Part 1: What it means for financial service providers
The UK Financial Conduct Authority (FCA) is on course to materially increase consumer protections for retail customers, with the publication of updated proposals for its new Consumer Duty. Submissions on this second round consultation have now closed, and it is expected that new rules will be confirmed by the end of July 2022.
For financial services firms engaging in regulated activities in the UK, this new regime introduces an obligation to ‘act to deliver good customer outcomes’. This will likely require a fundamental shift in impacted firms’ strategies and business models, and a significant evolution in many organisations’ approach to product design, consumer interactions and ongoing testing and oversight capabilities. The FCA has estimated that implementation costs may reach up to GBP2.4 billion across supervised entities.
We expect that the FCA’s approach will influence other conduct and consumer protection regulators globally, including ASIC in Australia. Organisations should consider this likely regulatory trend and how it may impact their services and obligations within the jurisdictions in which they operate.
What does the proposed Consumer Duty involve?
The Consumer Principle establishes the overall standard of conduct for organisations. The Cross-cutting Rules then set out the ‘how’ – the key behaviours required by the Consumer Duty, to achieve the Four Outcomes which represent the key elements of the customer journey.
Past thematic reviews and other FCA guidance give important insight on practices likely to come under the microscope for failing to achieve the Four Outcomes:
- Customers paying high prices where parties in the distribution chain receive remuneration which appears to significantly exceed the costs incurred in distributing the products.
- Customer service processes that make it difficult for customers to stop auto-renewal of products.
- Encouraging credit products as a tool for long-term borrowing.
- Using a mix of different charging structures which make it difficult for consumers to understand and compare product costs.
- Processes which add friction (such as delays in receiving information) to the customer journey.