The regulator said it had seen too many examples of firms presenting information in a way that exploited the behavioural biases of their customers, selling products or services that are not fit for purpose, or providing poor customer support.
The FCA has proposed launching a Consumer Duty to tackle these issues, with new rules which would tackle harmful practices. It said it would put the emphasis on firms to get products and services right in the first place, thereby raising standards across the board.
How the Consumer Duty will work
The regulator has proposed that the Duty will include three elements:
The consumer principle
A ‘consumer principle’ which reflects the overall standards of behaviour it wants from firms.
This has been proposed as: “A firm must act to deliver good outcomes for retail clients.”
Cross-cutting rules
Cross-cutting rules which cover the expectations, and which apply across all areas of conduct by financial firms.
The proposed rules are:
- Act in good faith towards retail customers
- Avoid causing foreseeable harm to retail customers
- Enable and support retail customers to pursue their financial objectives
Four outcomes
Finally, the duty will include four outcomes which give more detailed expectations for the key elements of the relationship between firms and consumers.
These cover the delivery of products and services, the price and value, the level of consumer understanding and the level of consumer support on offer.
The regulator is watching
The consultation is now open until 15 February, with the regulator expecting to confirm any new rules by the end of July.
Alongside the consultation, the FCA has published draft guidance to help financial firms prepare, as well as warning that it will use “assertive supervision” and a data-led approach to enable it to step in and intervene swiftly if it identifies practices which do not meet expectations.
Sheldon Mills, executive director of consumers and competition at the FCA, said the new Consumer Duty will lead to a change of culture in some financial firms.
He continued: “We expect firms to step up and put consumers at the heart of what they do and we’ll be holding senior managers accountable if they do not. The duty will also help create an environment for healthy competition between firms, encouraging them to be innovative in developing products and services that meet consumer’s needs.”
Good intentions
The new Duty has received a cautious welcome so far. Tom Selby, head of retirement policy at AJ Bell, said it was difficult to argue with the intent of the proposals, noting that most good firms would already be operating in this way.
However, he warned that the way the FCA has gone about this leaves room for confusion.
He said: “Given the new Consumer Duty is intended to replace existing FCA regulatory rules – most notably the ‘treating customers fairly’ principle – it would have made sense to ditch this altogether to give firms clarity about their responsibilities.
“The decision to retain this principle in the rulebook alongside the new Consumer Duty risks causing confusing layering of regulation which is far from ideal. If the FCA really wanted to signal a step change away from the previous regulatory model, why not discontinue the old rules altogether?”
Joanna Elson CBE, chief executive of the Money Advice Trust, said she was “encouraged” by the emphasis on product design, noting that ensuring good consumer outcomes are part of the design of the products will prevent harm from happening in the first place.
She continued: “To ensure these proposals achieve what they set out, they will need to be backed-up by practical measures. This needs to include a robust authorisation process to stop poorly designed products entering the market, and regulatory intervention and enforcement if and when needed.”
