The Consumer Duty was introduced to set new, higher standards for firms to adhere to, requiring those who operate in the financial services industry to consider customer outcomes in all circumstances. It requires firms to be open and honest, avoid causing foreseeable harm, and support consumers to achieve their financial goals.
Under the Duty, firms are expected to:
- Provide helpful and accessible customer support – this should allow consumers to sort out issues quickly and easily, as well as allowing the cancellation or switching of products to be as easy as it was to purchase them;
- Give timely and clear information – this should mean all consumers receive information that is easy to understand and there should be no important items hidden amongst lengthy terms and conditions;
- Provide products and services that are right for the consumer – this should ensure that consumers are not sold products and services they do not require, nor advised to take up product options that they don’t need and will never use;
- Provide products and services that represent fair value – this should mean that all consumers can expect value for their money from the financial products and services they buy, with firms carrying out value assessments to ensure that their offerings are fairly and competitively priced;
- Consider if any client is in a vulnerable situation – this should ensure that any consumer that is deemed to be in a potentially vulnerable situation is given the required support and care they need to achieve their financial goals.
the regulator is trying to implement a new regime where the objective is to avoid bad outcomes for consumers, but firms cannot be expected to risk their own profitability
The requirements of the Consumer Duty have been well-defined, but how firms choose to implement it within their own businesses is a matter of interpretation. The FCA has provided a number of examples of good practice, and it has issued several updates on how successfully (or not) firms have been in putting the Duty in to practice and embedding it into their culture. But how has the introduction of the Consumer Duty impacted the day-to-day operations of financial firms, not only in terms of what they actually do differently, but also the processes they have had to put in place to demonstrate their adherence?
One of the key obligations for firms is to show that all their staff have at least passed or even just taken a Consumer Duty CPD module; to show they have communicated the changes to their employees. The hope of any CPD module is that there will be a learning outcome at the end of it, but there not always any real proof that the employee has taken on-board all the intended lessons the module was designed to give.
Another consideration must be how the Consumer Duty has affected compliance supervision, specifically in respect of grading case files. All advisers will have case-checks, whether that be weekly, monthly, or quarterly. Firms are required to do spot checks to ensure their advisers are following the rules, adhering to established company processes, and most importantly giving sound advice to clients. But what happens when an adviser may have to step outside of company processes to avoid a potentially poor outcome for a client? Does his firm’s compliance function have the flexibility to take the Consumer Duty obligations into account when grading these files?
Say, for example, that a client requires a particular protection product, but the adviser firm offers tied advice for protection products and the only product offering that is suitable for this client is one that would potentially stretch their monthly budget too much. The adviser knows they can get a much better price elsewhere, and that if the client were to shop around, they would be able to achieve the same protection for a lower cost. It may not be within a firm’s advice guidelines to inform the client of this fact, and if the adviser chooses to do so they may fail their compliance check, even though the outcome for the consumer is a positive one.
There is a potential conflict between the Consumer Duty obligations and a firm’s need to do business and make money; the obvious problem lies where the latter takes precedence over the former. However, while alerting a client to the potential savings to be made by going elsewhere is the morally correct stance, the cost of doing the right thing is sending this potential business to a competitor. What does a compliance supervisor do when grading this case? Fail them for not abiding by company processes, or applaud them for giving due consideration to the possible outcomes for their client?
One argument is that a company’s processes have been approved by senior management and the firm’s compliance function, so they have been designed to help advisers stay within established rules and guidelines to give sound financial advice. If advisers were given the leeway to go outside of the normal company processes, this could leave the company even more exposed to potential risk as there is just as much chance that client outcomes could be negatively affected by allowing such freedoms. In the example discussed, say the client is sent away to purchase the product from a cheaper provider but never gets round to it and ends up without the necessary protection, you could argue that the adviser has failed the client to a greater degree than if they had simply sold them the slightly more expensive cover in the first place.
The counter argument is that if an adviser sticks to the company processes when those processes could potentially cause financial harm by stretching the client’s monthly budget, not alerting the client to the other options available on the market could be argued is not in the spirit of the Consumer Duty.
So, the question remains: has the FCA provided enough direction and guidance to firms regarding the changes they must make to the way they operate to achieve the aims of Consumer Duty, as the FCA would like it to be applied? From many within the industry, the answer would be a resounding no. For some firms, the Consumer Duty represents a huge shift from the way they have operated for years, if not decades, and it will take more than a few examples of ‘good and poor practice’ before the obligations of the Duty become second nature for them. There is also the issue of where firms must draw the line in turning away business to achieve positive outcomes for all clients.
Ultimately, the regulator is trying to implement a new regime where the objective is to avoid bad outcomes for consumers, but firms cannot be expected to risk their own profitability – and mere survival – to achieve the BEST possible outcome for all consumers, especially when that requires further action from the consumer or other firms that they cannot be held responsible for. What remains clear is that there is still much more work to be done by the regulator to encourage firms to make the necessary changes to the way they operate and the way they supervise their advisers to be truly Consumer Duty compliant.
