The Consumer Duty is a useful lens through which firms should view their ESG plans. This was the message from the FCA delivered in a recent speech by David Geale, Director of Retail Banking. The Consumer Duty will apply to firms which provide financial products – including products with ESG-related features or characteristics - to retail customers from 31 July 2023. This means that firms must act to deliver good outcomes for retail customers who have or are looking to take out ESG financial products, such as sustainability-linked mortgages, or ethical current or savings accounts.
The Consumer Duty is made up of three components:
- the new Consumer Duty Principle, which requires firms to act to deliver good outcomes for retail customers at every step of the customer journey.
- the cross-cutting rules, which set the three overarching firm behaviours which the FCA expects of firms in order to deliver good outcomes. These require firms to act in good faith towards retail customers, avoid causing foreseeable harm to retail customers and enable and support retail customers to pursue their financial objectives.
- the outcomes rules, which set the more detailed expectations for firm conduct in four areas that reflect key elements of the firm-customer relationship. These are products and services, price and value, consumer understanding and consumer support.
Below we outline what some of the cross-cutting and outcomes rules mean in the context of ESG financial products within the scope of the Consumer Duty.
Act in good faith
A firm must act honestly, fairly and openly with retail customers. A firm would not be acting in good faith where it fails to take account of its retail customers' interests in the way it presents information or seeks to inappropriately manipulate or exploit retail customers.
There are often information asymmetries between retail customers specifically looking to take out a sustainable or ethical product and the firm providing the product. Firms marketing products as 'ethical', 'socially responsible' or 'green' need to be able to substantiate those promotional claims. If they cannot then this likely would be a breach of the Consumer Duy cross-cutting rule on acting in good faith.
Products and services outcome
Firms need to specify at a sufficiently granular level the target market for the ESG financial product and ensure that the product meets the needs, characteristics and objectives of the target market.
Firms providing ESG products should carefully consider whether they have accurately defined their target market and need to ensure that the needs of that target market are met by the ESG product design. Where, for example, a firm provides mortgages that include an incentive for borrowers either to buy an energy efficient property or to improve the energy efficiency of an existing property - possibly a discount to the fixed interest rate or cashback on completion of an energy efficiency home improvement - they need to be able to filter out retail customers who already live in an energy efficient home. Those retail customers are unlikely to see benefit from the ESG features of the mortgage product, and if they don't they may also not be receiving fair value (see below).
Firms need to consider their distribution chains, particularly where these involve unregulated businesses – for example, suppliers of energy efficient products – to make sure that along the chain values are aligned with the aim of delivering good outcomes for retail customers. Fee structures, including commission, along the distribution chain should be reviewed to make sure they do not incentivise poor conduct or generate poor customer outcomes.
Price and value outcome
Price alone does not determine fair value. A value assessment must include a consideration of the product included the benefits it provides. ESG financial products will provide fair value where the price is reasonable relative to the benefits.
Where firms sell ESG financial products to retail customers who are unlikely to benefit from the incentives attached to those products those retail customers may not be receiving receive fair value and are more likely to suffer harm as a result.
Consumer understanding outcome
Firms must support retail customer understanding. Retail customers need to be able to make properly informed decisions based on clear and understandable communications which meet their needs.
Retail customers should, for example, understand how an ESG financial product works and if it works to raise funds for, say, home improvements, information provided by firms should provide the information that enables retail customers to understand the long-term costs of the product.
Consumer support outcome
Firms must support retail customers so they can use their ESG product as they reasonably anticipated. Firms' support processes must meet the needs of their retail customers, including groups of retail customers with differing needs.
Firms providing ESG financial products need to review their customer journeys to ensure they are delivering good support outcomes for all customer groups.
Many consumers with ESG-focused financial objectives need guidance navigating the ESG product landscape and need to be able to trust firms' information about these products, and know that they provide fair value. The new and higher standards of the Consumer Duty will drive good customer outcomes for retail customers in relation to in-scope financial products generally, including those with ESG-focused features.