The FCA's purpose with the duty is to set higher expectations for the standard of care that firms provide to consumers. Firms must put consumers at the heart of their business model — and critically be able to evidence this. Here we explain, at a high level, the requirements and implications for firms of the Consumer Duty measures. Other articles take a deeper look at some of the more challenging aspects of implementing the Consumer Duty.
The FCA's intention for the Consumer Principle is to drive a change in firms' behaviour with a focus on consumer outcomes.
A firm must act to deliver good outcomes for retail clients
The Consumer Principle will become Principle 12 within the FCA's Principles for Businesses (PRIN) sourcebook. Its inclusion within PRIN emphasises the importance the FCA places on the Consumer Duty. The FCA emphasise Principle 12 imposes a higher standard of conduct than Principles 6 and 7. As a result, Principles 6 and 7 will be disapplied for retail businesses where Principle 12 applies. Principles 6 and 7 will therefore only continue to apply to certain SMEs and wholesale business. However, firms will still be expected to consider existing guidance on Principles 6 and 7 when considering their obligations under the Consumer Duty.
The regulatory intention is for firms to not focus simply on processes, but on the impact of their actions on consumers. This focus needs to extend beyond individual products or service lines, encompassing the business model proposition, to consider whether there are any inherent design flaws within it that could lead to poor customer outcomes.
The FCA also accepts that it is not possible to secure good outcomes or act in a client's best interests at all costs. There is an acceptance of reasonableness in the practical application of the underlying rules, together with an inherent understanding that most firms have director and shareholder obligations.
Whilst the Consumer Principle concerns 'retail' customers there could still be scoping challenges for some firms. Distinguishing between who qualifies as a retail customer in certain circumstances for certain products may not be straightforward. More significantly firms will have to determine whether to apply the Principle to all customers creating a consistent standard across both cohorts or solely on retail customers, running parallel processes and controls. Either choice brings costs and benefits.
The three cross-cutting rules set out how firms should act to deliver good outcomes for retail customers. These rules and the associated non-handbook guidance articulate the standards of conduct the FCA expect under the Consumer Principle, setting out how firms should act to deliver good outcomes for consumers. The rules apply throughout the customer journey and lifecycle of the product.
The FCA want the cross-cutting rules to work together as a package, and poor conduct will often breach more than one of the cross-cutting rules. For example, a failure to explain the risks of a product is unlikely to be acting to avoid foreseeable harm or enabling and supporting customers to pursue their financial objectives. Equally compliance with the four outcomes alone will not ensure the standards required under the Consumer Duty are met. The cross-cutting rules help define the overarching standards of conduct firms should follow in areas not explicitly dealt with through the four outcomes.
Acting in good faith
Firms must act in good faith at all stages of the customer journey and during the whole lifecycle of a product from design and distribution. The requirement to act in good faith does not create a fiduciary relationship where it does not already otherwise exist between the firm and the customer.
At the product or service design stage, examples include:
- Designing features to exploit the consumer behavioural biases in order to create a demand for a product.
- Adding variations to products to make them more difficult to compare with other products from competitors.
- Designing products and services that do not offer fair value, or in which pricing and charges are not presented in a way that makes it easy for the consumer to understand the total cost.
This demonstrates the interconnectedness of the Consumer Duty elements and how firms will need to consider their activities through the lens of each component of the Consumer Duty rather than in isolation.
Firms will need to consider their activities through the lens of each component of the Consumer Duty rather than in isolation.
Avoid foreseeable harm
The FCA want firms to take proactive and reactive steps to avoid causing harm to customers through their conduct, products or services where it is in their control to do so. The FCA expect all firms to collect enough information to be able to act to avoid foreseeable harm.
The regular reviews the FCA require under the Consumer Duty are expected to provide firms with the opportunity to identify any new or emerging harms and respond accordingly to appropriately address them.
FCA guidance sets out areas which firms should consider in order to act to avoid foreseeable harm under each of the outcomes. In relation to consumer support outcome, firms should:
- Consider information available on customer behaviour and feedback to identify whether customers, or groups of customers, are encountering unreasonable barriers or unreasonable additional costs as part of firms' customer service provision.
- Put things right when mistakes occur.
- Be accessible when customers have questions.
This rule does not mean the need for all products should be entirely risk free, the FCA recognise that many involve risk and that if such a risk materialises a consumer may suffer an adverse outcome. For example defaulting on a mortgage could result in repossession. The rule does not mean firms are required to protect customers from risks that they reasonably believed the customer understood and accepted. However, it will be firms responsibility to clearly demonstrate how they reached this conclusion. FCA guidance explains this will depend on factors such as:
- The type of product.
- The adequacy of the product design.
- Associated customer services.
Enable and support retail customers to pursue their financial objectives
This rule is concerned with the financial objectives of the consumer in relation to the financial product or service and applies throughout the customer journey and lifecycle of the product. Consumers can only take responsibility where they are enabled and supported to make informed decisions in their interests through firms creating the right environment. With this rule, the FCA want firms to proactively and reactively focus on putting consumers in a better position to make decisions in line with their needs and financial objectives.
The actions a firm might need to achieve this will be determined by what is within a firm's control, based on their role and knowledge of consumers, for example:
- A firm providing advisory or discretionary services would understand more about the consumer's specific objectives and would need to act on that knowledge. For instance, an advice firm should know a consumer has the objective to retire by a particular age or to make sure a dependant is provided for.
FCA guidance provides examples of how firms can support consumers in pursuing their financial objectives across each of the four outcomes. For example, in the context of the consumer understanding outcome, firms can support consumers in pursuing their financial objectives by:
- Considering the characteristics of the consumers that their communications are aimed at and tailoring them accordingly so that they are likely to be understood
- Helping consumers navigate information, making it easy for consumers to identify the key information and their available options.
- Having systems and processes in place to monitor the impact of communications on consumer understanding actions such as cancelling a product or amending terms.
The four outcomes
The four outcomes represent the key elements of the firm-customer relationship. The behaviour and actions of firms in relation to each of these outcomes are instrumental in enabling consumers to meet their financial needs and improve their financial wellbeing.
The outcomes establish the suite of rules and guidance setting the FCA's expectations of firms under the Consumer Duty, and whilst standalone, are unsurprisingly interlinked. For example, poor product design or governance may impact fair value considerations. Across all outcomes there is an expectation that:
- Firms review their current approaches to bring them in line with the Consumer Duty requirements.
- Firms ensure they can evidence outcomes.
- Outcomes are reviewed and monitored on an ongoing basis.
- Any issues identified are remedied or mitigated.
0.1 Products and services
The FCA has, in recent years, identified a number of products and services that contain aspects that exploit behavioural biases or have features that make it difficult for consumers to assess whether they are right for their needs. The FCA, with this outcome, want firms to embed robust consideration of a products target market's needs, characteristics and objectives in order to deliver good outcomes.
To support this, the FCA is broadening out the scope and remit of rules relating to product governance to cover all aspects of the proposition in all sectors and for all products and services in the retail market. This will result in a more consistent application of expectations on product governance relating to a firm's objectivity and robustness.
The new requirements will be introduced within PRIN, differentiating between the roles of manufacturer and distributor. Where more than one firm is involved in the manufacture of a product or service, there is the expectation for firms to agree their roles and responsibilities under the rules to ensure requirements are met.
This approach is aligned with the existing Product Governance arrangements some sectors are already subject to under the PROD sourcebook. In simple terms, the proposals are akin to a PROD-lite. Whilst proportionate for those not currently subject to PROD, firms that have products or services in both PRIN and PROD regimes will need to decide whether to operate a single product governance framework and policy.
The FCA wants firms to think broader than just the specific product or service in isolation. Firms should consider the overall proposition in a more holistic fashion. For example, for advice firms and wealth managers, this means considering the total cost of ownership of platforms fees and fund charges (rather than just focusing narrowly on their own adviser charge). Equally, where the route from product manufacture to end customer involves a complex distribution chain in insurance, there will be an expectation that the impact on the end customer for each link in the chain is appropriately considered.
Case study: Products and Services
FCA expects that firms will develop products and services that are specifically designed to meet the needs of consumers and are sold to those whose needs they meet. This may lead to asset managers needing to simplify their range of funds as well as rationalising the number of legacy share classes to congregate around the more keenly priced share classes where they cannot demonstrate the additional value (or associated costs) of a higher charging share class.
The rules apply in relation to any new product or service, or when making significant adaptations to a product or service, before it is marketed or distributed to retail customers. Whilst the Consumer Duty is not expected to be retrospective, these rules will apply to existing products and services (whether they are open to new business or not) so there is certainly a degree of backward application.
As such, genuine outcomes testing becomes more important to evidence the appropriateness of the solution at time of purchase. However, it also becomes as relevant to assess the appropriateness of the outcomes experienced throughout the natural intended lifecycle of the product. This will require firms to put themselves in the shoes of the customer and where they identify issues, redesign processes to improve outcomes to customers. The full lifecycle of the product (through multiple customer lenses) may be required to consider a wide variety of circumstances where poor outcomes may be generated for a subset of the target market. Where identified, the expectation is that any such harm is mitigated and potentially remediated.
0.2 Price and value
Through various market studies and other initiatives, the FCA has intervened on the topic of price and value. Over the last few years, the FCA has proactively considered pricing and value in banking, insurance, and wealth and asset management, whether via market studies or other broader initiatives.
On some pension products and current account overdrafts, it has now set maximum charges, it has also restricted the fees Claims Management Companies (CMCs) can charge for some claims. On financial advice, it has banned contingent charging on pension transfer advice.
With the Consumer Duty, the FCA is seeking to set a clear and consistent approach to price and value across the financial services sector. As a result of the different initiatives, sectors are at different levels of maturity and have different mechanisms for assessing and evidencing value. Under the Consumer Duty, the FCA creates requirements for all firms to develop and embed a framework to objectively assess pricing factors to determine the value that products and services deliver. Critically, however, the FCA does not set detailed requirements for the fair value assessment. Instead, it proposes to set out the factors firms must consider, as a minimum, to assess value. This is similar to the approaches we have seen the FCA adopt elsewhere e.g. GI pricing practices.
Case study: Price and Value
The FCA's rules on General Insurance (GI) Pricing Practices introduced measures aimed at ensuring firms across the market offer fair value products - similar to those proposed in the Consumer Duty consultation. The measures are underpinned by detailed product governance requirements, which demonstrate the FCA's approach to how firms should consider value when launching or reviewing products. KPMG has been working with a wide range of GI and Protection providers to enhance and update their product and pricing governance frameworks throughout 2021. Key lessons included:
The need to form an overarching pricing and assessment of value framework to be applied as consistently as possible across all products and services, with a broad range of inputs from across product, brand & marketing, operations, digital and claims.
The need to underpin the approach with robust insight ensuring product value is regularly assessed from a customer perspective, supported by key performance metrics and minimum value thresholds.
Evidencing how the distribution arrangements support the intended value and maintaining strong oversight of distribution chains.
Documenting key decisions relating to pricing and product value, ensuring these clearly demonstrate consideration of customer outcomes and have been approved by an appropriate level of governance.
Achieving a genuine and objectively robust balance between the firm's commercial interests and those of the end retail customer.
Although labelled by the FCA as a separate outcome, fair value assessments will form an integral component of a firm's product and service governance arrangements. The assessments are likely to inform, and be informed by, other aspects of this framework. To effectively consider fair value, the assessment should also include consideration from two differing perspectives. A top-down strategic and business model view will be as important as a bottom-up product assessment focussing on specific features and benefits, how firms administer it and the associated fair value being delivered on specific products or services.
Customers will be the ultimate arbiter of value and although firms will develop frameworks to internally assess and benchmark price and value, it will also require direct interaction with end customers to understand their perceptions on the trade-offs between price and value. This should form part of a firm's enhanced product governance arrangements.
It may be assumed that this activity will have a wholesale downward pressure on costs; however, some tranches of customers will likely experience an increase in costs in the longer term. Where cross subsidisation is deemed unfair, this equalisation of costs versus benefits may justifiably see prices rise for some customers.
0.3 Consumer understanding
The FCA is seeking an outcome whereby firms put themselves in their customers' shoes so that their communications equip consumers with the right information at the right time and in an understandable way to enable effective decision making. This increasingly means how customers engage digitally. For example, under the Insurance Distribution Directive (IDD), this includes asking sufficient questions to establish customer requirements through the quote journey and ensuring any products offered are consistent with their individual needs. However, the adoption of digital cannot be to the detriment of more traditional communication channels.
Firms put themselves in their customers' shoes so that their communications equip consumers with the right information at the right time in an understandable way to enable effective decision making
The choice of wording for this outcome emphasises that the FCA wants firms to focus not just on giving customers information about products and services but that they are understandable to the average consumer. Demonstrating that firms need to consider more deeply what 'clear, fair and misleading' really means from a customer perspective.
The draft rules state that a firm must ensure that:
- it supports retail customer understanding so that its communications meet the information needs of retail customers;
- they are likely to be understood by the average retail customer intended to receive the communication; and
- equip retail customers to make decisions that are effective, timely and properly informed.
To meet the FCA's expectations in relation to vulnerable customers, firms will need to understand how they can still generate comparable outcomes, regardless of how customers choose to interact. This requires firms to understand who they are communicating to, but also the 'what' and the 'how' they are communicating. This could lead to a proliferation of communication content, approaches and/or reconfiguration and re-drafting depending on more specific client circumstances or specific vulnerabilities.
The proposals build on, and go further than, Principle 7 by requiring firms to focus much more on consumer outcomes and understanding throughout the customer journey. Firms also need to proactively consider the degree to which their communications intentionally or otherwise, take advantage of consumers behavioural biases and may potentially result in poor customer outcomes. To achieve the stated outcome, firms will need to conduct more testing with retail customers to objectively assess the degree to which their communications are designed to deliver the desired effect and empower customer to make informed decisions. This outcome is also likely to impact the more detailed product literature, disclosure and associated terms and conditions. This could lead to a challenging trade-off between useful features and benefits of the underlying products or services which cannot be easily articulated such that customers can readily understand them.
Notwithstanding existing regulatory communication obligations, suggests areas which enhance the effectiveness of a communications for firms to consider during production or review:
- Layered: key information (including any action required/ consequences of inaction) provided upfront with cross-references or links to further detail.
- Engaging: Using devices to make key information clear and engaging e.g. headings, layout, bullet points, tables, graphs, diagrams.
- Relevant: include the appropriate level of detail for each communication taking into account what consumers need to know, the kind of decision to be made and avoiding unnecessary disclaimers.
- Simple: Present information in a logical manner avoiding jargon or technical terms where possible. If there is no alternative, these terms should be explained in plain language.
- Well timed: Firms should communicate with consumers in a timely manner and at appropriate touch points throughout the product lifecycle.
Case Study: Consumer Understanding
It is commonplace for customers to come off a fixed rate mortgage after the expiry of the initial term and be moved to a mortgage provider's standard variable rate (SVR). Firms may now be expected to be more proactive in contacting such customers on a regular basis to remind them of the options available to them and provide guidance without crossing the advice boundary.
0.4 Consumer Support
The FCA is seeking to achieve an outcome where the support provided by firms is "designed and delivered to an appropriate standard such that consumers do not meet unreasonable barriers when they want to pursue their financial objectives”. As part of those “unreasonable barriers” the FCA include unreasonable additional costs.
This outcome sets overarching requirements in relation to the support firms provide their customers. However, the FCA expect these to be read alongside other elements of the FCA handbook that cover specific aspects of consumer support, such as complaint handling (DISP).
The FCA wants to ensure the effort and attention that firms put into pre-sales activity is replicated in the firm's after-sales care. The FCA has identified 'sludge practices' in customer service processes where they are deliberately designed to hinder consumers from taking action that would benefit them (e.g. switching to a more appropriate product). However, even where cumbersome processes are unintentional, they can have the same impact and lead to poor outcomes. For example, customer experience situations where the process to apply online is frictionless, but conversely, the process to leave, cancel or transfer is comparatively cumbersome. With this outcome the FCA expects that — “in general, it should be at least as easy to exit a product as it is to enter”.
As intended, this approach extends the reach of product governance to more ancillary and supporting activities such as client servicing and claims. The broader remit and scope move away from firms considering product governance too narrowly. It seeks to move firms towards a more holistic assessment of the appropriateness of the overarching proposition and holistic outcomes from a customer perspective over the lifetime of the product. This is more akin to proposition governance.
Firms would need to reassess all their product servicing arrangements to see the degree to which, intentionally or otherwise, they create a barrier to a customer being able to freely interact with the product or service — appropriately balancing the impact on the firms. This would range from more general customer service, through to claims handling, complaints and switching or cancelling the product or service. Similar to product and service, firms will need to conduct outcomes testing and gather appropriate management information on their customer service activities to ensure that they can evidence how they are delivering against the FCA's stated outcome.
Case Study: Consumer support
In the investment platform transfer market, a common issue, that has already been identified by the FCA is the complexity, barriers (including exit charges) and length of time it can take for assets to be transferred from one provider to another. It is accepted that there is complexity in multiple different systems, exchanges and share classes. However, under the Consumer Duty, the current process may not be in line with the regulatory expectations, whereby customers may be stuck in the middle between two providers that will not talk to each other and with a multitude of forms to complete on both sides (with wet signatures). As a result of previous regulatory interactions on this issue, the FCA may see the Consumer Duty as the ultimate remedy boundary.
Explore our Consumer Duty article series: