What are the drivers behind Consumer Duty?

Here we explore the broader context and the issues that have driven the FCA's Consumer Duty initiative. Some of the drivers have been perennial issues experienced by the regulator (such as ongoing customer harm) whilst others have been more recent accelerators (such as COVID-19 and cost of living challenges) that have brought existing issues into sharper focus.

There is a sense of frustration from the FCA that despite a number of wide-ranging initiatives to improve customer outcomes, it continues to identify consistent failings within firms. Treating Customers Fairly (TCF), and a focus on conduct risk more generally, were designed to bring the consideration of impact on customers closer to the point of decision. However, it has not been as successful as the FCA intended in prompting firms to, genuinely and proactively, consider the impact of their decisions on customer outcomes.

The FCA has highlighted that it continues to see practices that cause consumer harm, including:

• Firms providing information which is misleadingly presented or difficult for consumers to understand. 
• Products and services that are not fit for purpose in delivering the benefits that consumers reasonably expect. 
• Products and services that do not represent fair value.  
• Poor customer support and other practices which hinder consumers' ability to act, or which exploit information asymmetries, consumer inertia, behavioural biases or vulnerabilities.

The Consumer Duty will also change the FCA's approach to regulation and it is no coincidence that it comes at the same time as the regulator is undertaking its own transformation to become more proactive, innovative and data-led.

In the past, the FCA has identified and deployed sector specific or thematic-based remedies, such as its approach to assessment of value in the asset management sector. This was designed to ensure that firms objectively consider value through the eyes of their customers, perform regular reviews and make changes where required.

However, the Consumer Duty cuts across sectors and themes and place an overarching onus on management to improve customer outcomes proactively, rather than reactively in response to regulatory challenges. A firm's purpose and its associated business model will need to evidence how it delivers good outcomes by design.

Whilst not a driver in and of itself, COVID-19 has exacerbated, and brought into sharper focus, some of the poor outcomes that consumers were experiencing. Many SME businesses 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 FCA's 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.

Although firms have been innovating and embracing the advances that technology can bring for a prolonged period, COVID-19 has also been a technological catalyst. It has caused change on a greater scale and at a faster pace than any firm would have planned. 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 predicated on static, paper-based documents and face-to-face or voice interactions. Therefore, there is a need for the FCA to develop a more flexible and future-proofed regulatory architecture to reflect emerging trends. Alongside this, the FCA itself wants to harness the power of data, becoming more data-led as part of their drive to be a more innovative and adaptive regulator.

The Consumer Duty is part of a broader initiative by the FCA to deliver an outcomes-based approach to regulation. The Consumer Duty signals the final stage on the journey to the FCA implementing a cultural and outcomes-based approach to regulation in which a firm's purpose is truly under the spotlight. The FCA's work on culture, diversity and inclusion, and vulnerable customers has not focused on developing detailed rules; rather, the FCA is focused on firms making judgements about the spirit of what the regulator is seeking to achieve assessed by the outcomes being generated for retail customers. The Senior Managers and Certification Regime (SM&CR) whilst more prescriptive than these other initiatives, is also an important driver to increase personal accountability. Embedding the Consumer Duty alongside SM&CR requirements will further reduce harm to consumers (and strengthen market integrity) by making individuals more accountable for their conduct and competence in the outcomes that they generate for customers.

Concerns around limited consumer trust have been raised by the FCA as one of the drivers of the Consumer Duty. In February 2021, the Penrose Report¹ identified low customer trust as an issue across a range of markets - not just financial services — and highlighted concerns around the so-called 'loyalty penalty', whereby longstanding customers pay more for a product than new customers. In particular, firms' practices may weaken consumer trust in markets, and with a weakening of trust, consumer outcomes are likely to worsen.