The Consumer Duty, introduced by the Financial Conduct Authority (FCA) in 2023, represents a significant shift in how financial services firms must operate to protect consumers. The framework outlines specific principles that aim to deliver good outcomes for consumers, enhance transparency, and ensure fair treatment. These principles are designed to build trust between consumers and financial institutions while ensuring firms act in the best interests of their customers. Below, we detail the core principles that form the foundation of the FCA’s Consumer Duty.
Consumer Principle (Principle 12)
The centerpiece of the Consumer Duty is Consumer Principle 12, which sets the overarching expectation for how firms must treat their customers.
Definition
Under Principle 12, firms are required to “act to deliver good outcomes for retail customers.” This means that firms must prioritize the needs and welfare of consumers at every stage of the customer journey. The FCA expects firms to take responsibility for ensuring that their products and services consistently deliver positive outcomes for consumers, from the initial design and distribution of a product to post-sale support.
Objective
The objective of Principle 12 is to ensure that firms embed a customer-first approach within their operations. Firms are expected to actively consider the outcomes that consumers will experience when interacting with their products and services. This principle creates a shift from mere regulatory compliance to proactive engagement with consumer needs, requiring firms to act ethically and transparently to foster trust.
Cross-Cutting Rules
The cross-cutting rules under the Consumer Duty reinforce and clarify the standards of behavior expected from firms. These rules establish the foundation for firms’ conduct and ensure consistency in how they approach customer relationships. The cross-cutting rules are applicable across all areas of a firm’s operations and set clear expectations for interacting with customers.
1. Acting in Good Faith
Firms must always act in good faith when dealing with retail customers. This involves being honest, transparent, and fair in all communications and interactions. Firms should avoid misleading practices, ensuring that customers have clear and accurate information to make informed decisions. Acting in good faith means going beyond the letter of the law to ensure fair and equitable treatment of customers.
2. Avoiding Foreseeable Harm
One of the key elements of the Consumer Duty is the proactive identification and prevention of foreseeable harm to consumers. Firms are required to carefully assess their products and services to identify any potential risks or negative outcomes for consumers. Once identified, firms must take steps to mitigate or eliminate these risks, ensuring that consumers are not subject to avoidable harm due to product design flaws, inadequate support, or other operational issues.
3. Enabling and Supporting Customers
Firms must enable and support consumers in achieving their financial objectives. This includes providing assistance and guidance throughout the customer journey, from product selection to the use of the product or service. Firms should ensure that customers have access to adequate resources, support systems, and tools to make informed decisions and manage their financial well-being.
Four Key Outcomes
The Consumer Duty further outlines four specific outcomes that firms must aim to achieve. These outcomes focus on the practical application of the cross-cutting rules and the principles of the Duty. Firms are expected to align their business practices with these outcomes to ensure that they consistently deliver good customer experiences and avoid potential pitfalls.
1. Products and Services
Firms must ensure that their products and services are designed to meet the needs of their target market. This involves a thorough understanding of the characteristics, preferences, and financial circumstances of the customer base. Firms must ensure that their offerings are suitable for their intended audience and that customers can derive value from using the products.
The FCA expects firms to carry out regular reviews of their products and services, making necessary adjustments to keep them aligned with customer needs and market conditions. Additionally, firms must ensure that products are only marketed to the appropriate customer segments.
2. Price and Value
Delivering fair value to consumers is a core requirement of the Consumer Duty. Firms must ensure that the price of a product or service is proportionate to the benefit or value it provides. This means that firms should not charge excessive fees or impose unjustified costs on consumers.
Firms must also conduct regular assessments of their pricing structures, comparing them against market benchmarks and consumer expectations to ensure that they remain competitive and fair.
3. Consumer Understanding
Firms have a responsibility to ensure that customers fully understand the products and services they are purchasing. This means providing clear, concise, and accessible information to customers at every stage of the process, from marketing to contract execution.
Firms should avoid overly complex or technical language and instead focus on delivering information in a way that is easy for consumers to digest. In addition, firms must provide supporting materials and guidance to help customers understand their options, the risks involved, and how to use the product effectively.
4. Consumer Support
Providing adequate support is essential for ensuring positive customer outcomes. Firms are required to offer comprehensive customer support that helps consumers navigate any challenges they may face in using a product or service.
Support must be readily available, responsive, and tailored to the needs of the customer. Firms must ensure that they have robust systems in place to handle customer inquiries, complaints, and any issues that may arise during the use of a product or service. The goal is to provide continuous assistance that helps consumers make the most of their financial products and services.
The Importance of Compliance
Complying with the principles of the Consumer Duty is not optional; it is a mandatory requirement for firms operating in the UK financial services sector. The FCA has made it clear that it will take enforcement action against firms that fail to meet the standards set out in the Consumer Duty.
Firms must adopt a comprehensive approach to compliance, ensuring that the principles of the Duty are embedded in every aspect of their operations. This includes reviewing and refining product offerings, improving customer service capabilities, and ensuring that all communications are clear, transparent, and customer-focused.
Conclusion
The principles of the Consumer Duty represent a new era in consumer protection within the UK financial services industry. By focusing on good outcomes for retail customers, the Duty raises the bar for how firms must operate and interact with their customers.
Through the Consumer Principle, cross-cutting rules, and key outcomes, firms are required to take a proactive approach to customer welfare, ensuring that their products, services, and business practices align with the best interests of consumers. In doing so, firms will not only comply with regulatory expectations but also build stronger, more trusting relationships with their customers.