The FCA’s Consumer Duty – a new overarching principle

On 31 July, the FCA’s new Consumer Duty came into force, bringing in higher standards of consumer protection. You may not have heard of it, but financial services firms have been working for a couple of years to be ready for this.

Delivering good outcomes for retail customers is the new 12th principle in the FCA’s handbook and is described as the overarching principle.

That sounds very abstract. Partly that is because it covers such a wide range of financial services, including lending, insurance and investments. But it is more interesting when you look at the details.

An overview of the Consumer Duty

Common themes

There are common themes that apply to many of the areas the FCA regulates:

• products and support should be designed to avoid foreseeable harm;
• products should provide “fair value” to customers. This doesn’t mean everyone has to provide the lowest price, but the firm should be able to assess and justify fair value;
• communications should be tailored to the customers receiving them – what information do customers need to make good decisions?
• support when you have problems or a query, should be easy to access after taking out a product (loan, insurance, investment etc). People should not face long phone wait times and confusing menu options;
• it should be as easy to close a product as it is to open it – the FCA calls practices that make this harder “sludge”, for example when you have to phone to close an account that you opened online;
• firms should take extra care where customers are more likely to be vulnerable, for example high-cost credit, debt collecting, second charge mortgages, and debt advice.

A good outcome is not always possible

No amount of words by a regulator can ever ensure that a customer always gets exactly what they want, and the FCA is realistic here:

• banks may refuse low cost consolidation loans even if the customer is sure they could afford it;
• insurance companies will reject some claims;
• debt advisers cannot make all problem debts disappear;
• firms have to act to prevent foreseeable harm, considering what a firm knows, or could reasonably be expected to have known, at the time. They are not expected to have a functioning crystal ball.

This does not apply retrospectively

The FCA is clear that the Consumer Duty does not apply retrospectively.  Firms conduct should be judged on the rules and standards in place at that time. And that is also the approach that the Financial Ombudsman (FOS) takes.

Consumer protection in different sectors

The FCA has published the 14 sector letters sent to firms, see the Portfolio and Sector communications if you would like to read them.

Here are a few examples taken from these letters to show how extensive the impact of Consumer Duty may be.

Mainstream consumer credit lenders

• firms must assess whether there is a reasonable relationship between the price consumers are paying and the benefit they receive over time. Where firms charge different prices for different groups of consumers, all groups must receive fair value.
• our rules already set out information that must be provided to customers in payment difficulties. But the Duty requires firms to go beyond compliance with this and to test, monitor and adapt communications to ensure they support customers’ understanding and good outcomes.

Mortgages

• firms in the sector should carefully consider how they generate their revenue and profits and the potential implications of that for their customers’ outcomes. This should include whether revenue or profits are being generated disproportionately from specific groups of customers.
• products such as lifetime mortgages and retirement interest-only mortgages can have features which customers may be unfamiliar with (eg interest roll-up and drawdown facilities). In addition, a customer’s needs may change over time. So, it is vital for firms to consider how best to provide appropriate support, both at the point of sale, and over the whole term of the product.

Car Finance

• where customers wish to terminate their agreement, how voluntary termination works and its consequences need to be adequately explained. Firms should consider the range of their customers’ knowledge and financial capability in assessing how they deliver this outcome. 
• firms should ensure that products do not have features that exploit customers who might have a limited ability to get products or services elsewhere, e.g., by charging unjustifiably or unreasonably high fees or interest rates to groups, such as those with a poor credit history.

High cost lenders

• we will be looking to high-cost firms to demonstrate what fair value means in relation to their products and policies. Fair value is not limited to price. Value needs to be considered in the round, to ensure that the price the customer pays is reasonable compared to the overall benefits the product provides.
• we have significant concerns that firms do not consider when repeat borrowing behaviour may be indicative of underlying financial difficulties and that a more rigorous creditworthiness assessment is required.

Debt collectors

• you should not contact customers at unreasonable times and you should pay due regard to customers’ reasonable requests in respect of when, where, and how, you can contact them.
• some firms are still sending misleading communications to customers in relation to statute barred debts. In particular, some firms are misleading customers by suggesting or stating that they may be the subject of court proceedings when the firm  knows or ought reasonably to know that the relevant limitation period has expired.

Claims management firms

• firms do not always conduct or document appropriate checks when purchasing customer data or leads… It is important CMCs ensure customer data is not being misused so customers do not receive unwanted contact from CMCs.

How much difference will the Consumer Duty make?

A positive cultural change

The FCA has talked about shifting the mindset of firms towards better consumer outcomes. If the Consumer Duty is successful, it will result in a positive cultural change within the UK financial services industry.

Many of the biggest benefits may come from a greater emphasis on preventing harm, both through the design of products and of support services. The improved outcomes for consumers may not be very visible – things that work easily, don’t tend to get noticed.

For example someone reporting the death of an account holder may find a straightforward procedure that works, rather than a labyrinthine process where the same information has to be given several times, causing distress.

Firms must assess how well they are doing

The FCA has said:

With firms assessing how they’re meeting their customers’ needs, the FCA will be able to quickly identify practices that don’t deliver the right outcomes for consumers and take action before practices become entrenched as market norms. 

That sounds a bit like marking your own homework, however the firms should gather data to support their decisions.  A more fundamental problem is whether firms will be allowed not just to mark their own homework but to set the homework, by deciding what data to gather and when.

There is no point in asking someone who has just taken out credit whether they are happy with this. The answer will almost always be Yes, which is why firms can get lovely Trustpilot ratings by asking customers to rate them as soon as the loan is given or the account is opened.

Firms need to ask more challenging questions than that. Here are some that come to mind for credit card lenders:

• how many people who take out a card advertised as “credit building” actually increase their credit score in a year or two years? And how many of them end up in increased debt?
• is it fair to increase a customer’s interest rate when their risk profile appears to have deteriorated? Would it not provide a better consumer outcome if the firm was to proactively contact the customer and offer to freeze interest to allow them to reduce their balance?
• what percentage of customers who get a letter saying their interest rate is being increased see the bit, sometimes on the second page, explaining how they can reject this increase? And how many of these customers realise that they can choose to do this and just repay the balance on the previous terms, without it harming their credit record, as that is not normally mentioned in firm’s communications?

Enforcing the Consumer Duty – complaints may not be enough

When the Consumer Duty was first looked at, the FCA considered whether to give consumers the right to sue a firm for breaching the Consumer Duty. It decided:

We do not think a private right of action is needed at this stage to ensure consumers have access to prompt support and redress. The Financial Ombudsman Service offers a much simpler and lower-cost way for most consumers to have complaints resolved and to pursue redress.

It isn’t clear that complaint-led enforcement will be effective however. Take insurance as an example. The FCA Handbook has a specific rule saying A firm must not set a renewal price that is higher than the equivalent new business price.

Anecdotally many customers are getting astonishingly high renewal quotes for car insurance this year. Some can search online and find their current insurer offering a lower price to a new customer. Others can find a better quote elsewhere and then get their current insurer to match it.

But who is going to complain to FOS here? The customers who are actively engaged and who think their insurer has not treated them well, have shifted insurers or got a reduction. If they complain to FOS, FOS looks at how much they have lost, which isn’t much… The victims that have accepted very high renewal rates are generally unaware that they have been unfairly treated and so won’t complain.

Another example is affordability complaints. The FCA said identified complaint handling as a problem for high cost lenders in their sector letter about the consumer duty. Firms have made it hard to complain but not providing an email address, sent misleading responses to complaints that have put people off going to the Ombudsman, failed to conduct root cause analysis… all against the current DISP rules. And yet the FCA has done nothing so far to stop this.

The people who take their complaints to FOS get redress for unaffordable lending, but not compensation for poor complaint handling. Those that give up have been let down by the lenders and the FCA’s failure to enforce its current rules. I am sceptical about whether the Consumer Duty will improve this given the strong financial incentives for firms to reject complaints.

The FCA is going to have to get much tougher to enforce its rules. It can’t rely on FOS complaints as a mechanism.

Potentially a very useful tool in some situations

The Financial Services Consumer Panel has said:

the most important benefit of a new duty would be to address the problem of firms behaving in ways which breach the FCA’s Principles but not its detailed rules.

And I hope that will be the case. Here are some situations that come to mind:

• pawn broking – this is exempt from the affordability provisions in CONC 5. But how can prolonged relending be compatible with a good outcome for the consumer?
• IVA voting – IVAs are not within the FCA’s remit. However IVAs have to be voted on by creditors, many of whom are FCA authorised. These creditors need to consider whether an IVA is a good option for a consumer, given what they know about the consumer. And if an IVA runs into problems, the best outcome for the consumer may be to complete the IVA immediately, not fail it.
• economic abuse – Surviving Economic Abuse has produced a report on this. Here is a quote from it to illustrate one of the many situations that I hope will be made easier by the Consumer Duty:
  “My ex hasn’t made a single payment towards the mortgage in 5 years. And it has now increased by £700. I can’t afford it. I’ve spoken to my bank and they’ve said they can’t help me without his consent but he isn’t responding to them.”
• write offs – when a consumer has no hope of clearing a debt or making more than a token payment to it, a write off may simply be the best outome for them.
• freezing interest – CONC 7 only says that firms must consider freezing interest in a payment arrangement or a Debt Management Plan. Of course new interest and charges are almost always stopped, and in the rare cases where they aren’t a complaint can be made… it often turns out to have been an admin error. But I hope the introduction of the Consumer Duty will encourage DMP firms to take a more proactive stance and assist their customers to complain to the lenders and FOS if necessary.

There will, I expect, be many others.

Many of these have always been possible by complaining using the PRIN 6 Treat Customers Fairly. And it is still a good idea to mention that in a complaint – it hedges your bets if you are unsure if a complaint citing the Consumer Duty would be retrospective,

But the Consumer Duty clarifies the obligation of an authorised firm to consider what the best outcome for the customer is. Very welcome.