What are the implications?

The Duty sets higher expectations for the standard of care that firms provide to consumers. Firms must put consumers at the heart of their business model — and critically be able to evidence this. Here we explain, at a high level, the implications for firms of the Consumer Duty measures. Other articles take a deeper look at some of the more challenging aspects of implementing the Consumer Duty.

Consumer Principle

The FCA's intention for the Consumer Principle is to drive a change in firms' behaviour with a focus on consumer outcomes.

The Consumer Principle will become Principle 12 within the FCA's Principles for Businesses (PRIN) sourcebook. Its inclusion within PRIN emphasises the importance the FCA places on the Consumer Duty. The FCA emphasise Principle 12 imposes a higher standard of conduct than Principles 6 and 7. As a result, Principles 6 and 7 will be disapplied for retail businesses where Principle 12 applies. Principles 6 and 7 will therefore only continue to apply to certain SMEs and wholesale business. However, firms will still be expected to consider existing guidance on Principles 6 and 7 when considering their obligations under the Consumer Duty.

The regulatory intention is for firms to not focus simply on processes, but on the impact of their actions on consumers. This focus needs to extend beyond individual products or service lines, encompassing the business model, proposition and operating model, to consider whether there are any inherent design flaws within it that could lead to poor customer outcomes.

The FCA also accepts that it is not possible to secure good outcomes or act in a client's best interests at all costs. There is an acceptance of reasonableness in the practical application of the underlying rules, together with an inherent understanding that most firms have director and shareholder obligations. 

Firms should be mindful that Principle 12 is not a re-packaging of Principles 6 and 7 but imposes a higher and more exacting standard of conduct. Firms will need to take into account the limits of Principle 6 and 7 as they do not cover all FCA expectations under the Duty. 

The Consumer Principle concerns ‘retail’ customers, however there could still be scoping challenges for some firms. Distinguishing between who qualifies as a retail customer in certain circumstances for certain products may not be straightforward. More significantly, firms will have to determine whether to apply the Principle to all customers creating a consistent standard across both cohorts or solely to retail customers, running parallel processes and controls. Either choice brings costs and benefits.

Whilst the Duty does not remove consumers’ responsibility for their actions, firms are responsible for enabling and empowering consumers to make decisions in line with their needs and objectives. To do this effectively, firms will need to understand and take account of a products target market, consumer behavioural biases and the impact of vulnerability on consumer needs and choices.

Cross-cutting rules

The three cross-cutting rules set out how firms should act to deliver good outcomes for retail customers. These rules and the associated non-handbook guidance articulate the standards of conduct the FCA expect under the Consumer Duty Principle, setting out how firms should act to deliver good outcomes for consumers. The rules apply throughout the customer journey and lifecycle of the product.

The FCA want the cross-cutting rules to work together as a package, and poor conduct will often breach more than one of the cross-cutting rules. For example, a failure to explain the risks of a product is unlikely to be acting to avoid foreseeable harm or enabling and supporting customers to pursue their financial objectives. Equally compliance with the four outcomes alone will not ensure the standards required under the Duty are met. The cross-cutting rules help define the overarching standards of conduct firms should follow in areas not explicitly dealt with through the four outcomes.

Acting in good faith

Firms must act in good faith at all stages of the customer journey and during the whole lifecycle of a product from design and distribution. The requirement to act in good faith does not create a fiduciary relationship where it does not already otherwise exist between the firm and the customer.

Examples where a firm would not be acting in good faith include:

• Consumer understanding — promoting products or services in a way that misleads customers about the benefits or risks, for instance by disguising the risks or burying key terms in documents or web pages they know customers are unlikely to read.
• Consumer support — operating systems or processes that are known to frustrate or prevent customers enjoying the use of their products. For example, website or mobile phone applications designed to manipulate or subvert consumers’ choices through harmful leading questions.
• Products and services — Using algorithms, including machine learning or artificial intelligence, within products or services in ways that could lead to consumer harm. For example, where applying algorithms embed or amplify bias and lead to outcomes that are systematically worse for some groups of customers, unless differences in outcome can be justified.

This demonstrates the interconnectedness of the Consumer Duty elements and how firms will need to consider their activities through the lens of each component of the Consumer Duty rather than in isolation.

Avoid foreseeable harm

The FCA want firms to take proactive and reactive steps to avoid causing harm to customers through their conduct, products or services where it is in their control to do so. The FCA expect all firms to collect enough information to be able to act to avoid foreseeable harm.

What is foreseeable is dynamic and firms will need to ensure its monitoring takes this fluidity into account. The regular reviews the FCA require under the Consumer Duty are expected to provide firms with the opportunity to identify any new or emerging harms and respond accordingly to appropriately to address them. Consideration of information gleaned from complaints, internal MI, regulatory publications and press coverage may also provide sources of emerging harm and analysis of these data should be considered through this lens too.

FCA guidance sets out areas which firms should consider in order to act to avoid foreseeable harm under each of the outcomes. In relation to consumer support outcome, firms should:

• Consider information available on customer behaviour and feedback to identify whether customers, or groups of customers, are encountering inappropriate barriers or unreasonable additional costs as part of firms' customer service provision.
• Put things right when mistakes occur.
• Be accessible when customers have questions.

If a firm identifies that retail customers have suffered foreseeable harm as a result of its actions, it must act in good faith and take appropriate action to rectify the situation, including providing redress where appropriate.

This rule does not mean the need for all products should be entirely risk free, the FCA recognise that many involve risk and that if such a risk materialises a consumer may suffer an adverse outcome. For example, defaulting on a mortgage could result in repossession. Neither does it mean firms are required to protect customers from risks that they reasonably believed the customer understood and accepted. However, it will be a firms responsibility to clearly demonstrate how it reached this conclusion. FCA guidance explains this will depend on factors such as:

• The type of product.
• The adequacy of the product design.
• Pricing.
• Communications.
• Associated customer services.

Enable and support retail customers to pursue their financial objectives

This rule is concerned with the financial objectives of the consumer in relation to the financial product or service and applies throughout the customer journey and lifecycle of the product. Consumers can only take responsibility where they are enabled and supported to make informed decisions in their interests through firms creating the right environment. The FCA want firms to proactively and reactively focus on putting consumers in a better position to make decisions in line with their needs and financial objectives. The conclusions a firm will reach about its customers’ financial objectives will depend on the nature of the relevant products or services. The actions a firm might need to take to enable and support customers to pursue their financial objectives would be determined by what is within a firm’s control, based on their role and knowledge of the customer.

For example:

• A firm providing advisory or discretionary services would understand more about the consumer's specific objectives and would need to act on that knowledge. For instance, an advice firm should know a consumer has the objective to retire by a particular age or to make sure a dependant is provided for.

Further, all firms can support consumers in pursuing their financial objectives by:

• Considering the characteristics of the consumers that their communications are aimed at and tailoring them accordingly so that they are likely to be understood (consumer understanding).
• Ensuring that the channels of support they provide work effectively and do not act as a barrier to customers utilising their products, cancelling or switching to another provider should they wish to (consumer support).
• Designing products or services with clear and straight-forward features so they can be understood by consumers in the target market (product and service design).

The four outcomes

The four outcomes represent the key elements of the firm-customer relationship. The behaviour and actions of firms in relation to each of these outcomes are instrumental in enabling consumers to meet their financial needs and improve their financial wellbeing.

The outcomes establish the suite of rules and guidance setting the FCA's expectations of firms under the Consumer Duty, and whilst standalone, are unsurprisingly interlinked. For example, poor product design or governance may impact fair value considerations. Across all outcomes there is an expectation that:

• Firms review their current approaches to bring them in line with the Consumer Duty requirements.
• Firms ensure they can evidence outcomes.
• Outcomes are reviewed and monitored on an ongoing basis.
• Any issues identified are remedied or mitigated.

0.1 Products and services

The FCA has, in recent years, identified a number of products and services that contain aspects that exploit behavioural biases or have features that make it difficult for consumers to assess whether they are right for their needs. The FCA, with this outcome, want firms to embed robust consideration of a products target market's needs, characteristics and objectives in order to deliver good outcomes.

To support this, the FCA has broadened the scope and remit of rules relating to product governance to cover all aspects of the proposition in all sectors and for all products and services in the retail market. This delivers a more consistent application of expectations on product governance relating to a firm's objectivity and robustness.

The new requirements within PRIN, differentiate between the roles of manufacturer (including co-manufacture) and distributor. Across these different relationships, there is the expectation for firms to agree their roles and responsibilities under the rules to ensure requirements are met and document this in writing. The aim with this is to ensure in the event a problem arises about a product or services it is clear where accountability lies.

This approach is aligned with the existing Product Governance arrangements some sectors are already subject to under the PROD sourcebook. In simple terms, the proposals are akin to a PROD-lite. Whilst proportionate for those not currently subject to PROD, firms that have products or services in both PRIN and PROD regimes will need to decide whether to operate a single product governance framework and policy.

The rules apply in relation to any new product or service, or when making significant adaptations to a product or service, before it is marketed or distributed to retail customers. Whilst the Consumer Duty is not expected to be retrospective, these rules will apply to existing products and services (whether they are open to new business or not) so there is certainly a degree of backward application. Determining whether a product is new or existing may not always be a straightforward choice, and firms will need to weigh up the product against its existing portfolio and determine the difference or similarity and the impact on the customer. The guidance includes examples of how products can be classed.

• Existing product — A mortgage lender replacing a mortgage deal at one interest rate with a new deal at a different rate. Other terms and conditions, including other elements of the charging structure (such as entry and exit fees), remain the same from deal to deal with no significant additional changes to the product terms and conditions.
• New product — Updates to a general insurance product that narrows the scope of cover.

The FCA also highlight that a series of small changes which, standalone, may not amount to a significant change but together may amount to a significant change.

The FCA wants firms to think broader than just the specific product or service in isolation. Firms should consider the overall proposition in a more holistic fashion. For example, for advice firms and wealth managers, this means considering the total cost of ownership of platforms fees and fund charges (rather than just focusing narrowly on their own adviser charge). Equally, where the route from product manufacture to end customer involves a complex distribution chain in insurance, there will be an expectation that the impact on the end customer for each link in the chain is appropriately considered.

As such, genuine outcomes testing becomes more important to evidence the appropriateness of the solution at time of purchase. However, it also becomes as relevant to assess the appropriateness of the outcomes experienced throughout the natural intended lifecycle of the product. This will require firms to put themselves in the shoes of the customer and where they identify issues, redesign processes to improve outcomes to customers. The full lifecycle of the product (through multiple customer lenses) may be required to consider a wide variety of circumstances where poor outcomes may be generated for a subset of the target market. Where identified, the expectation is that any such harm is mitigated and, where appropriate, potentially remediated.

0.2 Price & value

Through various market studies and other initiatives, the FCA has intervened on the topic of price and value. Over the last few years, the FCA has proactively considered pricing and value in banking, insurance, and wealth and asset management, whether via market studies or other broader initiatives.

On some pension products and current account overdrafts, it has now set maximum charges, it has also restricted the fees Claims Management Companies (CMCs) can charge for some claims. On financial advice, it has banned contingent charging on pension transfer advice.

With the Consumer Duty, the FCA is seeking to set a clear and consistent approach to price and value across the financial services sector. As a result of the different initiatives, sectors are at different levels of maturity and have different mechanisms for assessing and evidencing value. Under the Consumer Duty, the FCA creates requirements for all firms to develop and embed a framework to objectively assess pricing factors to determine the value that products and services deliver. Critically, however, the FCA does not set detailed requirements for the fair value assessment. Instead, it sets out the factors firms must consider, as a minimum, to assess value. This is similar to the approaches we have seen the FCA adopt elsewhere e.g. GI pricing practices.

Although labelled by the FCA as a separate outcome, fair value assessments will form an integral component of a firm's product and service governance arrangements. The assessments are likely to inform, and be informed by, other aspects of this framework. To effectively consider fair value, the assessment should also include consideration from two differing perspectives. A top-down strategic and business model view will be as important as a bottom-up product assessment focussing on specific features and benefits, how firms administer it and the associated fair value being delivered on specific products or services. More detail on how firms might evaluate and evidence the price and value outcome and the skills and resources needed to do so, can be accessed here.

Customers will be the ultimate arbiter of value and although firms will develop frameworks to internally assess and benchmark price and value, it will also require direct interaction with end customers to understand their perceptions on the trade-offs between price and value. This should form part of a firm's enhanced product governance arrangements.

It may be assumed that this activity will have a wholesale downward pressure on costs; however, some tranches of customers will likely experience an increase in costs in the longer term. Where cross subsidisation is deemed unfair, this equalisation of costs versus benefits may justifiably see prices rise for some customers.

0.3 Consumer understanding

The FCA is seeking an outcome whereby firms put themselves in their customers' shoes so that their communications equip consumers with the right information at the right time and in an understandable way to enable effective decision making. This increasingly means how customers engage digitally. For example, under the Insurance Distribution Directive (IDD), this includes asking sufficient questions to establish customer requirements through the quote journey and ensuring any products offered are consistent with their individual needs. However, the adoption of digital cannot be to the detriment of more traditional communication channels.

The choice of wording for this outcome emphasises that the FCA wants firms to focus not just on giving customers information about products and services but that they are understandable to the average consumer. Demonstrating that firms need to consider more deeply what 'clear, fair and misleading' really means from a customer perspective.

The rules state that a firm must ensure that:

• it supports retail customer understanding so that its communications meet the information needs of retail customers;
• they are likely to be understood by the average retail customer intended to receive the communication; and
• equip retail customers to make decisions that are effective, timely and properly informed.

To meet the FCA's expectations in relation to vulnerable customers, firms will need to understand how they can still generate comparable outcomes, regardless of how customers chooses to interact. This requires firms to understand who they are communicating to, but also the 'what' and the 'how' they are communicating. This could lead to a proliferation of communication content, approaches and/or reconfiguration and re-drafting depending on more specific client circumstances or specific vulnerabilities. 

The proposals build on, and go further than, Principle 7, by requiring firms to focus much more on consumer outcomes and understanding throughout the customer journey. Firms need to proactively consider the degree to which their communications, intentionally or otherwise, take advantage of consumers behavioural biases and may potentially result in poor customer outcomes. To achieve the stated outcome, firms will need to conduct more testing with retail customers to objectively assess the degree to which their communications are designed to deliver the desired effect and empower customer to make informed decisions. This outcome is also likely to impact the more detailed product literature, disclosure and associated terms and conditions. This could lead to a challenging trade-off between useful features and benefits of the underlying products or services which cannot be easily articulated such that they are readily understandable by its customers.

Notwithstanding existing regulatory communication obligations, the FCA suggests areas which enhance the effectiveness of a communications for firms to consider during production or review:

• Layered: key information (including any action required/ consequences of inaction) provided upfront with cross-references or links to further detail.
• Engaging: Using devices to make key information clear and engaging e.g. headings, layout, bullet points, tables, graphs, diagrams.
• Relevant: include the appropriate level of detail for each communication taking into account what consumers need to know, the kind of decision to be made and avoiding unnecessary disclaimers.
• Simple: Present information in a logical manner avoiding jargon or technical terms where possible. If there is no alternative, these terms should be explained in plain language.
• Well timed: Firms should communicate with consumers in a timely manner and at appropriate touch points throughout the product lifecycle.

0.4 Consumer Support

The FCA is seeking to achieve an outcome where the support provided by firms is "designed and delivered to an appropriate standard such that consumers do not meet unreasonable barriers when they want to pursue their financial objectives”. As part of those “unreasonable barriers” the FCA include unreasonable additional costs.

This outcome sets overarching requirements in relation to the support firms provide their customers. However, the FCA expect these to be read alongside other elements of the FCA handbook that cover specific aspects of consumer support, such as complaint handling.

The FCA wants to ensure the effort and attention that firms put into pre-sales activity is replicated in the firm's after-sales care. The FCA has identified 'sludge practices' in customer service processes where they are consciously designed to hinder consumers from taking action that would benefit them (e.g. switching to a more appropriate product). However, even where cumbersome processes are unintentional, they can have the same impact and lead to poor outcomes. For example, customer experience situations where the process to apply online is frictionless, but conversely, the process to leave, cancel or transfer is comparatively cumbersome. With this outcome the FCA expects that — “in general, it should be at least as easy to exit a product as it is to enter”.

As intended, this approach extends the reach of product governance to more ancillary and supporting activities such as client servicing and claims. The broader remit and scope move away from firms considering product governance too narrowly. It seeks to move firms towards a more holistic assessment of the appropriateness of the overarching proposition and holistic outcomes from a customer perspective over the lifetime of the product. This is more akin to proposition governance.

Firms would need to reassess all their product servicing arrangements to see the degree to which they create a barrier to a customer being able to freely interact with the product or service — appropriately balancing the impact on the firms. This would range from more general customer service, through to claims handling, complaints and switching or cancelling the product or service. Similar to product and service, firms will need to conduct outcomes testing and gather appropriate management information on their customer service activities to ensure that they can evidence how they are delivering against the FCA's stated outcome.