The Financial Conduct Authority (FCA) Consumer Duty comprises four outcomes that firms must consistently strive to deliver, bringing customers to the forefront of everything financial services firms do:
- The products and services outcome (PRIN 2A.3)
This outcome involves extending product governance requirements across all retail products, with different rules for manufacturers and distributors. For example, manufacturers will be required to undertake a product approval process, identify a target market, and ensure appropriate distribution channels for their products.
The Product Intervention and Product Governance sourcebook (PROD) sets similar requirements for the design, approval, marketing and management of certain products and services throughout their lifecycle. However, PROD does not have general application across all regulated retail markets, with rules applying to investments (PROD 3), insurance (PROD 4) and (from 29 July 2022) funeral plans (PROD 7).
To avoid duplication where the PROD rules apply, the rules in PRIN 2A.3 do not apply to that product or service. To mitigate exclusion concerns resulting from targeted product development, new guidance advises firms to take account of any additional or different needs, characteristics and objectives that might be relevant for retail customers in the target market with characteristics of vulnerability (for example visual impairment, bereavement, low financial capability). Although the FCA does not require firms to follow an inclusive-design approach, the FCA’s guidance suggests firms may wish to consider it.
- The price and value outcome (PRIN 2A.4)
The price and value rules intend to ensure a reasonable relationship between the price that a consumer pays for a product or service and the benefits that they receive from it. Guidance has been added to state that, where a product or service meets all the other elements of the Duty (for example, it is designed to meet the needs of its target market, is transparently sold, and for which consumers are properly supported), it is generally much more likely to offer fair value.
Where the product or service does not have any financial or non‑financial cost to the consumer (for example, debt advice funded through other sources), the FCA would not expect firms to do a value assessment. However, manufacturers providing free products or services still need to consider whether their customers are paying in non-monetary terms and whether those costs are reasonable to the product’s benefits. An example of non-monetary payment is customers paying for their current accounts in the form of foregone interest, associated fees or using their data.
In the general insurance pricing practices work recently undertaken by the FCA, it was found that price walking (i.e., the practice of increasing prices on renewal for a loyal customer) can lead to some consumers making significant overpayments which do not provide fair value. Such practices, in any retail sector, would not meet the requirements of the Duty. However, the FCA does not believe that all differential pricing between new and existing customers necessarily causes harm. Where upfront discounts are clear and transparent, and the firm can demonstrate that both groups are receiving fair value, then this could meet the standards of the Duty.
Firms are responsible only for the prices that they control and are not required to redo or challenge other firms’ value assessments. However, distributors must ensure that their or other charges across the chain do not cumulatively result in the product ceasing to provide fair value. To allow for such assessments, manufacturers should provide distributors with the results of their value assessment, but they do not have to include sensitive information such as a breakdown of firms’ margins or risk-based pricing. Information sharing can be a high-level summary of the benefits to the target market, information on overall prices or fees and confirmation that the manufacturer considers that total benefits are proportionate to the total costs.
- The consumer understanding outcome (PRIN 2A.5)
The FCA expects firms to focus more on consumer outcomes and understanding throughout the customer journey. As well as ensuring that individual communications and disclosures are fair, clear, and not misleading, firms will need to consider their overall approach to communicating information to make sure they equip customers to make effective, timely and properly informed decisions. To achieve this result, firms will need to tailor their communications appropriately as well as monitor, test, and adapt their communications on an ongoing basis to ensure that the communications are suitable.
This outcome is broader than other legal disclosure requirements, for example, those prescribed under the Consumer Credit Act 1974, and applies to all communications provided to consumers. This includes verbally, such as during conversations with advisers, online, in letters or product terms and conditions. As firms embed the Duty, the FCA will also look to simplify prescriptive disclosure requirements, including those that stem from Europe Union regulations such as the Privacy and Electronic Communications (EC Directive) Regulations 2003 (PECR). Until then, firms are expected to comply with all other statutory disclosure requirements as well as the Duty.
Firms are not expected to tailor all communications to meet the individual needs of each customer. Instead, they are expected to consider the characteristics of customers more broadly, including characteristics of vulnerability. This means that firms should consider what they know about their customer base and the target market for their products and services. This could prove challenging for firms whose information capture does not provide sufficient detail about their customers and their needs.
- The consumer support outcome (PRIN 2A.6)
This outcome focuses on firms providing an appropriate standard of support to customers so that customers can use products as reasonably anticipated, and do not face unreasonable barriers in doing so. Firms are expected to monitor the support they provide, take relevant feedback into account, and look for signs that may indicate their channel offering is not sufficient to meet the needs of their customers.
Where this is the case, firms will need to take reasonable steps to address any shortfall in the support they provide. The FCA is not prescriptive about the channels of support, only that the channels meet customers’ needs including customers dealing with non-standard issues, and customers with characteristics of vulnerability. The FCA has separate guidance on the fair treatment of vulnerable customers with examples of how different vulnerabilities can make certain channels of support unsuitable.
Where a firm only provides support mainly or only through one channel, such as digital-only, there are additional factors for it to consider to ensure it delivers good customer outcomes, including communicating the support available and ensuring the support works effectively, as well as having measures to deal with non-standard issues (such as fraud), operational resilience (for example, a cyber-attack) and identifying consumers with protected characteristics* and with changing needs (for example, a customer in financial difficulties could lose internet or mobile access meaning that a digital-only support offering exposes them to the risk of harm).
When a firm chooses to outsource elements of its consumer support to a third party, the firm will remain responsible for ensuring the support provided meets the Duty standard. The firm will also need to have systems and controls in place to monitor the quality of support provided and provide assurance that it is meeting its regulatory obligations.
* Certain characteristics are protected by law. For example, firms have a duty to make reasonable adjustments for disabled customers under the Equality Act 2010. Firms must therefore ensure that the support they offer allows for reasonable adjustments to be made in these circumstances so they can act lawfully.
- 6-month countdown: Is your firm ready for FCA Consumer Duty regulations?
- What you need to know: FCA Consumer Duty Q&A
- FCA Consumer Duty – Update on the Road to Implementation
- Checklist: Consumer Duty
- Consumer Duty Final Guidance
- Consumer Duty – information for firms
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