Callum Delhoy explains how to demonstrate your client-centric approach and meet the FCA’s Consumer Duty requirements
This July, the Financial Conduct Authority (FCA) unveiled its plans to introduce a new Consumer Duty. Set to come into force for new and existing products on 31 July 2023 and for closed products on 31 July 2024. These reforms will fundamentally change how firms interact with their customers.
Historically, firms have taken an implementation date for new regulation and worked back from there. This has focused a lot of compliance activity in the weeks leading up to the implementation date. However, with the Consumer Duty, the FCA expects advisers to use new information from product providers to make judgements about the overall impact of the proposition they recommend to clients. As a result, the FCA has said that it expects firms to have a plan in place for the Consumer Duty by the end of October 2022 and start implementing the duty from then.
Many firms will already be putting their customers first to the extent that they are already compliant with the Consumer Duty. For example, the FCA’s last suitability review of investment advice found that in 93% of cases, the sector provides suitable advice. However, it is still vital for all firms to be able to show evidence of compliance in line with the FCA’s expectations.
The principles underpinning the Customer Duty are not new, but the FCA is under increased pressure to become a more assertive, data-led regulator. For example, a recent parliamentary report said the FCA “should have a better mechanism for responding to consumer harms and collect more evidence on a regular basis to pick up on issues that are being raised, especially from emerging risks in financial markets”.
The cost-of-living crisis has also underlined the importance of demonstrating that all firms are placing their clients at the heart of their business agenda. As Sheldon Mills, the FCA’s executive director of consumers and competition, explained: “The current economic climate means it’s more important than ever that consumers are able to make good financial decisions.
The Consumer Duty will lead to a major shift in financial services and will promote competition and growth based on high standards.”
To understand how firms will be able to demonstrate their adoption of new client-centric approaches, it is worth reviewing the specific requirements that adherence to the Consumer Duty requires:
- End what the FCA, in its more colourful moments, refers to as “rip-off charges and fees”. More specifically, in the advice sector, it is concerned that its Financial Lives consumer research shows that 22% of clients with an ongoing advice relationship say they have no idea how much they have paid for advice.
- Make it as easy to switch or cancel products as it was to take them out in the first place.
- Provide helpful and accessible customer support, not making people wait so long for an answer that they give up.
- Provide timely and clear information that people can understand about products and services so consumers can make good financial decisions, rather than burying key information in lengthy terms and conditions that few have the time to read.
- Provide products and services that are right for their customers.
- Focus on the real and diverse needs of their customers, including those in vulnerable circumstances, at every stage and in each interaction.
Given that advice firms are accountable to their clients for investment performance on an annual basis, many of these requirements should not require too much resource from compliant firms to implement.
However, some changes in approach are needed. Financial planners have traditionally thought about regulation within the context of individual clients; after all, that’s who they have a fiduciary duty to serve. But if firms focus on implementing the consumer duty on a client-by-client basis, they will drown in a sea of paperwork. Instead, they should think of their business at a segment level. Not only is this the best way to improve practice in a systematic way, the FCA only requires evidence of compliance with the Consumer Duty at the segment level.
In particular, firms must go back over their approach to vulnerability and ensure that their products and services are accessible and understandable by potentially vulnerable customers. Similarly, if firms find themselves withdrawing a product or service due to it not complying with the Consumer Duty, they should also consider how the withdrawal itself will impact affected customers. The FCA’s model for vulnerable customers of learning from experience, testing and improving propositions based on learnings, is a good model to start with when adapting one’s practices to become Consumer Duty-compliant.
Ultimately, these new FCA regulations provide an opportunity for firms to demonstrate their commitment to their clients and boost confidence in financial services, which is an outcome that is in everyone’s interests.
Callum Delhoy is public policy adviser at the CII