Consumer Duty – what’s the impact on firms and consumers?

The Financial Conduct Authority (FCA) has poured a significant amount of regulatory capital into Consumer Duty, so firms should expect it to have a noticeable impact across the market.

“As ‘formal’ Consumer Duty implementation plans had to be signed off by the boards of firms by October, 31, 2022, a lot of work on Consumer Duty should already be underway and is likely tying up a lot of resource,” said Phil Lewis (pictured), head of compliance at Source Insurance.

However, Lewis added that more work, and rework, will need to be done after the deadline to implement Consumer Duty for open products.

Impact on firms

One of the thorniest concepts contained within Consumer Duty, Lewis said is that of ‘fair value’. He questioned who decides what is considered ‘fair’, and how does one go about evidencing that.

“There is still a very open question about the role of commission, particularly renewal commission, and how compatible it is with the Consumer Duty,” Lewis said.

Under Consumer Duty, Lewis said it may be increasingly difficult to justify traditional percentage-based commission, especially renewal commission.

“Any withering of renewal commission is likely to have quite an impact on the intermediated general insurance market,” he added.

Some of the most noticeable impacts, Lewis said, have been seen at the product provider end of the market. Through Consumer Duty, he said the FCA has implicitly moved many responsibilities towards product manufacturers.

“This means that product manufacturers now have new responsibilities for their distribution chain, including brokers,” Lewis said.

Lewis said product providers will therefore be paying much more attention to who distributes their products and how much they charge for them.

“This scrutiny is likely to come in the form of questionnaires and or surveys, so brace yourselves,” Lewis said.

Another factor to come out of the various conversations about Consumer Duty, Lewis said, is that evidence will be “almost” everything.

“I say ‘almost’ because the FCA talks a lot about ‘outcomes’; it is becoming clear, however, that evidence about how and why certain ‘outcomes’ are delivered will likely be more important than the outcomes themselves,” Lewis said.

So, whenever firms make a decision about the services they offer, Lewis said they should document how and why they have arrived at the conclusion that it is compatible with the requirements of Consumer Duty. He added that there will also be an awful lot more reporting for many firms as the FCA uses Consumer Duty to pivot towards being a more data-driven regulator.

“This will undoubtedly appear to be a burden in the short term but should help the regulator become more efficient, which should help to manage the upward trend of regulatory fees,” Lewis said.

Impact on consumers

The central principle of Consumer Duty is that firms are required to put their customers’ needs first.

“The very fact that Consumer Duty exists implies that a significant number of firms are currently not putting their customers’ needs first, maybe not even second, and perhaps for some firms they are just an afterthought,” Lewis said.

In theory, as of July, 31, 2023, Lewis said a consumer should know they are buying a financial services product or service that is designed to provide them with a good outcome.

“The reality is that most firms, in my experience, do at least try to deliver good outcomes already, particularly in the broker space,” he added.

Doing anything else, Lewis said, will lead to firms with a very short lifespan as customers vote with their feet. 

The FCA has stated that one of the outcomes they expect from Consumer Duty is that firms start to compete on elements other than price. While it is a potentially a tricky issue for firms, Lewis said consumers should expect to benefit from ‘fair value’, with many innovating to provide better services while simultaneously driving down prices.

“Consumers should also benefit from clearer communications with firms; one of the historic criticisms of financial services products has been the abundance of jargon and small print,” Lewis said. While work to simplify product information was already underway in many sectors, Lewis said Consumer Duty gives further impetus to this work.

Benefits of Consumer Duty

The FCA expects the benefits of Consumer Duty to be truly international, with Sheldon Mills, executive director of the FCA, having said “it will bolster the UK’s position as a beacon for high standards and trust and radically reform our reputation for service and value.” 

While this is a lofty and noble aspiration, Lewis said, many people will expect to see the benefits more locally.

“The core benefits can be linked to the four outcomes which the FCA has set out within Consumer Duty, products and services, price and value, consumer understanding and consumer support,” Lewis said. These are:

• Products and services – products provided should be fit for purpose and sold appropriately, thereby reducing the chances of another ‘PPI scandal’.
• Price and value – products and services are sold at a ‘fair’ price that reflects their ‘value’.
• Consumer understanding – information is clear and understanding, and is made available at the right time to facilitate customers making the right decisions.
• Consumer support – support should be responsive and helpful.

How do you expect Consumer Duty to impact firms and consumers? Let us know in the comment section below.