In an era of heightened consumer protection and evolving industry standards, corporate boards and senior management are at the forefront of implementing the transformation of Consumer Duty. This regulatory framework, introduced by the Financial Conduct Authority (FCA), is reshaping the landscape of the UK's financial services sector, emphasising accountability, consumer welfare, and trust.
- The Consumer Duty, introduced by the FCA, aims to enhance consumer protection and elevate industry standards.
- Corporate boards and senior management play a pivotal role in overseeing and administering the Duty, ensuring compliance, and aligning firm strategies with a consumer-centric approach.
- Appointing a Consumer Duty Champion within the board is encouraged, particularly for larger firms, to ensure the Duty's integration and focus on achieving favourable consumer outcomes.
What is the Consumer Duty?
In an attempt to alleviate consumers’ burdens during a time of financial uncertainty, the FCA has reassessed its approach to financial regulation and has introduced a new Consumer Duty as part of its efforts to enhance consumer protection and improve the financial service industry’s standards.
Described as a major shift in the UK’s financial services sector, the FCA’s Consumer Duty came into force on 31 July with the aim of setting clearer standards of consumer protection across new and existing financial products and services that are open to sale or renewal. The Duty impacts all firms which distribute or manufacture products and/or services to retail customers, including those firms with no direct customer relationship. The Duty extends to goods and services offered to both "B2C" (Business-to-Consumer) consumers and "retail clients," which includes small and medium-sized enterprises (SMEs).
Importantly, the Duty applies to potential as well as actual customers, and firms must now give (if they haven’t already) serious consideration to their new obligations.
A cornerstone of the new Duty is a Consumer Principle requiring firms to ‘act to deliver good outcomes for retail customers.’ Three cross-cutting rules outline the FCA’s expectations in relation to this, and require firms to:
- Act in good faith towards retail customers;
- Avoid causing foreseeable harm to retail customers; and
- Enable and support retail customers to pursue their financial objectives.
In turn, these rules inform a suite of four outcomes which set out more detailed expectations for firm conduct in four key areas of the firm-consumer relationship:
- The governance of products and services;
- Price and value;
- Consumer understanding; and
- Consumer support.
The Duty applies across the “distribution chain” and applies to all firms involved in the manufacture, provision, sale and ongoing administration and management of a product or service to the end retail customer. The Duty applies from product and service origination through to distribution and post-sale activities.
The reality is, whilst the FCA acknowledges the fact that distribution chains can be “long and complicated” with the potential for visibility issues, firms’ obligations under the Duty should be interpreted reasonably and to the extent a firm can determine or materially influence retail customers’ outcomes. What is reasonable will also depend on the nature of the product, the characteristics of the retail customers, and the firm’s role.
In the absence of regulatory or contractual requirements, firms are only responsible for their own activities within the distribution chain. However, it’s important to be aware of situations in which an obligation arises to consider actions taken by other organisations within the chain. Any firm identifying non-compliance elsewhere in the chain must (i) raise the concern with any other relevant parties, and (ii) notify the FCA. Things may become stickier when two or more firms are in disagreement, although the FCA mandates that, where the firms involved are co-manufacturers of a product or service, they must have a written agreement outlining their respective roles and responsibilities. This will no doubt add clarity, but it’s less clear what might happen when one firm’s non-compliance leads to an adverse outcome for another firm’s customer .
The FCA has not yet created a private right of action (PROA) in respect of a breach of the Duty, but firms would be advised to mitigate the risk of enforcement investigations and potential disputes by looking at their relationships with third parties and considering whether they are adequately protected from a contractual perspective. In addition, as organisations across the distribution chain will be expected to provide and request information to and from one another, formal procedures should be embedded to successfully navigate such requests. Issues such as data privacy and commercially sensitive information will need to be addressed, and collaboration and communication will be essential.
The new rules establish an elevated level of consumer protection within the realm of financial services. In summary, the Duty entails that clients should receive timely and comprehensible assistance, tailored to their requirements. Furthermore, financial offerings should align with customer needs and provide fair value.
What role do boards and senior management play?
Leading up to the implementation of the Duty, it was anticipated that corporate boards will play a crucial role in supervising and administering the process. From the perspective of the FCA, the Duty should be the foremost concern for boards, and the ultimate responsibility for ensuring compliance rests with both boards and senior management.
In addition to the requirement for boards and senior management to oversee the implementation of the Duty, boards and senior management must (i) ensure that their firms deliver good outcomes for consumers; (ii) perform ongoing monitoring of consumer outcomes; and (iii) review and approve an annual (at the least) report setting out whether the firm is delivering good outcomes for its customers which are not only consistent with the Consumer Duty but that the board is satisfied that the firm is complying with the Duty.
The board's responsibility lies in guaranteeing that the firm's strategies, governance, leadership, procedures, and personnel policies (which encompass incentives at all organizational levels) are aligned with the imperative of proactively working to provide favourable results for customers.
To ensure compliance with the Consumer Duty, it is prudent to appoint a Consumer Duty Champion within the board. The primary duty of this Champion is to aid the Chair and CEO in consistently introducing the Duty into relevant discussions and scrutinizing the firm's leadership to gauge the effectiveness of the Duty’s integration and its focus on achieving favourable consumer outcomes.
According to the FCA, it is recommended that, whenever feasible, the Champion should be an independent non-executive director. The specific choice may also hinge on the nature and scale of the firm in question. In the case of larger firms with diverse business divisions, it might be prudent to explore whether having multiple Champions, each dedicated to a particular business division or a specific category of products or services, would align better with their business needs. That said, the FCA has cautioned firms against diluting the role when designating more than one champion role within a firm.
In conclusion, the successful implementation of the Consumer Duty is intrinsically tied to the pivotal role played by corporate boards and senior management. As we have discussed, these entities are not only tasked with overseeing and administering the Duty, but they also bear the ultimate responsibility for ensuring compliance and shaping the firm's culture to prioritize consumer welfare.
The board's role extends beyond mere oversight; it involves actively aligning the firm's strategies, governance, leadership, processes, and personnel policies with the Duty's core principle of delivering positive outcomes for consumers. This comprehensive approach is essential for building and maintaining trust and confidence in the financial service industry, enhancing consumer protection, and ensuring the highest standards of service.
In a time where consumer protection and industry standards are paramount, the diligent efforts of boards and senior management, coupled with the appointment of a dedicated Champion, are essential components in upholding the principles and objectives of the Consumer Duty. This multifaceted approach is not only a regulatory requirement but also a significant stride towards a more ethical and consumer-centric financial service industry.
For any questions related to the topics raised in this blog, please contact Kerri Wilson.