A closer look at the FCA’s Consumer Duty expectations
The historic customer detriment caused by the actions of financial services firms has sent consumer protection
TCC Regulatory Consultant Olivia Brady examines the FCA's approach to customer protection, and how their accountability is on the increase.
The historic customer detriment caused by the actions of financial services firms has sent consumer protection to the top of the FCA’s agenda, with a focus on vulnerable customers. Firms are now under increasing pressure to review policies, procedures and controls to ensure they consider and protect customer interests and deliver good customer outcomes. However, a greater understanding of consumer behaviour, driven by the regulator’s research into consumer decision making and the factors that influence it, has led to a shift in the responsibility for making financial decisions back to consumers.1 The regulator acknowledges that whilst firms do need to be able to identify and engage effectively with their vulnerable customers, most consumers are able (and wish to) make their own financial decisions.
This increased consumer responsibility comes at a time of increased choice and complexity, particularly in light of the pension freedoms. To assist consumers in negotiating financial services and to enable them to make good choices, firms must design quality, competitive products and engage with customers to provide appropriate disclosures and key information prior to purchase.
Technological advances in financial services are working to increase engagement and consumers are faced with slicker and more flexible ways to engage with firms. Increased engagement also works to boost competition, as consumers begin to shop around, provide reviews and use comparison websites, forcing firms to improve the quality of service and customer experience they deliver. However, the regulator still has concerns about specific sectors, such as pensions and savings, where engagement remains low. As a consequence, some firms are unmotivated to improve products and services for existing customers.
Considering customers’ information needs is an essential part of delivering appropriate outcomes. We have seen a shift in the regulator’s expectations that firms provide reams of documentation and disclosure, to a more clear and concise approach providing customers with the relevant information required to make an informed decision. The regulator’s increased use of behavioural economics shows that where this information is given in the customer journey is key to delivering a fair outcome. For example, whilst customers may be allowed to change their minds about a product after hearing the terms and conditions, they often feel committed by this point and are unlikely to do so. Firms are having to redesign their sales processes to ensure customers understand and can compare product features before selecting it as the best option for their needs.
As well as disclosing product information, the FCA is taking transparency to a deeper level. We have already seen the regulator take a keen interest in remuneration schemes and whether they motivate employees to prioritise the needs of the business over those of their customers. Distribution chains are now under scrutiny to determine if they contain conflicts of interest, risks or incur additional unnecessary costs which benefit firms and may disadvantage the customer.
The regulator is seeking assurance that firms are conducting themselves in a way that promotes good customer outcomes in a fair and competitive market. Generally, firms are not expected to make decisions for customers, but are required to design high-quality products which offer good value and are accessible to their target market. If consumers feel that firms are acting in their best interests and are being provided with appropriate levels of information about the products available, they should feel comfortable in making an informed decision about the most suitable solution for their needs. Where consumers do need more assistance, firms should have policies and procedures in place to facilitate that support, including signposting to organisations which provide services outside of the firm’s remit e.g. CAB, MALG, where necessary.
1 We have seen this most recently in the FCA’s study into the impact of different methods for presenting charges as part of the asset management market study (Occasional Paper 32).