In 2021, CFA published this post about the development of a new “consumer duty” for financial services. It’s now 2023, and the new duty is now incorporated into the Financial Conduct Authority’s regulatory handbook. So what is it, and how does it compare with Australia’s consumer protections?
What is the new Consumer Duty?
The duty is comprised of the following components:
- A Consumer Principle which requires firms to ‘deliver good outcomes for retail consumers’.
- Three Cross-cutting Rules which require firms to:
- Act in good faith towards retail consumers;
- Avoid causing foreseeable harm to retail consumers; and
- Enable and support consumers to pursue their financial objectives.
- Four Outcomes which are s suite of rules and guidance setting more detailed expectations for firms in four areas that represent key elements of the firm-consumer relationship:
- The governance of products and services;
- Price and value;
- Consumer understanding; and
- Consumer support.
The Consumer Principle expects firms to think more about consumer outcomes and put consumers’ interests at the heart of their activities. The FCA says it should “prompt firms to ask themselves questions such as, ’Am I treating my customers as I would expect to be treated in their circumstances?’ or, ’Are my customers getting the outcomes from my products and services that they would expect?’.
The Consumer Principle requires businesses to:
- deliver beneficial outcomes for consumers generally, by pro-actively acting to put consumers’ interests first;
- focus on the outcomes for consumers, and ensure the business’ behaviour is aligned with how consumers actually behave and interact with products. This is to be achieved by better enabling consumers to access and assess relevant information, and pursue their financial objectives;
- ensure that all relevant sectors of the business have a well-founded understanding of consumer behaviour and how the products and services function to provide the outcomes that would reasonably be expected by those consumers;
- when good outcomes are not being achieved, act to fix any shortcomings in processes, systems, or behaviours; and
- continuously and periodically review and improve themselves to ensure their actions align with the delivery of good outcomes for consumers.
The underlying purpose of the Consumer Principle is not to compel firms to protect individual customers from poor outcomes—it does not remove consumers’ responsibility for their choices and decisions. For example, firms, insofar as they have complied with the Consumer Duty, are not expected to protect consumers from risks that are inherent in a product’s structure or design, such as investment risks.
However, consumers can only be expected to take responsibility for their actions when they are able to trust that the range of products and services they choose from are designed to meet their needs, and offer fair value. They need help to understand products and services, and they need confidence that firms will act in a way that helps, rather than hinders, their ability to make decisions in line with their needs and financial objectives.
Cross-cutting Rules require firms to:
- act in good faith towards retail customers – this means conduct characterised by ‘honesty, fair and open dealing and acting consistently with the reasonable expectations of retail customers’. This is applicable to all stages of the customer journey and for the whole lifecycle of a product or service;
- avoid causing foreseeable harm to retail customers – while this does not require firms to prevent all harms, it does mandate firms to take proactive and reactive steps to avoid foreseeable harm and put in place appropriate harm mitigation measures.; and
- enable and support retail consumers to pursue their financial objectives – including steps to facilitate retail customers to make informed decisions that are in their interests.
Products and services outcomes
Under this outcome, firms must ensure that the products and services they offer are suitable and are regularly assessed to ensure that they continue to be suitable for its customers.
Products and services must have terms and features that match the needs of the consumers they’re created for, and firms must ensure that they have recorded their product development analysis and record when they monitor that they are meeting this outcome.
Price and value outcomes
Firms must ensure that their products and services offer fair value. This means that firms must offer products or services at a fair price which reflects the benefits of those products and services and protect consumers from unreasonably high fees and charges.
Consumer understanding outcomes
Ensuring that customers are provided with the right information at the right time is vital to ensuring that they are equipped to make effective and informed decisions. Firms must also ensure that information which is being provided to consumers is in a way that is easy to understand for their individual needs. Firms must ensure that communication with consumers is clear and transparent, is appropriate for the average customer and that firms consider potential customer vulnerabilities.
Consumer support outcomes
Under the Consumer Duty, firms must provide responsible and accessible consumer support. This includes processes which allows consumers to easily switch products and providers, cancel or make complaints. Firms should take a flexible approach taking customer needs into account, remove any post-sale barriers and is responsive and accessible.
Will the Consumer Duty make a difference?
UK consumer organisation Citizens Advice has welcomed the new Consumer Duty. It says:
“We’re usually sceptical of policy solutions which aim to make people into more effective shoppers rather than ensuring that firms design products and services which deliver on what consumers expect. This is why we welcome the Financial Conduct Authority (FCA) introducing a new Consumer Duty which looks to put the consumer at the heart of business decisions.”
Citizens Advice has identified three areas which they will monitor to measure the success of the consumer duty:
- Tackling the ethnicity penalty – in the UK, people of colour are paying £250 more on average for car insurance than white people. The new Consumer Duty, which requires firms to monitor if different groups get different outcomes, should ensure firms explain what’s happening and act appropriately.
- Creating better online consumer journeys – slippery online design practices, like pre-selecting options or making it hard to cancel a service, causes harm. One in six people have felt pushed into making purchases they didn’t want, didn’t need, or came to regret due to features in the design of the sales process. The Consumer Duty should drive better outcomes through prompting a focus on online design.
- Effective communication of hardship support – effective support when people have payment difficulties on financial products including harms is necessary to avoid harm. Many people, however, report saying they’ve had no contact from their lender about support during the cost-of-living crisis. The Consumer Duty should require firms to test whether they are reaching people effectively, and regularly adjusting their communication and support.
What about Australia?
It doesn’t look like a Consumer Duty is on the Australian regulatory agenda. However, a range of reforms have come out of the Royal Commission into Misconduct in the Banking, Finance and Superannuation Industry, including:
- Best interests duties for mortgage brokers, akin to best interests duties for financial advisers;
- Design and distribution obligations which require firms to have a consumer-centric approach to designing and distributing financial products;
- Product intervention powers which provide ASIC with the power to take temporary action to intervene where it is satisfied that the financial or credit products have resulted in, or are likely to result in, significant consumer detriment.
These reforms build on the general obligation to provide services efficiently, honestly, and fairly, which has increased in importance since civil penalties were applied to this provision.
While these requirements have enhanced the focus on consumer outcomes in Australia’s financial services consumer protection framework, the Consumer Duty appears far more comprehensive in its scope and potential.
What is on the horizon in Australia is a new prohibition on unfair trading. It has been suggested that a prohibition on unfair trading could:
- Better address marketing manipulation that impacts or restricts the freedom of choice of a consumer, for example, by exploiting consumers’ cognitive biases and individual vulnerabilities.
- Ensure a core product purpose meets consumers’ needs and that pricing is fair, for example, by ensuring commercial returns to the firm arise predominantly from consumer outcomes that are consistent with the product’s purpose.
- Better addressing vulnerability by promoting universal design in product design and customer service.
This new reform might be the opportunity to more comprehensively drive consumer protection in the way that the Consumer Duty is expected to do, and address consumer harm beyond financial services.