If the new Consumer Duty were a stick of rock the consumer principle – which requires firms to act to deliver good outcomes for retail customers – would run through the centre. It sets the overall standard of behaviour the FCA expects of firms. Around the consumer principle (the new Principle 12) would be a layer first of cross-cutting rules and then of outcomes rules and guidance.
The three cross-cutting rules – which require firms to act in good faith towards, and to avoid causing reasonably foreseeable harm to retail customers, and to enable and support retail customers to pursue their financial objectives – work together as a package, articulating what firms should do to deliver good outcomes for retail customers under the consumer principle and informing the outcomes.
The outcomes - the products and services outcome, the price and value outcome and the consumer understanding and the consumer support outcomes - are a suite of rules and guidance focused on key elements of the relationship firms have with their customers which support the cross-cutting rules. They provide some granularity around the firm-customer relationship which support the delivery of the cross-cutting rules and good outcomes for retail customers.
For example, if a firm meets its outcomes obligations of ensuring products are designed to meet the needs of customers within a firm's target market (and checks that they continue to be aligned with those customers' needs, characteristics and objectives) it will be acting to avoid causing reasonably foreseeable harm (in accordance with its cross-cutting obligations) and thereby be better placed to deliver good outcomes for its customers (meeting the consumer principle).
The reasonableness concept
The Consumer Duty is underpinned by the concept of reasonableness. This is an objective test which requires assessment of a firm's actions against the standard that could reasonably be expected of a prudent firm carrying on the same activity in relation to the same product, taking appropriate account of the needs and characteristics of customers in the relevant target market.
Factors such as the risk of harm to customers, the complexity of the product, the customers' resources, degree of financial capability or sophistication and vulnerability characteristics as well as the particular role the firm played in relation to the product will all be taken into account.
Reasonableness tests carry an inherent degree of interpretative uncertainty. Firms which are able to evidence that their core focus throughout a product lifecycle and at all stages of a customer journey is delivering good outcomes for retail customers – for example through MI and data and clear records of decisions made - will be best placed to show compliance with their Consumer Duty obligations.
Responsibility for consumer decisions
While the general principle that consumers take responsibility for their decisions remains, firms' duties in ensuring customers are in a position to make informed decisions are more onerous under the Consumer Duty. Principle 12 imposes a higher and more exacting standard of conduct, and is broader in application, than existing Principles 6 and 7. There can be a causal link between a firm's failure to meet the requirements of the Consumer Duty and the decisions consumers make. Consumers can only be expected to take responsibility where products meet their needs and offer fair value, where they have been helped to understand those products, and where firms have acted in a way that meets consumers' needs and facilitates their pursuit of their financial objectives.
What does the Consumer Duty mean for firms?
Firms will be expected to act proactively as well as reactively to deliver good outcomes for customers.
Firms need to understand both customer behaviour and how products and services function to demonstrate that the customers are achieving good outcomes, and will be expected to act to address matters where this is not the case.
Firms must challenge themselves and regularly monitor and check that they are delivering good outcomes for customers.
What firms should be doing now
Firms should have in place structured implementation plans, with board level engagement, to ensure compliance. Firms must dedicate adequate resource to the consideration of what the Consumer Duty means for a firm's business and identification of where the firm meets and where it falls short of the Consumer Duty requirements.
Key priorities will be a review and assessment of product design, documentation and communications with customers, an evaluation of products to ensure they represent fair value, the review of processes for regular monitoring of customer outcomes (information capture and mitigatory and remedial action), and firm-wide staff training. Stakeholders across the business – including product development, marketing and servicing teams - will need to be actively engaged in the various workstreams.
Even with the extended implementation timeline - the Consumer Duty comes into force on 31 July 2023, with transitional provisions for closed book products – firms have their work cut out for them.
We will be talking more about the Consumer Duty at our next Brodies Banking & Finance Academy on 14 September 2022. If you would like to be part of our discussion please sign up here.
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