7 December 2021
What the FCA's Consumer Duty means
The FCA published its long awaited second Consumer Duty paper today, confirming that it will push ahead with the plans it first mooted back in May.
The Consumer Duty is a new layer of principles-based regulation which is underpinned by the principle that all firms "must act to deliver good outcomes for retail clients".
At first glance, it may not seem much more than a tweak to Principles 6 and 7 of the FCA handbook:
- Principle 6: A firm must pay due regard to the interests of its customers and treat them fairly.
- Principle 7: A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading.
But in reality, the Consumer Duty sets a much higher burden on firms - not just to treat its customers fairly, but to evidence that it is doing so.
What is fair value?
Today's paper confirms that all firms will need to evidence that their products offer fair value - when they are created, but also on an ongoing basis. This extends the line of regulation which has been evolving in multiple sectors over the last few years - and will now be extended to almost all financial services firms.
This year's General Insurance Pricing Practices paper had already laid down the requirement for insurers to carry out annual assessments to prove they are offering fair value. And in asset management, the annual Assessment of Value reports have been around for a couple of years.
But banks, building societies, lenders and all other regulated firms that serve retail clients will now be bound by similar requirements.
For many firms, the challenge of determining whether they offer fair value is a headache - another abstract compliance challenge with no right answer. But today's paper did provide a few extra clues around what the FCA expects.
The paper states clearly that fair value is not simply all about price: "Value needs to be considered in the round and low prices do not always mean fair value."
It goes onto say that while it won't be drawn on defining exactly what should be included in a fair value assessment, it should as a minimum include the following:
- the nature of the product or service, including the benefits that will be provided or that consumers may reasonably expect, and their quality
- any limitations that are part of the product/service,
- the expected total price customers will pay, and
- any characteristics of vulnerability in the target market for the product or service.
This may be a shock to some in the insurance industry who have already completed their initial attempt at assessing fair value. Over the last few months, we've spoken to dozens of insurers about the fair value challenge, and many seem content to produce a dashboard of numbers to prove they are meeting the requirements. But as today's paper makes clear, a true assessment needs to be holistic and consider the whole proposition - not just the price and profitability.
Our fair value framework
Earlier this year, we created a framework for assessing fair value, and have now begun working with a first wave of lenders and insurers to help them meet these new requirements. Thankfully, today's paper very much echoes the approach we've been taking.
Our framework looks at five elements:
- Product - how do the product features compare to the rest of the market? Are there any features which could deliver poor outcomes?
- Customer needs and acquisition - are customers given the information they need to understand what they are buying? How does the firm satisfy itself that its product meet the needs of the people who are buying it?
- Customer experience - Does the product deliver what it promised? Is there an absence of sludge in the process for customers at key moments - eg insurance claim, or credit agreement default? Are communications clear at all stages of the customer lifecycle? What do existing/former customers think of the experience?
- Complaints - What are the complaints trends, and is there a feedback loop that delivers continuous improvement?
- Price - Can companies show that customers understood what they would have paid for an equivalent product? Is price competitive compared to other equivalent propositions, and if not, is the higher price justified by other parts of the experience?
Next year, once we have completed our first assessments, we'll be turning this into an accreditation - allowing firms that perform above our stretching bar to prove they offer fair, or even excellent, value to their customers.
We still see a lot of firms deciding to manage this challenge internally - but it's clear that it is much harder to credibly mark your own homework, with no external input.
Clear communications matter
One other important strand of the consumer duty paper is the requirement to communicate clearly. The paper makes it clear that this expectation goes beyond Principle 7's requirement for all communications to be "clear, fair and not misleading". Instead, the FCA wants firms to evidence that customers understand their communications.
I sincerely hope that this leads to many more firms taking the time to rewrite their technical policy documents and terms and conditions. We score hundreds of Ts&Cs every six months, and the vast majority are still incomprehensible to the average customer. Only around 20-30 documents in the industry yet meet the requirements of our Clear & Simple Mark accreditation.
Today's paper will raise the bar of conduct for financial services firms. But for those that take it in the spirit it is meant, it provides a clear path to marrying the long-term interests of shareholders and customers. By delivering good outcomes on a consistent basis, firms will deliver better returns for their shareholders over the longer run - and we can break free from the cycle of boom, fines, reparations and rebuild.
If you want to talk about the Consumer Duty, do get in touch. We'll be running a webinar early next month.