The Consumer Duty

Overview

The Consumer Duty (‘the Duty’) sets the standard of care that firms should give to customers in the retail financial market.

The FCAs expectations 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.
• Not 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 firm.
• 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).

The key components of the Duty

1. The Consumer Principle – reflects the overall standard of behaviour the FCA wants from firms.
2. Cross-cutting rules – which develop the FCAs expectations through three core requirements that explain how firms should act to deliver good outcomes. The Cross-cutting rules seek to inform and help firms interpret the Four Outcomes.
3. The Four Outcomes – rules and guidance setting more detailed expectations for firm conduct in four areas that represent key elements of firm-client relationship:
   1. The governance of products and services
   2. Price and value
   3. Consumer understanding
   4. Consumer support

The Duty stipulates that firms are mandated to consider the requirements, attributes, and goals of their customers, including those who may be deemed vulnerable, as well as their conduct, throughout the entire customer experience.

The Consumer Principle

The new Consumer Principle (Principle 12) requires firms to act to deliver good outcomes for their clients. It sets a higher standard of conduct than is currently required under Principles 6 and 7.

Principle 12 of the FCA emphasises the importance of firms adopting a positive and proactive approach towards conducting their business. It encourages firms to prioritise customer outcomes and consider their customers’ interests while carrying out their activities. The principle urges firms to evaluate their treatment of customers by asking questions like, “Would I be satisfied if I were in my customer’s shoes?” or “Are my customers receiving the expected outcomes from my products and services?”

Firms should embed a focus of acting to deliver good outcomes in each of their business functions and put customer interests at the heart of their business model and culture. This ranges from high-level strategic planning to individual customer interactions, as well as product and service development, sales and servicing.

Cross-cutting Rules

The Duty includes three cross-cutting rules which set out how firms should act in order to deliver good outcomes for their clients:

1. Act in good faith towards clients.
2. Avoid causing foreseeable harm to clients.
3. Enable and support clients to pursue their financial objectives.

The cross-cutting rules define the expected standards of behaviour under Principle 12 and outline how firms should behave to ensure favourable outcomes for their customers. These rules apply to both target markets and individual customers, depending on the situation, and are applicable proactively and reactively.

The cross-cutting rules also inform and are supported by the Four Outcomes which set out more detailed rules in key areas of the customer relationship.

The Four Outcomes

Expanding on the initial two components of the Duty, the Four Outcomes provide additional guidelines concerning crucial aspects of the customer interaction including:

Products and services

The FCA requires all products and services aimed at retail customers to be suitable for their intended purpose. This means that they should:

• Be tailored to meet the specific needs of the target market, and the distribution strategy should also be appropriate.
• The rules also require firms to conduct regular reviews to ensure that the product or service continues to meet the needs and objectives of the target market.

Price and Value

The FCA requires firms to provide fair value to all customers. Fair value is not only about price but also about the overall benefit that customers receive from the product or service. Firms must assess their offerings to ensure that there is a reasonable relationship between the price paid and the benefits provided. To assess value, firms must consider the nature of the product or service, any limitations, and the expected total price, including all applicable fees and charges over the lifetime of the relationship between customers and firms. Additionally, firms should be mindful of the impact of varying client characteristics on value, particularly those who are more vulnerable.

Consumer understanding

The FCA requires that a firms’ communications should support their clients in making informed decisions about products and services. They want clients to have access to this information at the right time and it should be clear and easy to understand. Additionally, firms must tailor their communications based on customers’ characteristics, including any vulnerabilities and product complexity. Finally, firms must continually test, monitor, and adapt their communications to ensure they remain effective.

Consumer support

The FCA wants firms to ensure that they provide adequate support to their customers throughout their relationship. This includes designing and delivering support that meets customers’ needs, ensuring that they can use the products and services as expected, and monitoring the quality of support offered.

Firms should prioritise the interests of their customers and embed them throughout the organisation. Monitoring outcomes is essential, and firms must regularly review the outcomes their customers are experiencing to ensure that they are consistent with the Duty. Any risks or issues identified must be addressed promptly, and processes should be in place to prevent their recurrence in the future.

Implementation timeline

All firms will need to apply the Duty to new and existing products and services offered (or renewed) from 31^st July 2023 and they have until 31^st July 2024 to apply it to products and services held in closed books.