The Consumer Duty mandates FCA regulated companies to look at the products, services, and delivery they provide to ensure good outcomes for their customers wherever possible. The aim of the new regulation is to minimise poor outcomes which cause customer harm.
The Consumer Duty comprises of:
- Four Outcomes
- Three Cross-Cutting Rules
- The Consumer Principle (Principle 12)
The Products and Services Outcome
We have seen harm occur where products or services were poorly designed or were distributed widely to customers for whom they were not designed. In addition, there is likely to be a link to the price and value outcome, as however they are priced, products and services that are poorly designed, or distributed to consumers for whom they were not designed, are unlikely to provide fair value
Firms must act in good faith towards customers. This is a standard of conduct characterised by honesty, fair and open dealing, and consistency with the reasonable expectations of customers.
Act to deliver good outcomes for retail customers.
The rules may seem relatively obvious and even unnecessary to most people, as they are quite simply just common sense and professional standards which most would already aim for. Below we will look more in depth at the caveats and nuance of each rule and better understand how to avoid breaches.
The introduction of Fair Value Assessments should mitigate poorly designed products/services. The manufacturer must ensure the design of a product/service meets the needs, characteristics, and objectives of the customers in the identified target market and conduct regular reviews to ensure this continues to be the case.
Manufacturers should undertake qualitative testing of a product/service and consider likely changes to the target market’s needs in the future. Where possible a manufacturer should embrace ‘inclusive design’, a methodology that involves designing products/services to be accessible and meet the needs of as many customers as possible, including those with characteristics of vulnerability. To support manufacturers’ reviews, distributors must, upon request, provide relevant information, including, where appropriate, sales information, information on cancellations, and information on the regular reviews of their distribution arrangements.
Target Market Statements and Distribution Agreements should mitigate the distribution of products/services to customers they were not designed for. The Target Market Statement must identify the target market at a ‘sufficiently granular level’ and identify customers for whom the product/service is not suitable and will likely cause harm. All involved parties must ensure the intended distribution strategy for the product/service is appropriate for the target market.
Manufacturers must provide Distributors with their Fair Value Assessments so that the findings can inform how, and to who, the product or service is sold. All appropriate information must be made available to Distributors so that they can understand:
- The characteristics of the product/service
- The target market
- The needs, characteristics, and objectives of any vulnerable customers
- The distribution strategy
- To ensure the product/service is only distributed to its intended target market.
Distributors must have a ‘distribution arrangement’ for each product/service they distribute. The arrangement must:
- avoid causing/mitigate foreseeable harm
- support management of conflicts of interest
- ensure the needs, characteristics, and objectives of the target market are considered.
The introduction of Fair Value Assessments should mitigate products/services being sold at unreasonable prices which do not reflect their value. Fair Value is determined by a reasonable relationship between the price charged and the benefits that consumers can reasonably expect from the product or service for the duration of its contract; in the case of insurance, there must be a reasonable probability of a consumer in the target market making a claim.
A Fair Value Assessment should be conducted using appropriate MI, prior to the product or service being offered to consumers and at least annually for the life of the product or service. Factors considered during a Fair Value Assessment should be recorded as evidence should the FCA request to see it. If a product or service does not provide, or ceases to provide fair value to customers, it must be amended or withdrawn from sale, and where harm has already occurred, redress should be considered. Distributors who price walk some groups of consumers can lead to them making significant overpayments which does not provide Fair Value.
Where products/services are sold as a package, firms must assess and be able to demonstrate, that each component, and also the offering as a whole, provide fair value. This can be assessed through an Ancillary Suitability Assessment.
A Distribution Remuneration Assessment can mitigate excessively high fees being charged to consumers since fees charged by Distributors must be reasonable and reflect the value of the work undertaken.
Consideration must be given to the cumulative impact of the remuneration added by each distributor in the chain, on the overall value of the product or service. Fees charged by different firms along the distribution chain might together result in a higher overall fee that does not represent fair value for consumers. Exit charges must be reasonable and reflective of their underlying costs for terminating a contract. Consideration must be given to all costs and charges the consumer may be required to pay during the life of the policy, not just the initial pricing. This must include non-financial costs such as time and effort to access, assess, amend, or cancel a product or service, or where consumers ‘pay’ with their data, privacy, or attention.
Fees charged as a percentage of the value of a product or service may cause harm and be unreasonable where the product or service is high-priced; similarly using a fixed fee structure across the business may cause harm and provide unfair value if the firm offers products or services that differ greatly in price. Firms should consider whether their chosen pricing strategy may result in consumer groups with characteristics of vulnerability being more at risk of experiencing harm or receiving poor value.
Key information should always be presented in a clear, visible, and accessible manner. This means ensuring any navigation to access the information is not confusing, and that the information is not hidden within a large volume of material. Firms should use ‘layering’ whereby key information is provided upfront, with further detail available through links or cross-references. Firms should be mindful of ensuring relevant information is inter-linked in a coherent manner.
Firms should avoid lengthy and technical communications, especially jargon, that may confuse or overwhelm their consumers. Communications should be as short and concise as possible without omitting important information and be designed to be engaging using variation in format and presentation such as subheadings, bullet points, tables, graphics, audio-visuals, and interactivity.
Regardless of the communication channel used, information must be effectively communicated, with digital content adhering to responsive web design. The chosen channel should also correlate to the target market of the communication. Avoid designing or delivering communications in a way that exploits consumers’ information asymmetries and behavioural biases. This includes online sales journeys where choice architecture is designed to influence consumers to select a particular option that benefits the firm, but not necessarily the consumer.
Appropriate product information such as costs and default terms should be provided early in the customer journey, in salient and easy to read formats. Where monitoring identifies a frequently asked question, it may be appropriate to proactively make the answer more visible in communications with customers.
Where a firm identifies frequent misunderstanding or an issue that results in poor outcomes, they should adapt the communication to make it more comprehensible by the intended recipients. Firms also have a legal duty to provide information in an accessible format for disabled customers; this may include braille, audio, large print etc. 15% of adults have literacy skills at/below those expected of an 11-year-old, and 34% of adults have a poor level of numeracy involving financial concepts. Resultantly, information should be communicated in as simple a way as possible.
To ensure clear information is available at the right time, firms should communicate with consumers at appropriate touch points throughout the product lifecycle to afford the opportunity for the customer to take in relevant information and consider their options without feeling pressured or rushed. Firms should also take care not to communicate too frequently as this can diminish the impact of important communications.
Firms should test communications where appropriate using the format of A/B testing, customer surveys, structured interviews, or focus group sessions. Testing should consider factors such as the purpose of communication and the importance of its content, its context, timing and frequency, the intended recipients need’s, the scope of harm if the information is misunderstood or overlooked, and whether it’s more important to communicate urgently rather than conducting testing first. Testing should provide assurance that customers can identify and understand any information necessary to make effective decisions; this likely includes actions required by customers, and the consequences of inaction; key features, benefits, costs, and risks of a product/service; how additional information or support can be accessed.
We expect firms to consider the impact they expect communications to have, monitor whether this is the case in practice, and carry out further investigation where this is not the case, to identify and remedy any issues to support good customer outcomes; for example, if a firm issues a communication asking customers to return certain documentation – are they returning the right documentation in practice?
Firms’ post-sale support should be as good as their pre-sale support. MI and processes should evidence and support that existing customers are not overlooked in favour of prospects and that sufficient customer service resources are available. Firms support should not impose unreasonable additional costs, including unreasonable exit fees or charges, delays, distress, or inconvenience.
Firms must ensure that the available after-sale support channels are clearly communicated to customers before the sale of a product or service, so that the customer can assess whether it meets their needs. Firms must also ensure that support channels are effective and avoid unreasonable barriers, including being unclear or confusing, and align with requirements under the Equality Act 2010. Firms should provide the same level of support to an approved representative of a customer, as they would to the customer themselves, and not introduce unreasonable barriers in the process.
Firms available support channels should be diverse or adaptable enough to ensure that customer harm is avoided in the event that a customer’s circumstances change, i.e., losing internet access. Firms should have operational resilience to provide reasonable levels of support in the event of an issue arising with their services such as an IT outage, or cyber-attack.
Firms should have exceptions processes to deal with non-standard issues such as security or fraud concerns, technical issues, or other complex/sensitive customer journeys. This will likely be a real-time human interface such as a phone service.
Firms should regularly monitor whether they are providing appropriate levels of support to customers to identify and mitigate the risk of consumer harm. Where firms are outsourcing or using a third-party provider, firms are responsible and accountable for all the regulatory responsibilities applying to outsourcing and third-party arrangements. Firms cannot delegate any part of this responsibility to a third party. Firms should consider customer feedback in identifying whether unreasonable barriers including costs exist in their journeys. Firms should use evidence they have about their customers’ use of products or services and interactions with the firm to identify areas where their processes may create unreasonable barriers.
Firms should review customer journeys and consider friction points and whether these are nudges toward good outcomes, or sludge practices which introduce unreasonable barriers. Positive friction could be additional steps in the sales process which are designed to prevent fraud or raise awareness of contract cancellation fees. Sludge practices in insurance would deter customers from taking actions in their own interests, such as raising a complaint, making a claim, or cancelling a policy. Research by the Institute of Customer Service carried out in January 2022 has found that in the insurance sector, 17.5% of customers who experienced a problem with an organisation did not report it.
Firms must act in good faith towards customers. This is a standard of conduct characterised by honesty, fair and open dealing, and consistency with the reasonable expectations of customers.
Firms and customers both have a role to play if customers are to achieve good outcomes. However, when consumers deal with financial services firms, there is generally an imbalance in bargaining position, knowledge and expertise. Therefore, consumers can only reasonably be expected to take responsibility for their choices and decisions if firms act openly and with honesty.
Acting in good faith is a key part of creating an environment in which customers can pursue their financial objectives. It is also a key part of acting to avoid causing foreseeable harm. It supports the other cross-cutting rules by focusing on the intent behind the actions or inactions of the firm.
A firm would not be acting in good faith where it fails to take account of customers’ interests, for example in the way it designs a product or presents information. Seeking to exploit consumers’ lack of knowledge and understanding would also be a clear sign a firm is not acting in good faith. This would include seeking to exploit customers’ behavioural biases, such as tendencies to be influenced by the way things are presented, overvaluing immediate impacts and undervaluing future ones or attaching less weight to effects that are further off, such as termination or renewal fees.
Firms also need to ensure that their culture supports and is conducive to their staff acting in good faith. A firm is unlikely to be able to act in good faith if it uses staff incentives, performance management or remuneration structures which are likely to cause detriment to their customers. Firms should have adequate arrangements in place that can help to detect and manage the risk of non-compliance with regulatory obligations arising from their remuneration or performance management practices.
Firms must avoid causing foreseeable harm to customers. Firms can cause foreseeable harm to customers through their actions and omissions. This can occur not only when the firm is in a direct relationship with a customer but also through their role in the distribution chain even where their actions or omissions are not the sole cause of harm.
The Duty applies across the distribution chain and the extent of a firm’s responsibilities will depend on its role and the extent of its influence over customer outcomes.
Whether harm is considered foreseeable would depend on whether a prudent firm acting reasonably would be able to predict or expect the ultimately harmful result of their action or omission in connection with the product or service.
Firms must take proactive and reactive steps to avoid causing harm to customers through their conduct, products or services where it is in a firm’s control to do so. This includes ensuring that no aspect of their design, terms and conditions, marketing, sale of and support for their products or services cause foreseeable harm.
Examples of forseeable harm include:
- consumers being unable to cancel a policy
- products performing poorly where they have not been appropriately tested
- products being distributed widely to customers for whom they were not designed
- consumers incurring overly high charges because they do not understand the pricing structure
- consumers with characteristics of vulnerability not having relevant customer support available
- consumers finding it too difficult to amend their policy because the process is unclear
As the Duty is underpinned by the concept of reasonableness, firms are only responsible for addressing the risk of harm when it is reasonably foreseeable at the time, considering what a firm knows, or could reasonably be expected to have known. This will depend in part on the information the firm collects as part of its business, and this in turn will depend on the scale, service offering and capabilities of the firm. However, we expect all firms to collect enough information to be able to act to avoid
causing foreseeable harm.
The regular reviews we require of firms provide an opportunity to identify any new or emerging harms. Firms will also become aware of sources of harms (for example through consumer complaints, management information (MI), press reporting, and FCA supervisory focus and communications such as ‘Dear CEO’ letters).
Where harm was not foreseeable at the outset but became apparent later, we would expect firms to take appropriate action to mitigate the risk of actual or foreseeable harm. They could do this by updating or amending the design or distribution strategy of a product or service, providing additional support or updating information or advice.
This rule is concerned with the financial objectives of the consumer in relation to the financial product or service and applies throughout the customer journey and life cycle of the product or service.
As with the entire Duty, this rule does not remove the responsibility that consumers have for their actions. But consumers can only take responsibility where they are enabled and supported to make informed decisions in their interests through firms creating the right environment. Firms must proactively and reactively focus on putting customers in a better position to make decisions in line with their needs and financial objectives. This would include recognising and taking account of consumers’ behavioural biases and the impact that characteristics of vulnerability can have on
As with acting to avoid causing foreseeable harm, the actions a firm might need to take to enable and support customers to pursue their financial objectives would be determined by what is within a firm’s control, based on their role and knowledge of the customer. The conclusions a firm can reach about the customers’ financial objectives will also depend on the type of product or service it provides.
Where a firm declines to provide a customer with a particular product or service, the firm should still consider whether there is information or support it could provide to help the customer pursue their financial objectives. For example, a firm could signpost a customer to a third party that provides reliable and relevant information to such consumers.
Travel insurance firms are required to signpost customers with pre-existing medical conditions to a directory of specialist insurers in certain circumstances. This approach is consistent with our expectations under the Duty, as firms signpost declined customers to a reliable source of information that can help them to achieve their financial objectives. Firms in other markets should consider a similar approach when they decline customers.
Principle 12 focuses on customer outcomes, and requires firms to:
- Pro-actively act to deliver good outcomes for customers generally and put customers’ interests at the heart of their activities
- Focus on the outcomes customers get, and act in a way that reflects how consumers actually behave and transact in the real world, better enabling them to access and assess relevant information, and to act to pursue their financial objectives
- Ensure they have sufficient understanding of customer behaviour and how products and services function to be able to demonstrate that the outcomes that would reasonably be expected are being achieved by those customers
- Where they identify that good outcomes are not being achieved, act to address this by putting in place processes to tackle the factors that are leading to poor outcomes
- Consistently and regularly challenge themselves to ensure their actions are compatible with delivering good outcomes for customers
Firms should embed a focus of acting to deliver good outcomes in each of their business functions and put customer interests at the heart of their business model and culture. This ranges from high-level strategic planning to individual customer interactions, as well as product and service development, sales and servicing, distribution, support, and risk and control functions.
The Consumer Principle does not mean that individual customers will always get good outcomes or will always be protected from poor outcomes. It also does not impose an open-ended duty that goes beyond the scope of the firm’s role and its ability to determine or influence customer outcomes, or protect customers from all potential harms. For instance, firms are not expected to protect customers from risks that come from the nature of the product.
The Consumer Principle also does not change the nature of a firm’s relationship with its customers. For example, it does not create a fiduciary relationship where one would not otherwise exist, nor require a firm to carry out any regulated activity (for example provide advice) where it would not otherwise have done so.
The overarching purpose of the Consumer Duty is to improve customer outcomes. All firms must be able to differentiate between good and poor outcomes; firms must also take appropriate actions to remedy the latter. Connect must identify the datapoints we require in order to measure the outcomes.
Outcome testing will assess whether a process or product provides a desirable outcome, or if customer harm may arise. The testing should help to identify the cause of any issues which may be rooted in culture, operational practice, processes, or policies.
Where a firm identifies the root cause of a poor outcome, there are several possible interventions to remedy the issue. The FCA state that we must be able to explain why we chose a particular intervention and demonstrate how the intervention has improved customer outcomes since, and where it has not, what additional steps we have taken to remediate the situation. We should maintain records of any issues we identify, and any actions we take to address those issues.
In order to identify where a customer has had a poor outcome, firms must first define what constitutes a good outcome, and moreover, what amounts to a poor outcome.
Easy to enquire.
Harassed as a potential lead.
Easy to purchase policy.
High deposit or fees.
Easy to request a policy change.
Difficult/unable to process adjustment.
Easy to renew policy.
Simple to raise a query.
Barriers to raising a query.
Easy to cancel policy.
Difficult/unable to cancel policy.
Easy to make a claim.
Barriers to making a claim.
Easy to raise complaint.
Barriers to raising a complaint.
Easy to provide feedback.
Harassed to leave feedback.
Easy to find email address.
Cannot find suitable email address.
Quick to load.
Slow to load.
Employees must be aware that Consumer Duty will directly and drastically impact all aspects of their role.
The Consumer Duty is intended to overhaul the entire financial market with a mammoth push toward embedding controls which lead to better customer outcomes and a healthier culture in all firms within the sector.
From both the top down, and the bottom up, Consumer Duty is forcing firms to reassess and redevelop their entire business model and all aspects of their business activity.