Consumer Duty reforms to shake up retail banking in 2023

When the Finan­cial Con­duct Author­i­ty (FCA) con­firmed in late 2021 that it would intro­duce the Con­sumer Duty, there was lit­tle push­back from firms. Per­haps this was because they thought it an incon­se­quen­tial devel­op­ment that would have lit­tle impact on how they do busi­ness. Yet the new duty – pro­posed in 2017 by the Finan­cial Ser­vices Con­sumer Pan­el – is among the most wide-rang­ing reforms the FCA has over­seen. 

The core require­ment for com­pa­nies to “focus on sup­port­ing and empow­er­ing their cus­tomers to make good finan­cial deci­sions” sounds sim­ple and most firms will say they already do that. But drill deep­er and the ambi­tion of the change is evi­dent. 

Joanne Owens is a con­sumer finance and retail finan­cial ser­vices reg­u­la­to­ry part­ner at Ever­sheds Suther­land. She says the con­sumer duty is a seis­mic change and “arguably the most sig­nif­i­cant shake-up of FCA reg­u­la­tion since the intro­duc­tion of the Finan­cial Ser­vices and Mar­kets Act 2000”.

Prin­ci­ple 6 of the FCA’s Prin­ci­ples of Busi­ness oblig­es firms to pay “due regard to the inter­ests of cus­tomers and treat them fair­ly”, while Prin­ci­ple 7 con­cerns “due regard to the infor­ma­tion needs of its clients, and com­mu­ni­cate infor­ma­tion to them in a way which is clear, fair and not mis­lead­ing”. The new duty replaces those prin­ci­ples with one that applies high­er stan­dards of con­duct: “A firm must act to deliv­er good out­comes for retail cus­tomers.”

The duty lists four key out­comes: cus­tomers are equipped to make informed deci­sions; prod­ucts and ser­vices are fit for pur­pose; ser­vice meets cus­tomer needs; and prod­ucts and ser­vices rep­re­sent fair val­ue. “This is a sea change in how the FCA reg­u­lates, with com­pa­nies hav­ing to prove on an ongo­ing basis that they are deliv­er­ing good cus­tomer out­comes,” says Fair­er Finance MD James Daley. “It could stim­u­late a race to the top on qual­i­ty.”

But with the FCA expect­ing the new duty to be ful­ly imple­ment­ed by 30 April 2023, firms must move quick­ly. “No doubt the whole retail finan­cial ser­vices sec­tor is work­ing hard on ini­tial assess­ments and a gap analy­sis to under­stand where the cur­rent delta is between exist­ing poli­cies and pro­ce­dures and the new high­er stan­dards,” Owens says.

This is a siz­able task, giv­en the duty’s wide scope and appli­ca­tion to new and exist­ing prod­ucts. The new rules make it clear that firms are not to con­tin­ue with busi­ness mod­els that rely on poor out­comes. This places cer­tain prod­uct lines under threat; 0% no-fee cred­it cards, for exam­ple, rely on some cus­tomers not clear­ing their bal­ance and pay­ing high­er inter­est rates as a result. Sim­i­lar­ly, it will be hard­er to jus­ti­fy leav­ing mort­gage cus­tomers on high stan­dard vari­able rates.

The extent to which cus­tomer choice might reduce in some prod­uct areas because of the reforms will part­ly depend on how firms judge whether they can still deliv­er val­ue for mon­ey under the duty, says Neil Mitchell, head of cus­tomer risk at TSB Bank. “There is also a risk of a lack of con­sis­ten­cy in approach as firms fol­low their busi­ness mod­els in how they do that.”

Price increas­es might be nec­es­sary, to cov­er the costs of imple­ment­ing the duty. The FCA esti­mat­ed the one-off direct costs at up to £2.4bn and ongo­ing annu­al direct costs rang­ing from £74m to £176.2m. Firms might change how they val­ue prod­ucts, as prices must be pro­por­tion­ate to the over­all ben­e­fit to the con­sumer. 

“This is not just about assess­ing finan­cial cost, but oth­er non-finan­cial costs to the con­sumer, includ­ing the use of their data,” Owens explains. “This could have an impact on the length of dis­tri­b­u­tion chains for some intro­duced prod­ucts, par­tic­u­lar­ly where a com­mis­sion is charged.” The scale of the chal­lenge means some busi­ness­es will see the con­sumer duty as a threat, although oth­ers will see the oppor­tu­ni­ty, Owens says.

“This is an oppor­tu­ni­ty (for busi­ness­es) to shape and define their prod­ucts and ser­vices and to think about how they deliv­er the right out­comes for their exist­ing and future cus­tomers.”

TSB Bank estab­lished a pro­gramme to com­ply with the new require­ments in Jan­u­ary 2022, Mitchell says. “We are assess­ing all busi­ness units in TSB on their cur­rent posi­tion against the con­sul­ta­tion and draft rules – this is our dis­cov­ery phase. Once the rules are finalised, we move into our deliv­ery phase.”

Much of the ini­tial work by firms focus­es on com­mu­ni­ca­tions. Providers often write their terms and con­di­tions through the lens of com­pli­ance – if the FCA signs it off, it’s fine. But the duty will require them to ensure that cus­tomers can under­stand what they are being told.

“The cus­tomer under­stand­ing out­come means cus­tomers must under­stand com­mu­ni­ca­tions and we know that peo­ple can’t make head or tail of the terms and con­di­tions (T&Cs) doc­u­ments or the let­ters they get from com­pa­nies,” says Daley. 

“We’ve been help­ing com­pa­nies rewrite let­ters and T&Cs for years but we’re see­ing a spike in inter­est.” The chal­lenge for banks is the ten­sion between the cus­tomer under­stand­ing out­come and meet­ing exist­ing con­sumer cred­it rules that require them to include pre­scribed state­ments in cus­tomer com­mu­ni­ca­tions. 

The duty’s cross-cut­ting nature gives it the poten­tial to be a cat­a­lyst for cul­tur­al change in banks and across the indus­try. It will like­ly change how cus­tomers are treat­ed, what and how retail prod­ucts are sold, and to whom they are sold.

The desired long-term out­come from a reg­u­la­to­ry per­spec­tive is a more sta­ble mar­ket that needs less inter­ven­tion and few­er rule changes. 

“From a con­sumer per­spec­tive we won’t see a big change overnight, but over time it has the poten­tial to improve stan­dards and the qual­i­ty of finan­cial ser­vices,” says Daley.

With the final rules expect­ed in July 2022 and firms expect­ed to be ful­ly com­pli­ant by April 2023, there’s no time for firms to waste.