If you haven’t got a clue what I am talking about then I recommend that you look at the FCA’s paper CP21/13.
The aim of this duty is to see a higher level of consumer protection where ‘firms are competing vigorously in the interests of consumers’. This may require a shift in culture and behaviour by firms or as a minimum a review of this area.
They want firms to put themselves in the shoes of the client and ask whether they would be happy to be treated in the same way as they treat their customers.
So what is it?
The Consumer Duty is a new standard of care. The plan is to introduce a new principle, cross-cutting rules and details of four customer outcomes.
The cross-cutting rules will set out expected behaviours:
- Take all reasonable steps to avoid causing foreseeable harm to customers i.e. take proactive steps to avoid harm; not exploit client vulnerabilities, biases or lack of knowledge; they should be fair in describing benefits and risks of products and services and not disguise through misleading framing, omission, burying terms in documents that they know clients will not read!
- Take all reasonable steps to enable customers to pursue their financial objectives i.e. the need to recognise and address client own biases – help consumers to expand their knowledge and help support them to make good decisions.
- Act in good faith i.e. act honestly, fairly and open dealing.
The four customer outcomes are:
- Communications – clients should receive information in a way that they are likely to understand and in a timely manner so that they can make an informed decision. This will not mean that clients will have to verify that they have read and understood the information provided.
- Products and services – for advisers, this means ensuring that the products they recommend are suitable for their target client market (effectively PROD)
- Customer service – firms will need to design services that take into account customers’ needs and not cause undue hinderance for consumers. The service should be relevant to the target market. The firm will need to monitor the service to ensure it is fit for purpose.
- Price and value – the price of products and services represent fair value for consumers.
The duty will apply to all entities who work with retail clients, from the manufacturer of products to the distributors i.e. financial planners.
Firms will have to demonstrate that they have taken into account vulnerable clients when meeting the duty.
The FCA will expect firms to conduct ‘outcomes testing’ i.e. check that the firm are delivering positive outcomes to clients. This means gathering data.
Isn’t this just TCF?
Well, the FCA doesn’t think so. Their thinking is that the TCF initiative between 2008-2010 did produce some positive effects but there are still poor consumer outcomes occurring. For example, poor customer service around dealing with complaints; misleading information, ‘hindering’ consumer ability to assess a product or service.
The FCA conducted a webinar on what the Consumer Duty means in June 2021. Here they explained that they believe that the duty will go a step further than TCF by requiring firms to think about what outcomes clients should expect from their products and the services they receive and look to proactively enable clients, rather than hinder.
The FCA believe that the duty will shift firms from following the right process and ticking boxes to focusing on the end outcome that the client gets.
I think this is going to be TCF with a bit of a kick
There will be a second consultation paper published by the end of the year which will detail how the FCA will supervise and enforce the new principle.
An area that should be of interest for firms is around price and value. The FCA will be expecting firms to conduct ‘value assessments’ to show that the relationship between price and benefits is ‘reasonable’. The firm’s senior management will be accountable for these assessments.
For example, the paper suggests ‘Firms offering the same charging structure to all consumers may also not provide fair value. Whilst it may often be fair to do this, it may not always be fair where, for example, servicing fees are charged as a percentage of the value of a product (this might be in relation to the size of a loan, investments or savings). Some consumers may pay substantially larger fees in this way even though the costs of providing the service and the benefits consumers receive may be very similar. In such circumstances, firms should consider whether the relationship of the price such consumers would pay is reasonable relative to the benefits they receive’.
While the words are not there, this suggests to me looking at whether cross subsidy exists and how has this been considered/addressed.
The paper does acknowledge that different groups can be charged at different rates but for each group, is the rate charged fair value for the service that they receive.
We do not know what ‘value assessments’ look like
I am not suggesting that firms should rush out to make changes to their client propositions and charges (which should be linked to their PROD client segmentation already).
However, firms should be aware that this is on the cards and there will be work to be done, even if the conclusion of the assessment is that nothing needs to change.
What ‘value’ is, is also far reaching. One person’s perception of value may be different to someone else’s. How do you put a value on receiving advice itself, educating the client of staying invested when markets fall etc? All these types of things will need to be considered and evidenced. Chances are firms will need to get client feedback to help evidence their value assessments.
One thing that the consultation paper does raise is the concept of ‘private right of action’ for a breach of a principle. This proposal would mean that an individual could raise a complaint for a breach of principle, which they cannot do at the moment.
The suggestion is that the fact this is a threat for firms will encourage them to raise their game and improve standards. The flip side to this though is PI would be likely to rocket further as claim companies see this as another avenue to pursue. This could lead to an increase in costs for consumers. Furthermore, this could discourage new entrants to the market leading to lack of competition. This was up for discussion (feedback for the paper closed 31.07.21).
In summary, the chances are that you will be meeting the intentions of the Consumer Duty already and may not need to make many, if any, changes to the way the firm works.
Many financial planners already tell me that they ask themselves ‘would I advise this product to my mother?’ for example.
However, if you want to be able to demonstrate that you have good SMCR governance and a positive culture towards compliance, then I recommend that you read the paper and start giving some thought as to what preparations the firm will need to make for July 2022.