Consumer Duty: avoiding harm and enabling good outcomes

On 31 July 2023, financial services will experience a significant change.

Earlier this century, the Financial Services Authority - the forerunner of today’s Financial Conduct Authority (FCA) - introduced the concept of Treating Customers Fairly, or TCF.

Then, on 31 December 2012, the Retail Distribution Review (RDR) was introduced. This changed the rules about how financial advisers described their services and how UK consumers paid for them. 

From the end of July, another FCA initiative that continues this regulatory evolution goes live, which is known as the Consumer Duty.

To underpin the FCA’s commitment to putting consumers’ needs first, the duty will require regulated firms to act to deliver "good outcomes" for consumers, and make sure those consumers are properly supported while using a financial product or service.
 

"Consumers should receive communications they can understand, products and services that meet their needs and offer fair value, and get the customer support they need, when they need it."

This means consumers should receive communications they can understand, products and services that meet their needs and offer fair value, and get the customer support they need, when they need it.

According to the FCA, “the purpose of the Consumer Duty [is to set] higher and clearer standards of consumer protection across financial services and requires firms to put their customers' needs first.”

Principle, outcomes, rules and roles

Underlying the duty’s over-arching Consumer Principle of “a firm must act to deliver good outcomes for retail clients” are four key outcomes for providers and advisers to comply with:

• Products and services;
• Price and value;
• Consumer understanding; and
• Consumer support.

In addition, cross-cutting rules define the standards of outcomes that a "reasonably prudent firm" is expected to deliver; namely, acting in good faith, avoiding foreseeable harms, and helping consumers achieve their financial objectives.

To demonstrate this, firms will be expected to collect data to ensure they are able to identify, monitor, evidence and stand behind the outcomes that their customers experience.

Finally, the duty is introducing descriptive names for those involved in the supply chain of products and services to consumers. A 'manufacturer' – which includes ourselves - is involved in the production of goods, while a 'distributor' – which includes the adviser firms that we work with - is involved in the distribution of those goods to consumers or retailers. 

In terms of the ownership of goods, manufacturers own the goods they produce, whereas distributors own the goods they purchase from manufacturers.

Putting the duty into practice

The concept of the Consumer Duty was first outlined by the FCA two years ago, and in addition to its consultation papers and policy statements, much has been written and spoken about the duty during that time, both within the financial services industry and beyond.

The original implementation date was going to be 30 April 2023, but the FCA’s policy statement last year allowed an extra three months to integrate the duty’s culture within providers and advisers - and document that fact.

As a manufacturer, we still had a deadline to meet by April; namely, to complete all the internal reviews that were necessary to satisfy the four outcomes outlined above, and to ensure that all relevant information about ourselves and our products were communicated to our distributors.

Two examples of where we are proactively addressing foreseeable harms – in order to deliver good consumer outcomes - are as follows:

1. Customers withdrawing a high amount of income from their pension

The foreseeable harm of a customer regularly extracting more income from their pension fund than returns from the underlying investment portfolio are replacing, is the exhaustion of their fund too early.

The data that will be used as part of our Consumer Duty Key Performance Indicators (KPIs) and included within our proposition risks and communication objectives, will enable us to flag to our distributors those customers who are close to exhausting their pension fund, which may also be suitable for use with other products to help identify and alert those customers who are consistently taking high levels of income.  

2. Customers holding a high percentage of their pension fund in cash

The foreseeable harm of a customer holding a high percentage of their pension fund in cash, is that they could miss out on potentially higher investment returns from other asset holdings over time, (for example, equities), compared with the interest rate earned on their cash holding. 

Again, the data that is gathered under our Consumer Duty KPIs to track investments over time, will ensure that we are identifying those customers at risk of harm.
 

"The FCA’s Consumer Duty initiative constitutes a paradigm shift in consumers’ expectations from financial services providers and advisers."

There may be relevant reasons as to why the customer is holding most of their pension fund in cash, (for example, in anticipation of a commercial property purchase), but a mailing is planned under the 'consumer understanding' outcome, to those customers persistently holding large amounts in cash. 

This is in addition to the cash warning statements that were introduced by the FCA in 2020 as part of its Investment Pathways initiative, as well as new cash warning statements for those still accumulating funds in their pension, that will be introduced from December 2023 as part of the FCA’s non-workplace pension review, (our SIPP is an example of a non-workplace pension arrangement).

In conclusion, the FCA’s Consumer Duty initiative constitutes a paradigm shift in consumers’ expectations from financial services providers and advisers.

There is no doubt the initiative will continue to evolve over time, as the FCA analyse the data gathered from within the financial services industry, and consumers share their outcome experiences; be they good, or otherwise.