Consumer Duty
The Consumer Duty sets higher and clearer standards of consumer protection across financial services and requires firms to put their customer’s needs first.
Putting consumers first and delivering good outcomes is at the heart of Consumer Duty.
This comes at a time where UK Customer Satisfaction has fallen to an all-time low, and complaints to the Financial Ombudsman Service are at an all-time high.
It takes effect as from 31 July 2023.
What is Consumer Duty in simple terms?
Firms should provide customers with products and services that meet their needs and offer fair value.
High standards and strong protection for consumers, many of whom are facing increasing financial pressures on their finances, is at the heart of this new legislation.
Cross-cutting rules provide greater clarity on expectations of firms and helps them interpret the four Consumer Duty outcomes.
What will the new rules mean for customers?
The new rules will aim to set a higher standard for consumers, particularly when it comes to claims being put to the test with insurers.
This will hopefully slash the number of complaints that have been referred to the Financial Ombudsman, where consumers have had claims and complaints rejected for spurious reasons.
The new Consumer Duty policy will raise the bar in setting standards for all providers of financial services products and require firms to put customers needs first.
The four pillars in delivering good and fair outcomes for customers are:
- Products and services
- Price and value
- Consumer understanding
- Consumer support
Firms will be required to consider customer’s needs, characteristics and objectives.
Behaviours throughout the customer journey with a focus on vulnerability will be at the forefront.
Vulnerability has a broad spectrum. Many disabilities are hidden, so firms need to raise the bar on customer service and experience to mitigate risks and reduce complaints.
Who does the new Consumer Duty apply to?
The Consumer Duty applies to all firms with a key role in delivering retail customer outcomes, including those with no direct customer relationship.
This includes third parties and where firms outsource the delivery of services to other parties.
How many cross-cutting rules are part of the Consumer Duty?
There are three cross-cutting rules defined under the Consumer Duty.
The FCA has created a set of three over-arching requirements, known as cross-cutting rules, which set conduct standards for firm’s retail financial services activities.
What are the key elements of Consumer Duty?
The three cross-cutting rules of Consumer Duty require firms to:
Act in good faith towards retail customers
This means putting yourself in the customer’s shoes and doing the right thing to deliver good outcomes for customers.
Avoid foreseeable harm to retail customers
The second Cross-Cutting Rule is that a firm must avoid causing foreseeable harm to retail customers.
Firms will need to focus on harms that are reasonably foreseeable.
Acts and omissions of a firm can cause foreseeable harm to customers.
Enable and support retail customers to pursue their financial objectives
The third Cross-Cutting Rule relates to the financial aims of the customer.
This applies across the entire customer journey and life cycle of the product or service.
What does cross cutting mean FCA?
The cross-cutting rules strengthen the standards of conduct the FCA expect under the Consumer Principle.
They develop the FCA’s objectives for a firm’s behaviour through three common themes applying across all areas of a firm’s conduct.
Cross-cutting rules provide clarity on the FCA expectations to inform and help firms interpret the four outcomes.
This sets the standard of care that firms should give to customers in retail financial markets and financial services.
This policy will cover:
- Warranties
- Insurance products including travel insurance policies
- Finance agreements and products
- Payment services and E-money
Products must be designed for a particular target market and deliver good outcomes.
All firms have a duty to act in good faith and deliver good outcomes for their customers.
This means:
- Having clear Terms and Conditions
- Reasonable expectations
- Putting customer’s interests first
- Acting in good faith
- Having a flexible approach when dealing with vulnerable customers
- Effective customer support to deal with unexpected surges
- Doing what is right and proper even in exceptional circumstances
- Eliminating sludge practices (creating unnecessary friction points to prevent consumers from lodging complaints, complex claims processes and seeking a remedy)
What are the Consumer Duty rules?
Under the Consumer Duty, firms should provide customers with products and services that meet their needs and offer fair value.
Customers should receive communications they can understand.
They should also get the customer support they need, when they need it.
What are the 4 Consumer Duty outcomes?
The four Consumer Duty outcomes are:
- Products and Services
- Price and Value
- Consumer Understanding
- Consumer Support
Key Factors
Key factors include:
Products and Services
Firms ought to be offering customers products that meet their needs, rather than being directed into accepting products that are not suited or necessary.
Complicated and risky products will need more attention and focus to ensure that customers are treated fairly and get good outcomes.
Price and Value
Consumers must receive fair value from products.
There must be a reasonable relationship between the price of a product and the benefits received from it.
Firms ought to be able to demonstrate that the prices charged are reasonable for the benefits.
Consumer Understanding
The consumer journey, digital user experience and disclosure of Key Term in contracts is at the heart of this.
Communication from firms must empower consumers to make informed decisions.
Products are expected to come with timely and clear information that customers can easily understand so they can make informed financial decisions.
Key product information needs to be easily accessible and to understand.
Consumer Support
Firms will be expected to take additional care where customers are more likely to have vulnerability characteristics.
Vulnerability has a broad spectrum. Firms will need to demonstrate that they have taken reasonable steps to identify that the product or service is suitable.
Firms need to make it easy for customers to interact with them via various communication channels and be receptive to diverse needs.
What effect will Consumer Duty have on car insurance premiums?
I doubt that consumer duty will lower car insurance premiums based on current trends, where motorists are being hit with inflation-busting increases in premiums.
This is despite new rules being introduced by the Financial Conduct Authority in January 2022 to stop insurers charging higher premiums for existing customers over new customers.
This loyalty penalty ban was meant to level the playing field, but has failed to do so.
I was able to haggle my car insurance premium down by £51 in less than 15 minutes last year by challenging a renewal quote from Admiral.
Insurance companies rely on motorists simply auto-renewing policies and not haggling to increase their profit margins.
I see this trend continuing, with insurance companies citing increased business costs in meeting the new Consumer Duty rules.
Will the new Consumer Duty make it easier to appeal a rejected claim?
I believe so. The Consumer Duty sets a higher standard for firms to adhere to, so consumers will be able to have a better chance in succeeding in appealing a rejected claim based on the new standards that firms are expected to meet.
Consumers will still need to lodge robust claims and stick to their guns if they believe they have been unfairly treated.
Perseverance breaks resistance every time.
I would strongly urge anyone who has had a rejected claim to seek a deadlock letter and lodge it with the Financial Ombudsman if necessary.
Consumer Duty – retrospective application
The Consumer Duty does not apply retrospectively.
The FCA and the Financial Ombudsman Service work on the basis that conduct should be judged on the rules and standards in place at that time.
The FCA have been working closely with the Financial Ombudsman to ensure that interpretations are consistent.
Finally
The Consumer Duty is not anything radical.
As Sheldon Mills, Executive Director, Consumers and Competition from the FCA says, “Selling suitable products at a fair price, providing good standards of customer service and communications people can understand shouldn’t be controversial.”
“Ultimately, when we get this right, we all win: consumers – who will get the right products and services at the price that is fair; firms, who will retain customers and attract new ones; regulators – who will need to step in less often – and most importantly, the wider economy.”
Many firms offer incentives to get new customers. These offers are worth looking at when you are shopping round and looking for firms that will treat you well.
What do you think of the new Consumer Duty rules? Do you think it will make a difference?