What You Need to Know About Consumer Duty

The Financial Conduct Authority (FCA) has recently published its guidelines and rules for its Consumer Duty. The original journey the FCA set out to accomplish, was to set parameters and guidelines for how Financial Services companies were to conduct business with the average consumer. The rules have been refined to do that very thing. Some have criticized the FCA for not being stricter in the requirements, while others commend the FCA for finally putting some strong requirements for the UK markets.

We anticipated that the FCA would require more stringent rules for companies. The Consumer Duty is comprised of four key components:

1. The Governance of products and services
2. Price and Value
3. Consumer Understanding
4. Consumer Support

These four components along with the guidelines of the cross-cutting rules are what set the essence of the Consumer Duty. The FCA refers to this as Principle 12. The intention of this principle is simple. It is set out to supersede both Principle’s 6 and 7 as the means for which firms should act when conducting business with retail clients. The notion is consistent with the fact that companies must act in good faith towards retail customers, avoid causing foreseeable harm, and enable and support retail customers to pursue their financial objectives.

The pursuit of having consumer reach "good outcomes" is the one variable that seems to not be fully define. The FCA has set a few milestone dates. The first coming in October of 2022. This date is traditionally when companies set out plans for the upcoming year. The proposed strategy, as it pertains to Consumer Duty, is to give senior management enough time to prepare for the July 2023 application of Consumer Duty.

Benefits

The Consumer Duty will now provide some reassurance to retail customers that companies will in fact have to put them at heart of what is important. They will need to be provided enough information to make a well-informed decision. This will occur by having proper disclosures, sales material that is simple to understand, guidelines for that products and services should adhere to, and reliable customer service models. The FCA has made it clear in that consumers will also hold the responsibility of caring for their own actions. The idea is for firms to provide consumers with enough information and guidance for the retail client to make their own well-informed decisions. Which seems like standard practice, but the subtly is that companies will need to document and record that they in fact tried their very best to give that consumer ample information.

Firms also stem to benefit from the consumer duty. The thought of building upon their reputations as a trusted company can continue. Companies that embrace Consumer Duty and become thought leaders on all aspect of putting the consumers interest at the core of their businesses, will benefit from larger shares of wallet and longer sustainable profits. These companies can marvel at the idea that they will be able to help many people, do it correctly, and continue to expand their footprints. Consumers will be quick to consider companies that are reputable and provide a service that has proven results.

Disadvantages

One aspect where the Consumer Duty falls short, is the fact that the FCA does not expect firms to act as Fiduciaries. Now this may seem a bit odd but given the FCA is giving firms a bit of room to create methods to establish "good outcomes" without them properly defining them for both companies and consumers. This gives firms the ability to see how best they can help their client base. The FCA also made it clear that they do not wish to impact a company’s ability to make a profit. Although one can argue that a company can still profit while following rules and regulations.

A second disadvantage is that firms will need to expand their budgets to prepare for the Consumer Duty. Although the cost may be more at the beginning, they can prove to be quite high for some. Larger companies are expected to be held to higher standards, given their volume of consumers and array of products and services. Where smaller companies, will still need to comply with the regulations, their means will not be as robust as bigger firms. Many companies are now going to work on budgets for not only the roll out of Consumer Duty, but also the maintenance of it moving forward.

Opportunities

There are a few opportunities both for the retail client and firms alike. Consumers will benefit from what should be a level playing field. The hope is that because pricing and products will likely be unilaterally the same, consumers can feel comfortable knowing that one company has better product offering that is better than another. Firms on the other hand, will have the opportunity to distinguish themselves by the services they can offer and how they measure these services in comparison to its peers. The ability to stand out will help firms cement their brands and leadership while helping their clients.

Firms will likely need to leverage technology more than ever. This is an opportunity to have analytics to help demonstrate results, but also record these results for regulators. Technology has always been at the for front of financial services and companies that continue to innovate will continue to benefit. Technology offers so many opportunities for firms now. From statistics, behavioral analytics, and AI (artificial intelligence). Companies that can leverage these will seem to benefit dramatically. Since record keeping, communications, and analytics seem to be a focal part of what the FCA will look for during its audits. Technology becomes even more important to be compliant.

Final Thoughts

The Consumer Duty has many positives aspect and a few that fall short. The UK markets will ultimately be better for it. The thought is that this is just the beginning. Like many other regulations, the Consumer Duty will continue to evolve and take shape all for the betterment of consumers. The FCA, like many other regulatory bodies across the world, has taken a stance to help it retail customer base. They will get a better sense of how things are progressing over the next 18 months. During that time, amendments and added guidance will be provided. The part that will be interesting to see, is the penalties levied on to those that fail to comply with the regulation. In the past, the FCA has been somewhat lighthearted on its sanctions towards companies, how they handle and penalize offenders of the Consumer Duty will prove to be vital.

The "good outcomes" result will be one that is subjective. Firms will have to prove that their interpretation of good is in fact good. How will they do this? That becomes the question. In my experience, I have a few thoughts on how these items can be measured and provide evidence, that would seem imperative to proving that firms have done everything possible to provide good outcomes. That involves the use of technology. Larger companies will surely have the ability to leverage this, but will smaller firms fall short of providing this level of results? What will be the standard? These are just a few of many questions that hopefully we get answered in the coming future. Time will tell how the regulation will shape financial services in the UK, but also the world markets. As more countries continue to watch world markets regulate industries to improve their consumers well beings, others tend to follow. One last question. Who will be next to increase their regulations for the betterment of their retail consumers?