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Consumer Duty: What we already know

Published: 20/06/2022 

With the FCA’s Consumer Duty fast approaching, Steve Allibone, Group Compliance Director for Vitality, reflects on what firms can do to prepare themselves ahead of its implementation

Whilst nothing is absolutely set in stone, we can take a lot of guidance from what’s already been published by the Financial Conduct Authority (FCA) as part of its proposals.

What we do already know is that the main driver of Consumer Duty is a recognition that customers need greater levels of consumer protection in the modern world. In recent years, firms have got more innovative; firstly, in the way they design products and, secondly, how they market and service them. 

Times have changed radically since the Consumer Protection Act of 1987 was brought in. The emergence of new technologies, such as smart phones and the internet of things, have revolutionised the way people purchase products. 

In addition, financial products and services have become more comprehensive and increasingly complex, bringing with them new challenges when it comes to ensuring customers are distributed to in the right way.

Past failures have brought with them substantial fines and we’ve seen some big scandals in the national news, and this has put safeguarding the long-term interests of consumers is back into the spotlight.

“The priority for organisations has to be ensuring the customer is placed at the very centre of their business,” 

- Steve Allibone, Group Compliance Director, Vitality.

Where in the past, firms may have prioritised profits over protecting the long-term interests of their customers, the FCA latest intention is to turn this on its head: placing the onus not just on treating customers fairly – but getting it right first time.

Especially where financial health is concerned, we can almost be certain that in a post-Consumer Duty world it will be far less acceptable to consider only the immediate interests of clients. It will be about thinking far more carefully about their needs going forward too, especially with regards to emerging harms.

Crystal ball-gazing

While it is not possible for providers and advisers to predict the future, more pressure will be on them to create and distribute financial products that are futureproofed against the risk of customer detriment later down the line.

Take the endowment mortgages scandal, as an example. With the power of hindsight, we are now able to see the impact falling investment returns had on people who took out mortgages in the late 90s. However, if we fast-forward to the regulatory environment currently being proposed by the FCA, firms will be expected to consider possible client outcomes should the economic outlook change years - or decades – into the future. Before offering a product, increasingly firms will need to think: What if?

It was dilemmas such as this that saw the emergence of Treating Customers Fairly (TCF) regulation in the mid-noughties, but Consumer Duty is due to take this to a whole new level.

Uncertain times

One thing the pandemic taught us is that what was once thought of as impossible, can in fact become possible.

Even before the cost of living crisis, which has seen interest rates skyrocket and the highest levels of inflation since 1992, the FCA declared that more than 50% of the UK population was displaying some form of vulnerability .

When we consider global socioeconomics today, new precedents seem to be set weekly and it’s hard to know what’s coming next. The financial services sector - distributors included – will need to bear in mind what impact further changes on the horizon will have on products and services in the future. Just take the potential impact of inflation on a life insurance plan, for example, or the market volatility being created by the War on Ukraine.

Suitability 2.0

One of the growing challenges for financial advisers going forward will not just be to explain why they have made a series of recommendations, but also why they have done so while not recommending others.

Justifying suitability has of course always been key, but while over-insuring a client might be frowned upon by the FOS, considering all possible outcomes based on need - regardless of affordability – will also be an expectation. Getting the balance right here will be crucial.

The positive aspect of broadening advice in this way is that it affords more opportunities to follow-up with clients. Regularly reviewing their situation and revisiting past conversations will not only potentially generate new business – alongside referrals – and engender loyalty, but it will also help ensure recommendations remain suitable to clients – and therefore compliant – in line with a changing financial environment.

Tangible value

All good advisers know that building long-term client relationships generates genuine value for all involved. Post-Consumer Duty, this will only become more important. As propositions evolve with the customer increasingly at the heart of them, greater focus will be on delivering something clients want and need in the here and now – not just at the point of claim.

I expect it will no longer be acceptable to overlook products due to their perceived complexity (or because they are different), especially as they evolve to deliver tangible value in a way that can improve outcomes – for example, through the offer of preventative health and wellbeing lifestyle benefits.

After all, if a client is regularly engaging with a protection, health insurance or investment plan, they are far less likely to question its relevance come what may. If that’s not putting the customer at the heart of the proposition and delivering value for money, then what is?

Given the FCA is almost definitely going to want to see evidence of changes following the roll out of Consumer Duty, here are three simple steps firms can take even before it is implemented: 

  • Don't be complacent


    It might be easy for firms to assume they already have the customer at the heart of their practices, so therefore do not need to do anything. If TCF taught us anything, those that do think this are potentially in for a rude awakening.

  • Start thinking about it now


    Some of the changes that will need to be brought in will take time, so it is important to start considering them now. This might include demonstrating how products are being distributed in a way that meets the needs of clients – now and in the future.

  • Conduct a gap analysis


    To show the FCA what changes you’ve made as a result of Consumer Duty, conduct an honest gap analysis. Even if the regulator does query some of the planned actions later down the line, showing them that you’ve taken it seriously is the main thing.

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1  Financial Lives: The experiences of vulnerable consumers, FCA, July 2020