Introducing the Consumer Duty
Many of us will be familiar with the failings of financial services providers in recent years. Whether it’s payment protection insurance, poor practices in relation to HCSTC or pricing practice in insurance, these failures have accumulated in the regulator, the Financial Conduct Authority, taking action to improve practices.
Whilst the FCA has been prompted to utilise their enforcement powers on a regular basis they have now taken the step to create a new set of standards that all firms must adhere to, the Consumer Duty. This is very much in line with the FCA’s approach to supervision, using a range of tools to achieve their goal, as well as reactive enforcement action against specific offenders. ‘Dear CEO’ letters and Portfolio Letters are used on a more proactive basis to remind firms of the standards expected of them. However, where firms continue to fall short, the regulator can always go a step further and create new rules.
The question we need to ask ourselves is, ‘what is the FCA’s goal with these new rules?
Ultimately it is to improve the service that customers gain from the sector. Historic practices have shown customers receiving poor value from their financial products or customers purchasing products which have not allowed them to pursue their financial objectives. Additionally, aftercare support is often found to fall short of the customer’s expectations whether through confusing communications, difficulty in getting in touch, or poorly trained agents.
The goal is therefore to ensure that customers receive a fairly priced product, which does not harm them and allows them to pursue their financial objectives, for example, through ease of switching or cancellation if the customer’s circumstances change.
Historically firms have measured the fair treatment of customers on a firm-level basis.
The Duty steps away from this point of view, towards a more holistic perspective. For example, your firm may have ‘done everything right’ but if another firm in the distribution chain you’re involved in does not, and this creates poor outcomes for customers, you are responsible. The need to work with other firms in the distribution chain is a key feature of the Duty, very much shifting the focus from a firm perspective to the customer perspective.
Firms are expected to undertake a series of reviews and assessments as part of the Duty, in fact doing so is a prescriptive rule in PRIN 2A. The new section of PRIN sets out the standards of the Duty, for example, firms must update their product approval process to comply with the exact standards set out. These include the need to review the characteristics of your target market and ensure your proposed product benefits your target market, foreseeable harms are avoided [often firms will identify potential harms as part of reviewing the characteristics of their target market] and the product offers fair value.
Additionally, firms will need to undertake value assessments, product reviews and test communications. Again, all these have very specific requirements as set out in PRIN. To help you understand more we have created a set of free-to-watch webinars [see below] as well as product approval templates, value assessments and product reviews which can be found here.
You can watch our first two webinars here:
For more information, contact Rob Bell: firstname.lastname@example.org.