Educating Tandem Introducing Consumer Duty Principle

The financial services conduct regulator, the FCA, published a new Consumer Duty Principle in July 2022, setting higher and clearer standards of consumer protection across financial services. It requires businesses to put their customers’ needs first.

The Consumer Duty will replace Principles 6 and 7, which have obligated businesses torespect customers’ interests, treat them fairly, and to communicate clearly, and not to mislead.

‘The requirement to act and deliver good outcomes’

The FCA has been clear to assert that the new principle encompasses all the requirements set out in principles 6 and 7, whilst significantly raising expected standards.

The Consumer Duty is made up of three elements:

• The Consumer Principle

• The Cross-Cutting Rules, and

• The Four Outcomes.

The FCA also published a web page dedicated to the Consumer Duty, which includes the final rules, an overview of the key deadlines, and several speeches that have been delivered by the regulator. Find out more>

New Consumer Duty Principle & Cross-Cutting Rules

The Consumer Duty is made up of three elements: the Consumer Principle, the Cross-Cutting Rules, and the Four Outcomes.

The Consumer Principle

A business must act to deliver good outcomes for consumers.

The FCA wants to move the financial services industry to a world where businesses must demonstrate that they treat customers fairly, leading to consistently and demonstrably good outcomes.

This is a key differentiator of the Consumer Duty, as businesses won’t just be required to treat customers fairly, but now will be required to evidence how the treatment of its customers has led to good outcomes in a measurable way.

The Cross-Cutting Rules

The FCA has set out three Cross-Cutting Rules requiring businesses to:

1. Act in good faith

2. Avoid foreseeable harm to customers

3. Enable and support consumers to pursue their financial objectives

The Cross-Cutting Rules articulate the standards of conduct that the FCA expect under the new Consumer Principle (principle 12).

1. Act in good faith:

The FCA has set out guidance regarding what constitutes acting in good faith which are ‘a standard of conduct characterised by honesty, fair and open dealing and acting consistently with the reasonable expectations of customers’.

Ensuring that businesses act in good faith, is a key part of creating an environment in which customers can pursue their financial objectives. It is also a key part of acting to avoid causing foreseeable harms.

This includes recognising and taking account of consumers’ behavioural biases, and the impact that characteristics of vulnerability, can have on their needs.

2. Avoid foreseeable harm:

Businesses must avoid causing foreseeable harm to customers. They can cause foreseeable harm to customers through their actions and omissions.

Businesses must take proactive and reactive steps to avoid causing harm to customers through their conduct, products, or services where it is in the business’ control to do so. This includes ensuring that no aspect of their design, terms and conditions, marketing, sale of and support for their products or services cause foreseeable harm.

3. Enable and support customers to pursue their financial objectives:

This rule protects the financial objectives of the consumer, in relation to the financial product or service and applies throughout the customer journey and product or service life cycle.

It doesn’t remove the responsibility that consumers have for their actions. Consumers can only take responsibility where they are enabled and supported to make informed decisions in their interests, through businesses creating an environment that supports this.

Businesses must proactively and reactively focus on putting customers in an adequate position to make decisions in line with their needs and financial objectives.

The FCA has given more detailed expectations relating to the business-consumer relationship broken down in to Four Outcomes:

• Products and Services

• Price and Value

• Consumer Understanding

• Consumer Support

Products and Services

This outcome focuses on the way that products and services are designed, distributed, monitored, and adapted throughout the product lifecycle.

This outcome seeks to ensure that products are only distributed to those consumers for which they are designed, therefore requiring that businesses have defined a suitably granular target market.

The products and services outcome rules are therefore central to businesses acting todeliver good outcomes. (Continued...)