The new consumer duty: why all the fuss?

The Financial Conduct Authority’s new "consumer duty" came into force on 31 July 2023. It will set higher and clearer standards of consumer protection across financial services, requiring firms to act and deliver good outcomes for consumers. The authority expects the duty to be embedded in all credit providers’ products and policies.

Essentially, the new duty will require firms to put consumers at the heart of their business, focusing on the delivery of good outcomes for their customers at every stage of their processes and at all levels of the business’s organisational structure. The duty will enhance the standards in the FCA’s handbook and, in particular, will ensure that vulnerable customers’ needs are effectively addressed.

Compliance will need to be evidenced on an ongoing basis. And with new rules being applicable from 31 July 2023 for new and existing retail products, all those involved in consumer credit will have to take notice.

If past experience is replicated, organisations such as energy providers, while not governed by consumer credit regulation, will adopt a similar approach, in particular when dealing with their vulnerable customers. Accordingly, the impact of the legislation may well become the "new normal" when it comes to consumer debtors.

The duty further explained

The duty is reinforced by adding a new "consumer principle 12" to the existing "principles of business", requiring firms to "act and deliver good outcomes for retail customers". These obligations should be central to a firm’s culture and purpose, be embedded throughout the organisation and be at the heart of their business.

This goes beyond principle 6, which has the lower bar of "treating customers fairly". These new obligations are dynamic inasmuch as firms will have to evaluate continually the extent to which their products and services meet customers’ needs, whether or not the customers are direct clients of the firm.

In general, firms will have to demonstrate that their staff, including third parties, have sufficient understanding how their customers behave in relation to their products. When a firm is considering "consumer support", it is likely that third party debt recovery agencies, including solicitors, will require to meet these standards, particularly when dealing with vulnerable debtors in arrears. This could involve enhanced reporting and monitoring their experience via their data strategies to evidence how they deal with vulnerability.

These obligations are underpinned by the requirement that firms must act in good faith in assisting customers to achieve good outcomes and to avoid causing them foreseeable harm through their conduct, as well as taking proactive steps to avoid it.

In order to comply with principle 12, the FCA requires that firms are able to demonstrate four outcomes:

1. Are the products and services designed in such a way that they are fit for purpose and meet customers’ needs and targeted to those customers whose needs they are designed to meet?
2. Are the prices for the products and services fair and do they offer value for money and meet customers’ needs and objectives?
3. Are communications about products and services clear and not misleading? Do they adequately explain, in a clear fashion, the risks so that informed decisions can be made?
4. Do firms have adequate systems in place for customers which offer them support and focus on their needs throughout the customer journey?

Reporting obligations

To reinforce accountability, the rules have been strengthened with the introduction of an "individual conduct" rule. This requires all relevant staff to "deliver good outcomes for retail customers". This will be a continuing obligation.

Responsible individuals will not only have to deliver the outcome, but also ensure that they remain on track and are continually reviewed to meet the "duty" standards. This should be achieved by repeated reviews to identify any gaps or weaknesses and implement necessary remedial action. These obligations have to be implemented throughout the business. Staff will also have to demonstrate this. In particular, senior management will have to explain their understanding of the duty and the actions which they have taken to comply with it.

For larger organisations, a "duty champion" should be appointed who, along with the chair and CEO, must ensure that the duty is regularly discussed and reviewed.

10 key questions

As part of its strategy to ensure compliance, the FCA has highlighted 10 key questions for firms to consider:

1. Are you satisfied that your products and services are well designed to meet the needs of consumers in the target market and perform as expected? What testing has been conducted?
2. Do your products or services have features that could risk harm for groups of customers with characteristics of vulnerability? If so, what changes are you making to the design of your products or services?
3. What action have you taken as a result of your fair value assessments, and how are you ensuring this action is effective in improving consumer outcomes?
4. What data, MI and other intelligence are you using to monitor the fair value of your products or services on an ongoing basis?
5. How are you testing the effectiveness of your communications? How are you acting on these results?
6. How do you adapt your communications to meet the needs of customers with characteristics of vulnerability?
7. What assessment have you made about whether your customer support is meeting the needs of customers with characteristics of vulnerability? What data, MI and customer feedback is being used to support this assessment?
8. How are you satisfied yourself that the quality and availability of any post-sale support you have is as good as your pre-sale support?
9. Do individuals throughout your firm – including those in control and support functions – understand their role and responsibility in delivering the duty?
10. Have you identified the key risks to your ability to deliver good outcomes to customers and put appropriate mitigants in place?

In conclusion

The question posited to this article is "Why all the fuss?"

The extent of the new duty illustrates a sea change in how the credit industry conducts its business, which will probably have to be customer-centric.

There will also be an impact for those involved in debt recovery. "Vulnerability" features more than once in the 10 key questions above.

Regulated firms will want to ensure conformity with the duty and, in so doing, will require those who are collecting their debts to comply with the duty and be able to evidence this. The advice to the debt recovery sector should be to discuss with clients what measures to put in place both to comply and to demonstrate compliance.