On The Financial Conduct Authority (FCA) has introduced a new set of rules - The Consumer Duty, which aims to ensure that financial firms provide a higher standard of care to their customers. For new and existing products or services that are open to sale or renewal, the rules came into force on 31 July 2023. For closed products or services (i.e. those no longer marketed or distributed to retail customers nor open to renewal), the rules come into force on 31 July 2024.
The Duty applies to products and services that are provided by UK-authorised firms to ‘retail customers’ (i.e. consumers and SMEs). The Consumer Duty applies to 'all firms who determine or have a material influence over customer outcomes – not just those with a direct customer relationship.' Further details from the FCA are available here.
Why is The Consumer Duty deemed necessary?
The Consumer Duty regulations aim to ensure that financial services firms treat their customers fairly and act in their best interests. Following a series of market studies and feedback from consumers and industry stakeholders, the FCA found that there were significant gaps in consumer protection and outcomes, especially in complex and competitive markets such as insurance, mortgages, pensions and investments. The Consumer Duty seeks to address these gaps by setting clear expectations for firms on how they should communicate, design and deliver their products and services, and how they should handle complaints and redress.
The Consumer Duty also intends to empower consumers to make informed choices and to hold firms accountable for their actions.
What are the main elements of The Consumer Duty?
The Consumer Duty consists of three main elements:
- The Consumer Principle, which states that firms must act in the best interests of their customers and avoid causing them harm.
- The Cross-cutting Rules, which require firms to take all reasonable steps to avoid foreseeable harm to customers, to enable customers to pursue their financial objectives and to act in good faith.
- The Four Outcomes, which specify the standards of behaviour and service that customers should expect from firms in relation to communications, products and services, customer service, and price and value.
What does the FCA expect of regulated firms?
The FCA expects firms to embed The Consumer Duty in their culture, policies, processes, governance, and oversight. Firms should also monitor and test how they are delivering on The Consumer Duty and remedy any shortcomings. In some cases, firms may be required to demonstrate that the outcomes for their customers are in line with the FCA’s expectations.
What are the sanctions for non-compliance?
The FCA has the power to enforce The Consumer Duty through a range of supervisory and disciplinary actions, including imposing fines, suspending or restricting activities, or withdrawing authorisation. The FCA has also indicated that it will consider introducing a private right of action for consumers who suffer harm as a result of breaches of The Consumer Duty.
What does this mean for regulated businesses?
If you are a financial firm that provides products or services to retail consumers in the UK, you need to adhere to The Consumer Duty and ensure that you are meeting the expectations of the FCA and your customers. Here are some typical steps that financial firms should be taking:
- Reviewing current practices and identifying any gaps or risks in relation to The Consumer Duty.
- Developing and implementing a plan to address any issues and improve customer outcomes.
- Training staff on The Consumer Duty and how it affects their roles and responsibilities.
- Communicating with customers about how the firm is complying with The Consumer Duty and what customers can expect from the company.
- Reviewing contracts, terms, and conditions, and complaints procedures to ensure they are consistent with The Consumer Duty.
- Keeping up to date with the FCA's guidance and feedback on The Consumer Duty and making any necessary adjustments.
How 3CS can help
The Consumer Duty is a significant change in the regulatory landscape for financial firms and consumers. It aims to raise the bar for customer protection and trust in the financial sector. If you need any further information regarding The Consumer Duty or help with any corporate or commercial legal matter, please get in touch with your usual 3CS contact.
