• Robert Bell

Consumer Duty: Navigating Through The Most Difficult Elements

The Financial Conduct Authority’s Consumer Duty will introduce the biggest change in financial services regulation in almost ten years. Given that, the nine months firms will have to prepare for implementation is an extraordinarily short period. Two consultations have been published so far, and final rules are due at the end of July. Despite previous publications, there are a number of aspects of the Duty that are still causing confusion and concern across the industry.

This week, we will take a look at some of the most frequent questions and concerns, and what to do about them.

Already an area of extensive Regulator interest, financial promotions and communications will be subject to higher expectations even than at present. The FCA has a dedicated team acting on misleading financial promotions, and unclear and deceptive communications make up a significant proportion of financial services complaints each year. Under the Consumer Duty, firms will need to consider the impact that the Consumer Principle, the cross-cutting rules and the consumer understanding outcome will have on their communications, and act sooner rather than later to review their compliance.

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Financial Promotions feature regularly in the FCA’s Dear CEO letters, highlighting just how often errors or failures come up. Following the implementation of the Consumer Duty, firms will need to – as usual – make sure their promotions and communications comply with CONC 3, but also that they meet the higher standard across the Duty, and particularly within the Consumer Understanding outcome. This outcome puts the onus on firms to ensure customers are able to make informed decisions based on information that is pertinent to their circumstances. The FCA expects to see this reflected in “simpler and more consumer-friendly explanations of products and services and their associated features, benefits, risks and costs.” In short, this outcome means the focus will need to shift from creating wording that meets the firm’s expectations towards having a reasonable certainty that the wording will be understood and be useful for their audience.

Where possible, this certainty should be based on evidence. This can be gathered relatively simply. Feedback sessions, centered around individuals that represent the customer base, can confirm whether some of the more complicated terms are understood on a practical level. The key here is that the customer base – and not the firm’s employees – should be able to interpret and understand what is written with ease.

There may also be confusion around the interplay between the Outcome and legal requirements; the FCA have confirmed that firms should follow legislative and regulatory disclosure requirements, but that a wider consideration of the purpose of the communication might lead to decisions to supply explanations of industry jargon and legal terms, or signpost the customer to further detail.

The concept and application of ‘fair value’ is perhaps the most consistent area of concern. While benchmarking of prices against competitors is commonplace, an assessment of value of the product to the customer is new to most firms. One of the four outcomes, the ‘Price and Value’ outcome requires firms to assess the value (resulting benefits against the total price) of each product and service. The onus will be on firms to be sure that products represent ‘fair value’ – or are reasonably priced given the benefits the customer can expect – and be able to demonstrate this.

While the new rules direct firms to consider the nature of the product, total costs, associated fees and charges, benefits, useability, needs of the target market, and non-financial costs within their value assessment, there is very little accompanying guidance, and no prescribed assessment format, or best practice example.

A good starting point in building assessments is a review of the FCA’s previous work on fair pricing, a major focus for the regulator over the previous five years. Highlighting practices it considers clear examples of unfair pricing gives a sharper view of what an assessment should aim to identify and weed out. The 2019 Feedback Statement on Fair Pricing in Financial Services focused on firms charging different prices to different consumers based solely on variations in consumers’ price sensitivity (‘price discrimination’) and charging existing customers higher prices than new customers (‘loyalty pricing’ or ‘inertia pricing’). The FCA highlighted that although these practices are not always unfair, where they disadvantage some consumers significantly – particularly vulnerable customers and the least resilient customers – this would concern the FCA.

Reviews around repeat use of overdrafts, particularly around high prices for unarranged overdrafts, shows the method the FCA used to understand the value that customers were getting. The research carried out by the FCA showed that prices were high when compared to the return for customers – regularly ten times as high as payday loans. A significant factor in the FCA’s assessment was the fact that disproportionate revenue was earned from unarranged overdrafts when compared to arranged overdrafts. Banking firms also struggled to justify the higher prices in relation to the cost of providing the service. The research also found that higher charges were disproportionately concentrated on a small group of customers, and that this group were more likely to be vulnerable. Finally, while unarranged overdrafts should be used sparingly and temporarily, the FCA found that there was a significant number of customers using the service both regularly and over longer periods of time to cope financially.

With this in mind, it is clear that one of the main stepping stones will be a good understanding of the consumer base. This, in itself, is fraught with difficulty in the current economic climate. The relative stability of customer bases will now be in a state of flux. The rising cost of living – alone – will mean that many more adults are exposed to lower financial resilience, and very likely increased risk of being or becoming vulnerable. Research into the customer base must be up to date, taking into account the circumstances of customers who are – in summer 2022 – dealing with a different financial reality than even a year ago. The FCA won’t expect an unreasonable amount of work here, but being able to demonstrate an awareness that the circumstances of the customer base are likely to be more difficult than in previous years is a must.

Our online Consumer Duty course takes learners step-by-step through the expectations of the Duty, covering the background, Principle, cross-cutting rules, and the four outcomes. Each online course is priced at just £20.

Conducting a gap analysis around a set of high-level expectations is a difficult task. We offer a comprehensive Gap Analysis Service that benefits from our knowledge of best practice and what the regulator wants to see from experience with firms throughout the industry.

For more information, contact Rob Bell: robert.bell@rbcompliance.co.uk

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