in the financial services industry, the regulator argues.

Public perception

In the FCA’s 2020 Financial Lives survey, one in four respondents said they lacked confidence in the financial services industry, while only 35% agreed firms were honest and transparent in dealing with customers.

To address this negative public perception, the regulator will add another principle to its existing rules to ensure firms provide better consumer protection, thereby enabling good consumer outcomes.

Firms should definitely treat this seriously across all levels

Speaking to Money Marketing, the FCA says: “Over the years we have used our range of regulatory tools to set out and drive home our expectations of firms and improve consumer outcomes, and the new Consumer Duty builds on and embeds these expectations in a clear and consistent way across retail sectors.

“We will continue to act where we see harm, but we want to see firms avoiding this harm by getting it right in the first place.

“This is particularly important in an environment where more financial decisions are now in consumers’ hands and consumers are transacting in an increasingly complex and fast-moving digital landscape.

“We want to see a higher level of consumer protection in retail financial markets, where firms are competing vigorously in the interests of consumers.”

Consumer outcomes

The new regulation will require firms to focus on the actual outcomes experienced by consumers, and to act in a way that reflects and meets consumers’ needs and financial objectives.

This would give firms more certainty about the standards expected of them by both the regulator and consumers. And this in turn, according to the FCA, would help make competition work more effectively and markets deliver better consumer outcomes.

The Consumer Duty could root out any lingering bad practices

The regulator stresses products, services, communication and engagement from firms should, “instil trust, enabling consumers to make effective and confident choices to advance their financial wellbeing”.

It adds: “This is not just about ‘enforcing existing rules better’. To create the change we want to see, we need to be clearer about the behaviour we expect from all firms, and hold firms to account against this higher, clearer set of expectations.

“We also want to be clear through the new Consumer Duty that we expect a higher standard than the existing requirement of Principle 6 (‘A firm must pay due regard to the interests of its customers and treat them fairly’).

“We want firms to be clear that they need to play a greater and more positive role in delivering good outcomes for consumers — including those who are not direct customers of the firm.”

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Interventionist regulator

The FCA seems intent on becoming more assertive and wants to shake up the way it does things. Under its new chief executive, Nikhil Rathi, it looks to be making greater strides in tackling consumer harm and protecting vulnerable customers — or, at least, it is talking a good game.

Rathi, who assumed the top job in October last year, is said to be very much on the consumer’s side. He has introduced a raft of measures to clean up the financial services industry and his reforming agenda seems to be gaining momentum.

At the launch of the regulator’s business plan for 2021–22, Rathi said: “The FCA must continue to become a forward-looking, proactive regulator — one that is tough, assertive, confident, decisive, agile.

“Over the next 18 months you will continue to see an FCA that looks and feels even more different: one that operates differently, partners differently and communicates differently; one that delivers market integrity and delivers for the consumers that we serve; one that is not only purposeful but fit for purpose.”

The FCA proposes to introduce new rules rather than understand whether those already in place could be enforced better

Rathi has given a new lease of life to an institution that on many occasions has been accused of being ‘asleep at the wheel’. He has put down a marker for things to come; and in the process has achieved what his predecessors thought was mission impossible.

Thus far, he has the support of his staff and of those regulated by his organisation. A recent internal employee survey about the FCA’s leadership and culture brought “favourable scores”, with the majority of participants giving positive feedback.

Industry response

Firms and industry players have mostly welcomed the proposals for Consumer Duty rules and have responded to the first consultation (CP/13), which closed on 31 July.

The regulator says it received a “significant number of responses”, which it is analysing to inform the development of its proposals.

Consumer advocacy group Citizens Advice says the new rules will protect consumers against exploitation.

To create the change we want to see, we need to be clearer about the behaviour we expect from all firms

Chief executive Clare Moriarty says: “These proposals should help ensure people are protected from the get-go rather than regulation having to play catch-up with poorly designed products or firms that don’t act in the best interests of customers.

“They are good news for consumers and for firms that already act in their customers’ best interests.

“The real test will come in how the FCA uses the Consumer Duty to proactively prevent harm and tackle breaches. This will be particularly key in markets where new products can make it far too easy for consumers to get into difficulty — and much harder for them to escape it.”

Royal London director of policy and external affairs Jamie Jenkins agrees.

“While there are certainly points of detail to debate, it’s difficult to argue against a principle that is intuitively right; and one that could help root out any lingering bad practices and improve trust in the sector,” he says.

PensionBee chief executive Romi Savova adds: “[This] can help clean up financial services by giving the FCA the powers it needs to make sure firms are doing right by consumers. Of course, with great power comes great responsibility to ensure the right decisions are being made.”

The FCA expects to publish a second consultation by 31 December 2021, which will set out the proposed text for any new rules or guidance. This will provide further details of how the regulator intends to supervise and embed the Consumer Duty. It says any new rules will be made by 31 July 2022.

Frank Brown, head of risk and transformation at financial services regulatory consultants Bovill, urges firms to sit up and take note. He says: “Firms should definitely treat this seriously across all levels, particularly when the regulator starts talking about things like business strategy or approach to markets.

“You can see [the FCA] is very interested in firms thinking about putting a consumer duty lens on their strategy, their business model and their approach to market. So it’s not just [about] individual interaction with customers.”

This is where the new duty is a radical departure from previous rules in that it permeates all levels of a firm, including the accountable person if the firm fails to fulfil it. Potentially, consumers could sue a firm if it had failed to put itself in their shoes.

Regulation ‘with hindsight’

But some warn there could be problems down the line. Personal Investment Management and Financial Advice Association (Pimfa) chief executive Liz Field tells Money Marketing: “We are concerned that, as it stands, the new Consumer Duty could lead to a situation in which the Financial Ombudsman Service regulates in hindsight, with firms falling foul of elements of a duty that wasn’t evident or apparent at the time.

“It is likely this will lead to firms trying to second guess how the regulations could be interpreted in the future unless they are given clear and specific guidance, while also driving up costs for some firms or leading to future regulatory failure for others.”

We believe the proposals do amount to a duty of care

She adds that Pimfa’s long-standing criticism of the regulator relates to its knee-jerk reaction to consumer harm.

“When harm does occur in the market, [the FCA] proposes to introduce a collection of new rules rather than understand whether those already in place could be enforced better and be accompanied by fit-for-purpose supervision,” says Field.

Consumer protection is one of three operational objectives of the regulator, as set out in the Financial Services Act 2012. The act mandates the FCA “to secure an appropriate degree of protection for consumers” and ensure “those providing regulated financial services should be expected to provide consumers with a level of care that is appropriate having regard to the degree of risk involved in relation to the investment or other transaction”.

In layman’s terms, the regulator has a statutory duty to protect consumers against fraud and unfair practices while at the same time fostering an environment in which risk taking occurs.

Enduring issue

Striking a balance between consumer protection and risk taking is an enduring issue for the FCA. Despite its best intentions, it has been found wanting in adequately protecting consumers from financial misconduct. The rollcall of high-profile cases makes for stark reading: Connaught, London Capital & Finance, Libor rigging, payment protection insurance misselling, interest rate hedging products, to name a few. Many thousands of people have suffered life-changing monetary losses due to such malpractice.

But do the proposed measures go far enough? Pro-consumer group the Transparency Task Force (TTF) claims the new Consumer Duty fails to adequately protect consumers. The group’s founder, Andy Agathangelou, argues the proposals are “flawed” because they fail to include “duty of care”.

He says: “One of the biggest benefits of a proper, legally enforceable duty of care, where complainants have a right to private action, is it will focus attention on the small minority who get involved with malpractice, malfeasance, misconduct and misselling. Those sorts of individual and the organisations they represent would find it far riskier to play fast and loose with their clients’ interests if a proper Consumer Duty was in place.”

Mark Bishop, who led the TTF’s consultation response, adds: “The FCA has not consulted on a duty of care but rather on an enhancement of its Treating Customers Fairly principle. We think there’s been a dilution of what parliament wanted.”

However, the FCA maintains its proposals will raise the standard of care for consumers. It says what constitutes duty of care has many meanings and depends on context.

FCA director of consumer and retail policy Nisha Arora rebuts these lines of criticism thrown at the regulator. She says: “We believe the proposals do amount to a duty of care. We haven’t labelled them as such because… we didn’t want to attach a pre-existing label, but they do amount to duty of care in substance.”

In a nutshell, the FCA wants to create an environment in financial services where harm does not occur and where consumers are better equipped to achieve good outcomes. To attain this, firms must ensure their products and services are fit for purpose and offer fair value, while their communication and customer service must enable consumers to make well informed decisions.

‘Before you buy shoes, measure your feet,’ says an old African proverb. This nugget of wisdom could be said to sum up the FCA’s new Consumer Duty. Are advice firms ready to measure their customers’ feet and put themselves firmly in their shoes? And will they do their duty?

This article featured in the October edition of MM. To read the full digital magazine click on the image below.

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