the what and the why…

a definition:

In a nutshell, the Duty is a regulation that sets higher expectations for the standard of care firms give to consumers in retail financial markets. It is overseen and regulated by the Financial Conduct Authority (FCA).

what is the duty TRYING to acheive?

Existing regulations that focus on delivering good customer outcomes and fair value (such as Treating Customers Fairly – TCF), means that the majority of firms (like ourselves) will already be delivering on much of what the Consumer Duty aims to achieve – so it shouldn’t be too difficult a task to accept and implement the Consumer Duty.

However, there will be additional actions required to ensure that existing and new best practices are applied consistently across the industry, as the Consumer Duty demands that all who operate in this market evidence that they are:

“…acting to deliver good outcomes for retail customers”

Put simply the Duty is in place to better protect consumers from potential current and future ‘drivers’ of harm.

Why is the Consumer Duty being introduced?

what is the consumer duty trying to achieve?

Existing regulations that focus on delivering good customer outcomes and fair value (such as Treating Customers Fairly – TCF), means that the majority of firms (like ourselves) will already be delivering on much of what the Consumer Duty aims to achieve – so it shouldn’t be too difficult a task to accept and implement the Consumer Duty.

However, there will be additional actions required to ensure that existing and new best practices are applied consistently across the industry, as the Consumer Duty demands that all who operate in this market evidence that they are “acting to deliver good outcomes for retail customers”.

the financial conduct authority (and consumer harm)

The FCA Want:

An outcomes-focused approach to supervision whilst retaining aspects of the current conduct (or rules) based approach that asks the following questions:

  • Has a firm implemented and maintained an appropriate balance between its commercial interests and delivering good customer outcomes?
  • Has a firm put itself in the customers’ shoes when designing and communicating products?

It also requires regulation and supervision to be more:

  • Pro-active
  • Innovative
  • Data-led

An increased focus on Consumer Harm.

To reinforce this focus, `harm` is used over 130 times in both the Finalised Guidance (FG22/5) and Policy Statement (PS22/9):

  • Applies to product design, understanding, terms and conditions communication and consumer outcomes (examples in the Finalised Guidance – FG22/5)
  • A firm has responsibility to prevent foreseeable customer harm
  • A firm must take proactive and reactive steps to avoid causing harm to customers through their conduct, products, or services

why?

  • To change the culture in all firms, so they put the customer at the heart of what they do
  • Not all firms had adopted the previous Treating Customers Fairly and Conduct Risk requirements as well as was anticipated
  • Many firms are still not genuinely and proactively considering the impact of their decisions on customer outcomes

For more information and details on the FCA’s final rules visit their website…

Pandemic (Future Emergencies & Vulnerable Customers)

The likes of COVID-19 have brought into sharper focus, some of the poor outcomes that consumers were experiencing. Take a look at these examples:

Insurance

Many SMEs purchased Business Interruption insurance which they believed offered them protection from having to close – only to discover that their insurers did not cover specific aspects of the pandemic and they could not make claims. Therefore, customers had paid a premium which, at the point of claiming, did not offer the utility expected. The Consumer Duty aims to prevent situations like this from occurring.

The pandemic and cost of living challenges have also created a significant number of additional vulnerable customers, it has highlighted just how precarious many consumers are in terms of financial resilience and therefore the need to offer them a greater degree of protection.

Digitalisation

Since the pandemic, digital engagement with customers regarding products and services continue to increase and will become a permanent feature. Further, as firms develop more innovative product and service solutions, they challenge whether the current suite of Business Standards Sourcebooks have kept pace, as they were based on static, paper-based documents and face-to-face or voice interactions.

This has created a need for the FCA to develop a more flexible and future-proofed regulatory framework to reflect new trends.

In other words

  • Customers had paid a premium for something they didn’t get
  • Products were sold without full information disclosed
  • Customers had not fully understood the terms and conditions
  • Customers received poor value for money
  • Availability of information was limited
  • More Sales were transacted “at a distance”
  • Firms were greatly impacted

We are all at the point where we need to make changes and improve processes because:

  • More people are suffering financial hardships
  • More people in the UK are experiencing vulnerability
  • There is a need to provide a greater degree of protection
  • There is a need to ensure dealers can remain open

Who knows what’s around the corner?

vulnerable customers

According to the FCA, there are four drivers of vulnerability:

Including conditions or illnesses that affect a person’s ability to undertake daily tasks. This could include physical and mental health issues.

Such as bereavement, a loss of employment, and relationship breakdown.

A customer’s ability to withstand financial or emotional shocks.

A lack of resilience could be caused by inconsistent income, a high level of debt, or low savings.

The FCA’s financial life survey indicated that there were 24 million adults showing at least one characteristic of vulnerability in 2020. This represents 46% of UK adults.

A consumer’s level of financial knowledge and confidence in managing money.

some alarming numbers

  • 24 million people have characteristics of a vulnerability
  • 10.7million have characteristics of vulnerability to do with low financial resilience
  • 7.2 million are over-indebted amongst those with low financial resilience
  • 3.8 million in financial difficulty among the over-indebted

HOWEVER, THE SAME STUDY SHOWED THAT 86% OF UK ADULTS DON’T CONSIDER THEMSELVES TO BE VULNERABLE!

Digitisation

  • Digital engagement with customers regarding products and services continues to increase and will become a permanent feature
  • Current static paper-based documents within firms and regulators (FCA Sourcebooks) no longer keep pace with developments
  • Need for the FCA to develop a more flexible and future-proofed regulatory framework to reflect new trends
The Senior Managers and Certification Regime (SM&CR)

The Senior Managers and Certification Regime (SM&CR)

What is it?

The Senior Managers and Certification Regime (SM&CR) has changed how people working in financial services are regulated. 

The SM&CR aims to reduce harm to consumers and strengthen market integrity by making individuals more accountable for their conduct and competence.

It is a catalyst for change – an opportunity to establish healthy cultures and effective governance in firms by encouraging greater individual accountability and setting a new standard of personal conduct.

what needs to happen?

  • Encourage a culture where staff at all levels take personal responsibility for their actions
  • Ensure firms and staff clearly understand and can demonstrate where responsibility lies
  • Staff in key roles are fit and proper to perform their roles (appropriate ‘checks’ made)
  • Staff are trained so that they understand how the rules apply to them in their roles
  • Every Senior Manager will need to have a ‘Statement of Responsibilities’

consumer trust

In an independently commissioned government report (The Penrose Report), it was identified that low customer trust is an issue across a range of markets (not just financial services). This was highlighted by `’loyalty penalties’, where existing customers pay more than new ones for the same product.

The FCA identified this as a key driver behind the Consumer Duty.

It is thought that firms’ practices often weaken consumer trust and result in reduced consumer outcomes.

Outcomes

When we consider and implement all this the following outcomes will emerge:

  • More innovative and consumer-friendly (useful) products and services
  • Management accountability within firms
  • Staff in key roles are fit and proper to perform their roles (appropriate ‘checks’ made)
  • Staff are trained so that they understand how the rules apply to them in their roles
  • Every Senior Manager will need to have a ‘Statement of Responsibilities’

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