A Guide To The New FCA Consumer Duty Regulations

The Financial Conduct Authority (FCA) is introducing major changes to its Consumer Duty regulations that aim to ‘make the consumer duty an integral part of our regulatory approach and mindset’. This is part of the FCA’s ‘transformation to becoming more assertive and data-led regulator’. These changes introduce much more stringent requirements to act in the best interests of their clients, both in outcomes and transparency. 

What is changing?

 Whilst there are many changes, three key items are being introduced:

• The introduction of Principle 12 – ‘a firm must act to deliver good outcomes for retail customers.’
• The introduction of the following cross-cutting rules:

• Act in good faith towards retail customers

• Avoid foreseeable harm to retail customers

• Enable and support retail customers to pursue their financial objective

• The introduction of the four Outcomes which are the key elements of the firm-customer relationship. A company’s actions in this are vital in enabling retail customers to meet their financial needs and improve their financial wellbeing. These are:

• Products and services

• Price and value

• Consumer understanding

• Consumer support

The overall aim of the rule changes is to require companies to consider the needs, characteristics, and objectives of retail customers across all stages of the customer journey. As well as delivering good customer outcomes they will need to understand and evidence that these outcomes are being met.

 When are these changes being introduced?

 The introduction of these changes is staggered based on product type. For new and existing products or services that are open to sale or renewal the changes come into effect on 31/7/23; whilst for closed products, those no longer marketed, distributed nor open to renewal, these changes will begin one year later on 31/7/24.

Who is affected?

 Under the new guidelines, these changes apply to all companies under the FCA’s jurisdiction that ‘have a material influence over, or determine, retail customer outcomes’. This is a very broad description but any companies that are covered under the Financial Services and Markets Act 2020, E-money Regulation 2011 (where it refers to prospective or actual retail customers) or The Payments Services Regulation 2017 will make up the majority of those companies affected and who must comply with the new rules.

 In the context of these rules, retail customers are not just private individuals but can also include SMEs, much larger corporations or even bodies such as local authorities. Exactly what constitutes a retail customer in each instance depends on the regulation that covers customer interaction and what it defines as a retail customer.

 Why is it changing?

The FCA is becoming more of an active and proactive regulator that seeks to have more of an effect on the behaviours of the financial sector and these rules represent this change. The FCA aims to ensure that best practice is being followed and that the consumer and reputation of the sector are protected. 

Sheldon Mills, the Executive Director of Consumers and Competition, said, ‘The current economic climate means it’s more important than ever that consumers are able to make good financial decisions. The financial services industries needs to give people the support and information they need to put their customers first.’

These rules were designed after the FCA completed a major review of customers of retail banks and found that practices and procedures were not in keeping with the best interests of customers. The significant findings were:

• Repeated instances of poor customer outcomes and failures to treat customers fairly.
• Repeated instances of poor customer outcomes being driven by gaps in policy and procedures, inadequate staff training covering conduct requirements and manual interventions within systems appear to make delivering fair customer outcomes more difficult.
• Absence of outcomes testing or quality assurance that considered whether customers had received fair outcomes from the end-to-end treatment they received.
• Poor record keeping so that it was not possible to determine if the customer received a fair outcome.
• Instances of customers providing information indicating characteristics of a vulnerability that were not considered or suitably responded to.

 What do companies need to do when the changes come into effect?

Before these rules come into place companies need to examine the journeys their customers go through and ensure they have the correct processes and procedures in place to ensure that a customer’s best interests are being served and that they are supported and provided with enough information and transparency to make informed financial decisions.

In relation to the 4 Outcomes it is important that companies: 

• Review their current approaches to ensure they are compliant with the new Customer Duty requirements.
• Ensure that they can evidence the positive outcomes each customer experienced
• Review these outcomes on a regular and ongoing basis
• Any issues identified in these reviews are corrected

 The new Customer Duty requires that companies:

• End rip-off charges and fees.
• Make it as easy to cancel or switch products as it was to take them out.
• Provide helpful, prompt and accessible customer support and eliminate the practice of making customers wait so long they give up.
• Eliminate burying key product or service information in terms & conditions and instead provide clear information to allow customers to make informed decisions.
• Provide product services that are right for customers.
• Focus on the real needs of customers and understand that they are diverse, including those in vulnerable circumstances, at every stage of the customer journey.

 These rules are intended to force a major cultural shift in the financial industry and eliminate the practice of selling consumers services and products which do not suit their financial needs and are not in their best interests. Ultimately companies need to ensure that negative customer outcomes are not allowed for the sake of profit.

 How can Red Flag Alert help?

With the introduction of these rules business clients, who are classed as retail customers, will be protected and it is the vendors' responsibility to understand their client's business so they can provide appropriate products and services to ensure a good outcome.

Red Flag Alert is a business data platform and credit reference agency that provides full reports on all UK businesses. These reports give a 360 view of a company's past and present, and contain information key to deciding which products are in their best interest. This information includes full CCJ information, company history, financial data and debenture history.

Red Flag Alert also includes:

• Records on over 15 million UK companies and over 350 million international companies
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