Customer needs have always been a key priority for any successful financial services provider. With the arrival of the FCA’s Consumer Duty in the UK, this focus on the customer becomes a necessity rather than a choice.
In this post, we will explore what the FCA’s Consumer Duty means for financial services organizations and what you can do to prepare your business for the new requirements.
You can also watch our interview with financial services experts Mazars for a deep dive into the Duty and its implications:
As of July 31, 2023, the FCA’s Consumer Duty will come into effect. These new rules build on an existing regulatory framework, aiming to ensure a higher standard of customer care and protection, while also enabling consumers to make better decisions.
The FCA wants firms to act in good faith to deliver positive customer outcomes, avoid foreseeable harm, and support consumer interests, shifting the focus from compliance to outcomes.
In practice, this means that organizations will have to prove that their customers receive good value, understand the product or service and its terms, and receive clear communication and adequate support.
The Duty consists of three key components—the Consumer Principle (Principle 12), the Four Outcomes, and the Cross-Cutting Rules—which we will discuss in detail below.
The FCA’s Consumer Duty will come into effect on a phased basis.
For new and existing products or services that are open to sale or renewal, the Duty applies from July 31, 2023.
Then, from July 31, 2024, the Consumer Duty will be fully effective, applying to closed products and services as well.
The Duty will apply to products and services provided by UK-authorized firms that “have a material influence over, or determine, retail customer outcomes”, encompassing organizations throughout the distribution chain, from origin through to post-sale.
Under the Duty, these UK-authorized firms are divided into four financial services categories—investment services, consumer credit business, deposit-taking, and insurance business.
The FCA’s Consumer Duty is focused on meeting diverse customer needs at every stage of their purchasing journey, ensuring clear communication, effective support, and quality products and services.
As noted, the Consumer Duty is structured to consist of 3 core elements—the Consumer Principle, the Cross-Cutting Rules, and the Four Outcomes:
Principle 12, known as the Consumer Principle, obliges firms to deliver good outcomes for retail customers, reflecting the overall standard that the FCA expects companies to adhere to.
Failure to comply may lead to FCA reprimands, resulting in fines and associated reputational damage.
As part of the Duty, the FCA has established the Four Outcomes—detailed expectations regarding for firms in four key areas of the business-customer relationship.
In reality, the steps required to achieve each outcome will involve considerable overlap and any controls put in place will likely contribute to compliance in more than one area.
The products and services on offer must be fit for purpose, meeting the needs of customers in the target market and working as expected.
The products and services should retail at a price that is reflective of their true value, with no excessive fees.
Information should be readily available and clearly communicated to consumers so that they are equipped to make good decisions.
Responsive, helpful customer support should be available and cancellation or switching of a product or service should be as simple as the initial purchase.
In addition to delivering on the Four Outcomes detailed above, companies must adhere to defined conduct standards. These standards, known as the Cross-Cutting Rules, apply on both individual and target-market levels.
For individuals, this means adhering to these standards while assisting clients and providing support. On the target-market level, it’s about big-picture decisions like design and pricing.
While there is significant overlap between these rules, there are also important distinctions to be made. Let’s have a look.
Firms must adhere to a standard of conduct wherein they act honestly, fairly, openly, and consistently with the reasonable expectations of retail customers.
Firms must avoid foreseeable harm including, but not limited to, poor product or service performance as a result of inadequate market testing, and customer incurrence of high charges due to product misunderstanding or inherent flaws in the pricing structure.
Firms must enable customers to act in their own interests by providing clear information and considering the product lifecycle. There is no requirement to do more than is reasonably expected or carry out activities beyond the firm’s authorization.
Consumers may be vulnerable to exploitation due to a lack of knowledge or experience, a sense of loyalty to existing providers, or the tendency of some firms to prioritize profit over consumer needs.
With a core aim of providing stronger consumer care and protection, the Duty will increase scrutiny of firm behavior in order to prevent this exploitation, obligating businesses to act in good faith and avoid doing harm.
With the arrival of the FCA’s Consumer Duty, consumers will benefit from improved CX, clearer information pre-purchase, and better customer support post-purchase.
On a market level, the FCA will be able to quickly identify practices that don’t deliver positive customer outcomes and take corrective action before these practices become entrenched.
Successfully implementing Consumer Duty will require significant input from management, as well as tailored training for staff, to ensure adherence at both market and individual levels. From laying the groundwork, to establishing long-term accountability, the implementation of the Duty will include a number of important steps.
Firms must conduct assessments to ensure products and services are fit for purpose and designed for their target markets, carry out cost-benefit analyses on behalf of customers, and review customer communications and support on an ongoing basis.
In the boardroom, the champion will play a crucial role—raising awareness, cultivating discussions, and challenging implementation. For any financial services provider in the scope of these rules, the Duty must form part of their strategic planning moving forward.
With the FCA strongly cautioning firms to prepare for the Consumer Duty coming into play on July 31, 2023, they have advised a risk-based approach to implementation. Firms should focus on their most complex products at first, paying specific attention to accountability and governance requirements.
Let’s look at the most important steps you can take to prepare for the FCA’s Consumer Duty.
Defining positive customer outcomes in terms of your business under the Duty is a primary concern. By creating a framework for monitoring outcomes and establishing proper governance to identify and correct issues, you can meet the regulations from day one.
With somewhat subjective terms like “foreseeable harm” and “fair value”, firms are required to define these concepts and how they relate to their products or services. While the FCA has provided examples of complaint and non-compliant behavior, nuance will be required.
Under the regulations of the Duty, data and KPIs will be invaluable tools for determining successful outcomes for both consumers and product lifecycle. By leveraging your firm’s data analysis capabilities, you can identify pain points in product, service, and CX.
Leadership must consider the impact of the Duty on all staff, including management. New individual conduct rules may necessitate tailored training, while managers are largely responsible for ensuring compliance and driving a culture focused on customer outcomes.
A core aim of the Duty is putting customers first. Firms must evaluate how they support consumers on their financial journeys, empower them to make decisions in their own interest, and deliver fairly-priced products that are fit for purpose in their target market.
Mazars is an internationally renowned audit, tax, and advisory firm with over 47,000 professionals in more than 95 countries and territories, offering tailored services in audit and accounting, tax, financial advice, consulting, and legal services.
For organizations seeking assistance in implementing the Consumer Duty, Mazars is offering a range of services including:
Scorebuddy supports firms implementing the FCA’s Consumer Duty with a suite of purpose-built QA tools to boost customer experience, ensure compliance, and deliver training to staff.
The FCA’s Consumer Duty has further established the importance of compliance for financial services providers. With Scorebuddy, you can automate your regulatory processes, maintain a compliance audit trail and provide real-time alerts in the event of a breach, protecting your organization from financial and reputational repercussions.
With individual conduct playing a significant role in implementing the Duty, organizations need to support staff with appropriate training. Using Scorebuddy, you can carry out scorecard evaluations, deliver targeted training via an integrated learning management system, and monitor employee progress with an in-depth reporting suite.
Consumer outcomes are at the heart of the FCA’s new legislation, so anything you can do to enhance your organization’s CX will be important for adherence. With Scorebuddy’s QA tools, you can analyze every single agent-customer interaction, identify consumer pain points, and take action to improve the customer journey at every touchpoint.
Implementing the new Consumer Duty may involve certain costs and challenges, but it also offers a lot of potential for improved products, a better customer experience, and increased trust in the financial services industry.
The Duty will push firms to carry out ongoing self-assessment, leading to stronger insights and learnings that will ultimately benefit organizations, consumers, and the marketplace as a whole.
See how Scorebuddy can support FCA Consumer Duty adherence—request your free 14-day trial now.