One of the biggest shake-ups of financial regulations is on its way from today (31 July), affecting the way consumers take out mortgages, current accounts, credit cards, investments and insurance.
The Financial Conduct Authority (FCA) has introduced new “Consumer Duty” rules which place a responsibility on firms to deliver fair value and good customer outcomes. The regulator says it wants financial companies to change their culture and put customers’ needs first.
It comes as the FCA’s latest Financial Lives survey – research among 19,000 consumers - shows fewer than half of UK adults, equivalent to 21.9 million people, had confidence in the UK financial services industry and just 36% agreed that most financial firms are honest and transparent.
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The research found that 7.4m people have unsuccessfully attempted to contact one or more of their financial services providers in the 12 months before May 2022
This underlines the challenge facing firms and the regulator to boost protection and support for consumers in financial services.
Under the Consumer Duty rules, banks, building societies, insurers, investment firms and financial advisers have all been warned they must improve and track how they communicate with and treat customers. Regulated firms will be required to monitor consumer outcomes and the FCA may even ask for evidence of how this is tracked.
Any that ignore the rules and risk harming consumers will face swift action from the regulator, such as interventions or disciplinary sanctions.
Philip Deeks, a director at the consultancy KPMG, says the reforms will result in myriad benefits for customers. “The driving force behind the Consumer Duty is to increase the current level of consumer protection in the retail financial services market. With it, the FCA has signalled a ‘paradigm shift in its expectations’ and therefore the impact of the initiative should not be under-estimated in terms of its regulatory intentions - and consequently the positive impact it will have on customers.”
But what do good outcomes and fair value mean for customers? We explain what the new rules mean for you, and how service levels and financial products could be impacted.
What is the Consumer Duty?
The Consumer Duty will exist alongside other FCA rules and principles aimed at reducing consumer harm, as well as rules derived from general laws, such as consumer protection legislation.
The main rules will come into force for existing products and services, meaning those on sale to new customers, or available for renewal by existing customers. It does not have a retrospective effect and will not apply to past actions by firms.
The Consumer Duty applies to regulated firms that provide services to retail customers, such as investment firms marketing funds to retail clients, plus banks, building societies and insurers that serve consumers.
The FCA has said it wants to see evidence of good outcomes for financial services customers when it comes to products and services, price and value, consumer understanding and consumer support.
What do “good outcomes for customers” mean?
The Consumer Duty is slightly vague in that it doesn’t dictate how financial products should be sold or, say, impose a cap on fees.
The FCA has made it clear that the new rules are not a tick-box exercise; instead, it’s a holistic approach that revolves around companies giving customers value for money and making it easier for them to buy the right products - and cancel them or complain if they’re unhappy.
There is a widespread perception that financial services are unethical, and so the Consumer Duty will spark a fundamental shift in culture across companies as they seek to change this and put customers first.
Good outcomes for customers could mean making it easier to cancel or switch investments, telling customers if a better mortgage rate is available, scrapping onerous fees, and having clearer terms and conditions.
For example, if someone suffered a family bereavement and needed money from their bank account, the bank may be expected to waive exit fees. Meanwhile, a customer with a life insurance policy who subsequently has a life expectancy of less than 12 months may find it difficult to navigate the claims process when they are clearly vulnerable, so their provider would be expected to help them to avoid “foreseeable harm”.
There is also an important focus on supporting vulnerable customers.
The FCA’s Financial Lives survey showed adults with one or more characteristics of vulnerability were more likely to report that customer support services did not help them at all to achieve what they wanted to do.
Jenny Davidson, commercial proposition director at Quilter, says firms must do more to help people navigate financial choices.
“Vulnerability can be a deeply personal issue,” she says
“Customers are unlikely to shout about it or may be unwilling to discuss it, so a crucial challenge for all companies is to identify customers on this spectrum of risk.”
Here are five ways that customers may notice a difference after the Consumer Duty is introduced.
1. Clearer customer communications
The Consumer Duty not only talks about firms needing to ensure all communication is clear - but puts the onus on them to prove it too. James Daley of Fairer Finance, the independent consumer group, comments: “It's an open secret in most organisations that the terms and conditions - and even some of the day-to-day letters that go out - simply aren't clear enough. “There are multiple examples of complex language, and many do not always achieve their goal of explaining the key points.”
Daley says that as a result of the Consumer Duty, terms and conditions will be simplified, making them “shorter, structured more intuitively and easier for the average customer to understand”.
We may also see more communications from financial providers. This is because the rules require firms to help customers make the right decisions. So, instead of just getting a letter a month before your car insurance ends, you may get a follow-up email and text message reminding you that you need to act.
Many of us buy financial products online, and companies often work hard to make the process as frictionless - and fast - as possible. But Daley says this means providers sometimes “rush” over the small print, and fail to explain some of the limitations and pitfalls. He notes: “The Consumer Duty will see a reverse of this process.”
According to Deeks, having easier-to-understand communications is only a good thing, as it will “better equip consumers to make effective decisions about financial products and services”. He adds: “A better-informed customer making better-informed choices is a very positive step in building confidence in this sector.”
There are of course customers who won’t be comfortable transacting online.
The FCA Financial Lives survey highlights that while there is an increasing number of people regularly using digital services, many people are still heavy users of cash - 6% or 3.1 million - and reliant on face-to-face services.
The Consumer Duty should hopefully protect these customers by giving consumers different ways to access products beyond online-only.
2. Focusing on price and proving “fair value”
Financial firms will need to be able to show that the price represents fair value for consumers. This means balancing their own commercial interests with the costs charged to customers. There’s no simple economic model to do this assessment, but providers will need to examine all their products (which could mean thousands of different pricing brackets for insurance, for example) and also look at how various cohorts of customers could be impacted by the type and timing of charges.
Deeks comments: “This will be good news for customers in vulnerable circumstances, where evidence has shown they can be excessively burdened with the share of costs. The focus on price and value is also designed to drive competition and challenge any clustering of pricing. Aligned to the product and service outcome, we should see a wider variety of solutions, priced accordingly, addressing the differing level of needs for the target markets identified. This is another win for customers.”
3. The demise of the 0% introductory credit card
According to Daley, this is an example of a product design that may need to change. He explains: “The Consumer Duty asks some challenging questions of established business models. The FCA is clear that it expects firms not to rely on income generated by poor customer outcomes. But some products such as 0% credit cards with no fee rely on earning from those who miss payments, fail to pay off their balance or do not transfer away before the end of the offer period.”
Standard APRs on credit cards after a 0% introductory period can be as high as 39.9%, while missed payment fees are often around £12. “An enticing offer like a 0% card can draw in and incentivise spending among both sophisticated consumers as well as those who are more vulnerable. Sadly, it’s likely to be the latter who will end up with larger debts that cannot be paid off and carried on to higher interest rates,” says Daley.
He believes some of these business models will be under threat as evidencing the Consumer Duty principles of avoiding foreseeable harm and acting in good faith towards customers to ensure they receive fair value will be harder to justify.
It could mean generous financial products, which effectively give savvy customers something at no or low cost, become a thing of the past, while fees on other products could potentially be pushed up as providers overhaul pricing structures to ensure vulnerable customers receive the same outcomes as other customers.
4. The risk of mis-selling
The risk of being mis-sold should drastically reduce thanks to the new rules. Deeks explains: “Firms will be required to evidence how the product is designed to meet the needs of consumers, and sold to only those whose needs they meet. With firms being clearer about who the product is (and isn’t) designed for, it helps minimise the risk that customers mis-buy a product.”
He adds that in the future solutions designed and sold specifically for a target market will help ensure the product delivers ongoing good customer outcomes. This customer-centric mind-set (along with more engagement with customers) is also likely to lead to more innovation by firms in identifying and addressing needs not previously considered. So, expect to see some new financial products coming to market soon.
5. Hello more speedy responses - and fewer complaints
The FCA expects that consumers should be able to buy and engage with financial products without facing unreasonable barriers. For example, firms should make it as easy for customers to leave as it was to join. So, requiring a customer to physically go into a branch to cancel their contract could be a breach of the rules.
According to Deeks, punitive penalty charges will be replaced with costs more reflective of the work required to action a customer request. This could mean a large exit fee to switch to another product breaks the rules.
Deeks adds: “So-called ‘sludge practices’ will be targeted by firms - essentially anything that uses behavioural economics (intentionally or otherwise) to place unreasonable barriers in a customer’s way. Customers will experience slicker processes and more timely responses when they need to contact the firm about making a withdrawal, making a claim, or cancelling a product.”
A spokesperson at the trade body UK Finance agrees, saying the Consumer Duty should mean we see “clearer explanations of products and services, communications that are easier to understand, and continued improvements in customer support”.
The focus on needing to evidence good outcomes will hopefully result in problems being identified more quickly, and anyone receiving a “poor outcome” identified and the matter fixed sooner. Deeks says this should improve customer experience and minimise complaints and/or remedial action further down the line.
What do firms have to do?
Sheldon Mills, executive director, consumers and competition at the FCA, says the Consumer Duty “presents a real opportunity for financial services”, adding: “Not only do we expect the Duty to deliver higher standards and reduce consumer harm, but it should also increase trust and confidence, boost competition and innovation and mean firms face fewer rule changes in the future.”
Mills adds that the current economic climate with high inflation and rising rates makes it vital that consumers can communicate easily with their provider.
He says: “Times like this show why it’s important people get the support they need as more people are likely turning to their financial services providers for help.
“Our Consumer Duty will guide our ongoing work to improve the way firms provide customer support - getting through to your provider is the starting point for receiving help, so we will be working with them to improve in this area.”
The FCA expects each firm to produce a report “at least annually” assessing whether it is acting to deliver good outcomes for its customers, which are consistent with the Consumer Duty.
It also requires firms to evidence that they are offering fair value to customers, and expects them to appoint someone as a Consumer Duty Champion, to drive through the culture change within their business.
