The UK’s financial services conduct regulator, the Financial Conduct Authority (FCA), wants “higher level of consumer protection in retail financial markets, where firms are competing vigorously in the interests of consumers”. A key part of this is a new ‘Consumer Duty’.
The consultation proposes:
- a new Consumer Principle that provides an overarching standard of conduct; and
- a set of Crosscutting Rules and four Outcomes that support the Consumer Principle.
The proposals apply to regulated products and services sold to ‘retail clients’ which would include small and medium-sized enterprises (SMEs).
The case for change
In the Consultation Paper, the FCA acknowledges that many firms are already delivering the right outcomes for consumers but highlights the following poor practices:
- firms providing information which is misleadingly presented or difficult for consumers to understand, hindering their ability to properly assess products/ services;
- products and services that are not fit for purpose in delivering the benefits that consumers reasonably expect, or are not appropriate for the consumers they are being targeted at and sold to;
- products and services that do not represent fair value, where the benefits consumers receive are not reasonable relative to the price they pay;
- poor customer service that hinders consumers from taking timely action to manage their financial affairs and making use of products and services, or increases their costs in doing so; and
- other practices which hinder consumers’ ability to act, or which exploit information asymmetries, consumer inertia, behavioural biases or vulnerabilities.
The case for change is driven by consumer behaviour and biases and the FCA’s increased knowledge and experience in this field, not just as a result of deliberate poor conduct by retail firms.
The proposed changes
Consumer Principle
The new Consumer Principle is to set a higher standard than the existing requirement for a firm to ‘pay due regard to the interests of its customers and treat them fairly’.
The FCA sets out two options:
Option 1: ‘A firm must act to deliver good outcomes for retail clients’
Option 2: ‘A firm must act in the best interests of retail clients’
Option 1 aligns with the focus on outcomes and the impact of firms’ actions on consumers.? The ‘best interests’ concept in Option 2 is one that already exists in relation to a number of products, but is not intended to give rise to a fiduciary relationship.
Cross-cutting Rules
A set of crosscutting rules and guidance are proposed to develop and amplify the standards of conduct expected under the Consumer Principle. These Rules would require three key behaviours from firms, requiring them to:
- Take all reasonable steps to avoid causing foreseeable harm to customers.
- Take all reasonable steps to enable customers to pursue their financial objectives.
- Act in good faith
The Four Outcomes
The FCA proposes to set expectations for each of Four Outcomes in a suite of rules and guidance. The expectations are intended to build on the Consumer Principle and the Crosscutting Rules.
At a high level, the proposed expected outcomes are as follows:
| Outcome 1: Communications | Communications equip consumers to make effective, timely and properly informed decisions about financial products and services. |
| Outcome 2: Product and Services | Products and services are specifically designed to meet the needs of consumers, and sold to those whose needs they meet. |
| Outcome 3: Customer Service | Customer service meets the needs of consumers, enabling them to realise the benefits of products and services and act in their interests without undue hindrance. |
| Outcome 4: Price and Value | The price of products and services represents fair value for consumers |
What does all this mean?
The FCA Paper says that, for many firms, these changes will require ‘a significant shift in culture and behaviour, where they consistently focus on consumer outcomes, and put customers in a position where they can act and make decisions in their interests.’
There are three key areas worth noting:
- Firms will ‘need to exercise more judgement in determining how their behaviours, policies and processes act’ in achieving the outcomes. The rules put onus on firms, for example, to have identified foreseeable harm in order to take reasonable steps to avoid it – this will require a clear understanding of customers’ behavioural biases and then monitoring what happens in practice.?
- Fair value—this is an extension of existing work by the FCA on fair value, such as looking at ‘price discrimination’ and ‘inertia pricing’, which the FCA has identified disadvantages some consumers significantly, and has led to interventions on pricing in some markets. This means firms will need to be able to demonstrate that the benefits of their products and services are reasonable relative to their price.?
- Testing—firms will need to be able to demonstrate that they have complied with the Consumer Principle and the cross cutting rules through continual self-assessment. However, the self-assessment and testing will need to extend beyond ensuring narrow compliance with the specific principles and rules, as the FCA wants firms to also focus on delivering good outcomes for consumers.
Related issues
Private right of action
The FCA wants the consultation to focus on its proposals for the Consumer Duty, and ensure that they would deliver the right outcomes for consumers. As such, it has not made any specific proposals on a private right of action, but says that it would welcome stakeholders’ further views on how a private right of action could support or hinder the success of the proposals and their intended impact on firms, consumers and markets.
Protecting vulnerable consumers
Protecting vulnerable consumers is a key focus for the FCA and there is a continued focus on protecting vulnerable consumers in the Consultation Paper. The FCA highlights that firms should take additional care to ensure vulnerable consumers achieve outcomes that are as good as those of other consumers.
What does this mean for Australian financial regulation?
There is not the same impetus for reform regarding a “Consumer Duty” in Australia along the lines of that proposed by the FCA. However, there is a policy discussion around a 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.
Perhaps the UK policy discussion about a Consumer Duty will provide further impetus for consumer protection reform in Australia, too.
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