Consumer Duty sets high standards for financial services

25 October 2024

Written by Retirement Line

Introduced by the Financial Conduct Authority in 2023, Consumer Duty aims to raise the bar for customer protection in financial services.

Consumer Duty offers strong protection by ensuring that businesses focus not only on complying with rules, but also on achieving good outcomes for their customers. So what is Consumer Duty, and why might it matter to you?

What is Consumer Duty?

Consumer Duty is a set of regulations introduced by the Financial Conduct Authority (FCA) to improve how financial services firms in the UK interact with their customers. It is part of the FCA's broader strategy to create a fairer, more transparent financial environment where consumers can trust the products and services they use. 

According to the FCA, Consumer Duty provides a suite of rules and guidance that supports each of four outcomes that which represent key elements of the firm-consumer relationship:

• The governance of products and services

• Price and value

• Consumer understanding

• Consumer support

The regulatory changes that were brought in apply across the financial services industry. Banks, insurance companies, pension providers and financial advisors, among others, are all required to follow Consumer Duty regulations.

At its core, Consumer Duty encourages financial firms to adopt a customer-first approach. Instead of merely meeting minimum compliance requirements, companies must think proactively about whether their services truly serve the interests of their clients. 

This includes addressing any shortcomings in their products or services that could cause customer harm. Firms are also required to take steps to improve the overall customer experience.

When did Consumer Duty come into force?

The FCA's Consumer Duty regulations officially came into effect on 31 July 2023. Some businesses had already begun to integrate these principles before the formal deadline. However, this date signified a turning point for all firms under FCA supervision.

Companies must now continuously review their products, customer interactions and internal processes to ensure that they meet the high standards outlined in Consumer Duty. Failure to comply could result in penalties or further action by the FCA.

What protection does Consumer Duty offer?

Consumer Duty is designed to offer stronger consumer protections by focusing on four key outcomes: the governance of products and services, price and value, consumer understanding, and consumer support. 

Together, these outcomes aim to address various aspects of financial interactions, from the design and marketing of products to post-purchase support and communications.

1 - Governance of products and services

Firms must ensure that their products and services are designed to meet the specific objectives of their target market. This involves conducting thorough research during the product development stage and reviewing offerings to address changes in consumer trends and priorities. 

Additionally, firms need to have robust processes in place to handle complaints effectively and learn from any negative customer experiences to make meaningful improvements.

2 - Price and value

Firms must ensure that their pricing models are fair and proportionate to the value provided by their products or services. The regulator will expect firms to justify their charges through evidence that shows a clear relationship between the cost and the benefit to the consumer. 

It's important that pricing structures don’t create barriers to accessing products, taking account personal characteristics such as age, location or disability status.

3 - Consumer understanding

Clear and effective communication is at the heart of this outcome. Firms are required to present information in a clear and understandable way, ensuring consumers can make informed decisions. 

4 - Consumer support

The quality of after-sales support is a crucial element of Consumer Duty. The FCA emphasises that firms must allow customers to act on their informed decisions without facing unnecessary obstacles. 

It also encourages businesses to reflect on whether they apply the same high standards of customer support for maintaining good outcomes as they do for generating sales and revenue. For example, firms should ensure that switching products, leaving a service, or making changes is just as straightforward as the initial purchase process. Also, customers should not experience significantly longer wait times for post-sale inquiries compared to when they initially sign up for a product or service.

Identifying customer vulnerabilities is also an important aspect of this outcome. An important element of Consumer Duty is to consider if a customer is ‘vulnerable’, for example on the basis of poor health or experiencing financial difficulties, and to support them accordingly.

Ongoing monitoring and accountability

Another significant aspect of Consumer Duty is the expectation for ongoing monitoring. Firms are required to assess their performance regularly, making adjustments where necessary to maintain high standards of customer care. 

The FCA expects firms to track customer outcomes, identify areas where improvements can be made, and act swiftly to correct any issues. 

Furthermore, the FCA has made it clear that responsibility for compliance extends beyond frontline staff to leadership, which will need to demonstrate that they are taking Consumer Duty seriously.

The new regulations do seem to have gone down well in the industry. In a poll in September at the FT Adviser’s Financial Advice Forum, the vast majority (92 per cent) of advisers said they believe that consumer duty has been positive.

Why Consumer Duty matters

Consumer Duty represents a shift in how financial services firms operate, with the focus on delivering better outcomes for customers. For consumers, this means greater confidence that their financial products and services are designed to meet their needs, are priced fairly, and are explained in a way that they can understand. 

It also means that firms must prioritise providing good customer support. This is especially so for those who are vulnerable or may struggle to access traditional services.

For financial firms, Consumer Duty introduces more stringent requirements. But it also offers an opportunity to build trust and long-term relationships with customers by demonstrating a commitment to fairness, transparency and accountability.

The introduction of Consumer Duty represents a pivotal moment for the UK financial services industry, placing the customer at the centre of regulatory expectations. As businesses continue to adapt to these new standards, consumers should benefit from better products, clearer communication and improved customer service. All of these outcomes are vital for financial wellbeing.

What to do if you have a problem with a financial services provider

If you have an issue with a financial services provider, or you feel they are not meeting Consumer Duty standards, then you should first make a complaint directly to them. If you are not happy with their response, then you can contact the Financial Ombudsman Service.

Sources

What Consumer Duty means for you: Consumer Duty sets higher standards for financial services customers. Financial Conduct Authority. Accessed 08 October 2024.

Outcomes supported by Consumer Duty: FG22/5 Final non-Handbook Guidance for firms on the Consumer Duty. Financial Conduct Authority. Accessed 08 October 2024.

92% of advisers believe Consumer Duty has been positive: Majority of advisers say consumer duty has been positive. FT Adviser. Accessed 08 October 2024.

Picture: copyright Financial Conduct Authority