Duty calls: will the FCA’s proposed consumer duty be effective?

Posted August 18, 2021

Money Advice Trust Policy Lead Meg van Rooyen takes a look at the FCA's proposed 'consumer duty'.

There have long been calls from consumer groups for the FCA to introduce a legal ‘duty of care’ to protect consumers and tackle a range of harms seen within financial services markets.

In May, the FCA released new proposals in response to this – setting out their plans for a new consumer duty.

This new consumer duty would comprise:

• A high-level ‘consumer principle’ – with the FCA consulting on whether this should be focused on firms being required to ‘deliver good outcomes’ or ‘act in the best interests’ of consumers.
• Cross-cutting rules – for example on taking steps to avoid foreseeable harm for consumers.
• Four outcomes relating to communications, products and services meeting the needs of consumers, customer service, and fair value in the pricing of products.

Although these proposals might sound quite technical on first glance, they could have far-reaching consequences for all consumers. Handily, the FCA has set out its proposals on in an easy-to-read webpage too. With the consultation on the duty having recently closed, all eyes will be back on the FCA to see how it is going to take it forward.

So, what do we make of the proposals?

Addressing consumer harms 

When assessing the FCA’s proposals, we’ve been led by considering the types of harms it needs to prevent. For the new duty to be considered effective it needs to tackle the problems we too often see in the market, such as poorly designed products that rely upon targeting vulnerable consumers or exploiting consumer behaviour and biases. Or the problem of groups of consumers being excluded from – or expected to pay significantly more – for products that others take for granted.

A robust framework 

So, what might the FCA’s proposals achieve, and will they be effective?

Firstly, we think the proposal to have different levels of the duty (i.e. a consumer principle, backed up by more specific rules) should provide a robust structure to improve outcomes for consumers.

Similarly, it should help to ensure that the consumer duty is embedded throughout the regulatory framework and will therefore have a much greater effect on outcomes for consumers than a one-line legal duty or principle would have done.

It’s also important to remember that these proposals don’t exist in a vacuum. Earlier this year, the FCA released their new vulnerability guidance. We believe that the combination of these proposals and the strengthened vulnerability guidance will mean firms should put even greater focus on ensuring appropriate levels of care for vulnerable customers, building on the positive steps we’ve already seen in recent years. The FCA’s aim for firms to deliver outcomes for people in vulnerable circumstances as good as those for other consumers, will raise the bar for everyone. A requirement to take reasonable steps to avoid harm and not just identify, and respond to, existing harm will be a great step forward.

In this respect, we hope that the new duty will really push firms to think about preventing harm – including at the product and service design stage. Good product design is integral to ensuring good practice and using inclusive design can transform the way markets, products and services work, particularly for people in vulnerable circumstances. Earlier this year, the Money Advice Trust worked with our friends at Fair By Design to jointly publish guidance on embedding inclusive design in financial services, and other essential service markets. Designing inclusively will be crucial to firms fulfilling their duties under the FCA’s proposals.

In our view, the new duty wouldn’t just bring benefits for consumers, but is likely to benefit all firms too, including in relation to competition. The proposals will help to create a level playing field for all firms, and prevent some firms undercutting the firms that already do the right thing. Removing exploitation of consumer bias or vulnerability also means firms can genuinely compete around innovation, level of service and on meeting customer needs. This should help to drive healthy competition in the market.

Robust authorisation, supervision and enforcement

While there is much to welcome in the new consumer duty, we are clear that the proposals themselves will achieve little if they are not appropriately enforced. We believe that a reformed authorisations process and robust supervision and enforcement regimes will be crucial to the success of the consumer duty measures in improving outcomes for consumers.

A robust authorisation regime will need to be able to prevent firms from entering the market and selling poorly designed or toxic products to consumers. An enhanced supervision and enforcement regime would also allow the FCA to better monitor firms to identify poor practice and intervene before that practice becomes the market norm – something that should be a key ambition of the new duty.

The FCA has promised to set out its proposals for an enhanced supervision and enforcement regime in the next round of consultation on the consumer duty, and this will be an area we scrutinise closely.

What about financial inclusion…? 

Another area of concern is whether the duty will be effective in tackling financial exclusion – one of the key areas of harm we currently see. We expect more action will be needed from the FCA – and government – for example, to tackle the problem of affordable credit for people on low incomes.

With high-cost credit products, we come back to the fundamental problem that some products may be so toxic for consumers that they should not be allowed to be offered in the future under the new rules. However, as the FCA does not have the powers to mandate firms to create and market new products that are more suitable, there is a risk that more vulnerable consumers and those on low incomes will be unable to access appropriate credit that meets their needs. It is very difficult to square this circle, as a credit provider who cannot see a profit in a product, will not offer it, and the FCA cannot ensure they do so.

The FCA – and government – therefore won’t be able to rely on the duty to solve every problem. There will be a continued need for social policy solutions to issues the market cannot solve on its own – such as the need for government-backed interest free or low interest loan schemes.

Delivering on the ambitions of the consumer duty

The FCA has committed to consulting further on the detailed rules and guidance that it will need to put in place for the consumer duty to work. It will be important that the ambitious aims of the consumer duty are not watered down during the consultation process, and that there are clear rules and guidance to ensure a consistent interpretation of the requirements by firms.

We will be looking at the draft rules closely, once published, to make sure that the ambitious vision set out so far, does not evaporate in practice. The new duty could lead to significant improvements for all consumers but, for this to happen, the FCA will need to continue to be bold and drive firms to deliver the culture change needed to truly put consumers at the heart of financial services markets.

To find out more, read our full response to the FCA consumer duty consultation.

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