In the last year, the FCA announced their intention to set clearer standards of consumer protection, to put consumers’ needs first. This came in the form of the much-discussed FCA Consumer Duty Principle, with the power to impact the financial services industry at large.
This was triggered by concerns that certain firms were employing harmful practices and that an update to the consumer duty rules was needed. In the FCA’s own words,
“Our new Duty sets higher and clearer standards of consumer protection across financial services, and requires firms to put their customers’ needs first .”
So, what were firms doing so badly? According to the FCA (otherwise fondly known as the financial conduct authority), there were several sins being committed including “firms presenting information in a way that exploited consumers’ behavioural biases, selling products or services that were not fit for purpose, or providing poor customer support”.
And so, over the past 12 months or so, the financial conduct authority set about conducting consultations and amending the rules to help firms avoid the naughty list. And voila, the all-new Consumer Duty Principle was born.
What is the FCA Consumer Duty Principle?
Firms will now need to officially consider their end users at every stage of the development and distribution journey – from advisers, to distributors, to investment managers and banks. You name it – every firm that has a part to play in the process of creating and providing financial services is on the hook. The message? It’s all about working together, both internally to ensure the firm’s culture is aligned, but also externally with outsourced partners, third party suppliers and more, to harvest “good vibes only” for consumers.
The first question firms will be asking themselves is, “am I caught?” And, the answer is clear. If you are trying to find ways to escape the clutches of the FCA Consumer Duty Principle, you’re in trouble.
The FCA Consumer Duty Principle Explained
Taking it back to basics, the new rules introduce the following:
- a new “Consumer Principle” that requires firms to act in good faith – i.e. in a way that considers any foreseeable harm and ensures the delivery of good outcomes for retail customers.
- “Cross-cutting rules” which aim to provide greater clarity on the FCA’s expectations under the new Principle and help firms interpret the four outcomes (more on this below).
- “four outcomes” the FCA want to see demonstrated under the Consumer Duty. These represent key elements of the firm-consumer relationship which are instrumental in helping to drive good outcomes for customers.
What are the 4 consumer duty outcomes?
Those “outcomes” relate to:
- products and services
- price and value
- consumer understanding
- consumer support
Overall, the aim is to cover the entire industry in one sweeping set of regulations that encourage an internal business culture that puts the consumer first.
The deadline for the FCA Consumer Duty Principle implementation plan
The ‘deadlines’ for compliance provided by the FCA are looming – but don’t worry. Just demonstrating that your business is aware of the new duty and taking steps to make necessary changes (if needed) shows a willingness to comply.
If it’s dates you want, then the following timeline might help you visualise where you should be when it comes to the implementation plan:
The beady-eyed amongst you will have noticed that we have already passed stages 1 and 2. Firms should be between stages 2 and 3 – essentially, you need to have internally acknowledged and agreed implementation plans for the consumer duty. This means reaching out to a lawyer, checking in with the compliance team (or hiring a consultant to that effect) and making sure your contracts, processes and policies are up to scratch.
How do the FCA Consumer Duty rules apply to my business?
Given that the consumer duty rules are principles-based, it is assumed that there will be some flexibility to the industry. The consequence of this is that firms won’t be able to confirm anything more prescribed with the FCA for their individual business – the rules apply to all organisations and key players equally. As a knock-on effect, this means that the rules shouldn’t need to be constantly changed and updated over time, as the way they impact and interact with firms is not too specific and can’t exclude innovating products.
These future-proofed principles are not however, simply a “tick box” exercise. There will be quite a lot for firms to consider and decide for themselves (some of which lawyers can assist with).
Essentially, it’s now up to firms to deliver on the FCA’s expectations – there won’t be any holding of hands by the FCA beyond the rules and the guidance already provided.
Where should you start with the FCA Consumer Duty Principle?
Our recommendation is to look at the entire ecosystem for your product or service, because you’re going to need to work with everyone in your distribution chain to reach consensus on how you’ll ensure that the products and services you’re creating and distributing are fit for purpose.
Find your relevant industry body. They’re likely already thinking about these rules for your industry sector and will be a good place for mediated discussions to take place between all the stakeholders.
What about your legal contracts?
As part of the implementation process, you may want to consider reviewing your legal documents – this includes both your B2B and B2C contracts , including supplier terms and customer/end user terms and conditions.
You should also check any internal policies and procedures you have in place that could impact on consumers, for example anti bribery and anti-money laundering policies. You might even consider hiring an independent non-executive director for the role and title of Consumer Duty Champion . Although this is not a mandated requirement of the new rules, it may assist in ensuring compliance, and the CDC can act as a go-to for internal questions or complaints regarding consumer duty matters.
Alongside providing your staff with training on the new updates, and how they can help to ensure compliance, we’ve pulled together a few key things to watch out for in your legals:
Think about the language of the document
Is it always clear and easy to understand? Do you use unnecessary jargon (or a cheeky Latin phrase or two)? Think about the literacy of your customers – are you bombarding them with terrible terms and conditions? End users should be able to understand what they are signing up to, what their rights are, and what is expected of them in return.
Consider your target market and customers
Are you working with vulnerable customers? These aren’t just the elderly. They may also be people who are temporarily vulnerable – i.e. those going through a divorce, or who have recently suffered a bereavement. They may have a gambling addiction or have recently lost their life savings to a financial scam.
Consider the literacy of these parties and whether your contracts align with the “consumer understanding” principle.
What about structure?
Are you overloading your customers with chunky paragraphs where they can’t see the wood for the trees? Take a step back, cut down the unnecessary fluff and lay out each point clearly.
Highlight the important stuff
If you’re not out there to give tax advice, say so, and put it in bold and underlined . Are they automatically agreeing to variations of the agreement? Signpost it!
Third parties and other documents referenced
Where you mention other contracts, documents, policies or third parties, pop in a hyperlink to the relevant webpage or contact – make it as easy as possible for the customer to find out more. Don’t conceal information – take away the obstacles and comply with the “consumer support” principle.
How does this fit in with your broader compliance implementation plan?
There are also certain back-end (and non legal) things that your business should take the time to review and improve as necessary. This might include things like business continuity commitments, service level agreements and ensuring clear communications channels are in place for consumers to get support from. Take the time to consider your customers at all stages in the product development and distribution chain, and you’ll be golden.
So, to sum up:
- Help consumers make good decisions for themselves by ensuring that they understand how your product works and what they are signing up to – this is especially important for vulnerable customer groups, such as the elderly.
- Support your customers in that decision-making process. Consider the price and value of your product and whether it is proportionate to the complexity of it and by extension, the customer’s understanding of that product.
- Ensure that consumers can communicate with you when they need to and that you are adequately communicating important information with them.
- Consistency is key: is what you offer consistent throughout the product process?
- Act in good faith. If you can foresee (i.e. reasonably predict) certain harms or detriments that may befall your customers, you should address these before launching and promoting a new product or encouraging customers to engage with it. Put simply, consumer protection is key.
Support with the FCA Consumer Duty Compliance
We’ve advised hundreds of financial services firms on FCA consumer duty compliance. And, in doing so, we've ensured a good outcome for regulated firms and customers alike. Don’t wait to see what other UK firms do in response to these new rules – you’ll only get left behind and earn a slap on the wrist from the financial conduct authority. In need of support? Get in touch with our regulatory experts.
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