What is the Consumer Duty?

Hi everyone, my name is Craig Muir and I’m joined by my colleague Gregor Sked, and we’re both part of Royal London’s Intermediary Development and technical team.

The purpose of this video is to give you a brief introduction to the new consumer duty, why it’s being introduced, and what the Financial Conduct Authority is trying to achieve.  We’ll also cover the timescales and look at how Royal London can support your consumer duty journey.

Let’s start by looking at the intention of the consumer duty?  Well in the FCA’s own words, “the Duty will set a higher standard of care that firms must provide to customers. Firms will need to focus on delivering good outcomes for customers, this will enable them to identify problems earlier, and prevent problems escalating or becoming widespread”.

So what are the FCA trying to achieve and what outcomes do they want to see?

First up is Fair value: Consumers pay a price for products and services that represents fair value and poor value products and services are removed from markets leading to fewer upheld complaints about poor value and unexpected fees or charges.

Secondly, Suitable products and services: Consumers are sold and receive products and services that have been designed to meet their needs, characteristics and objectives leading to a reduction in the number of upheld complaints about products and services not working as expected.

Thirdly, Suitable treatment: Consumers receive good customer service leading to a reduction in upheld complaints about switching, cancellation and service levels and customers having higher levels of satisfaction with the service they receive.

And fourthly Confidence: Consumers increase their confidence in financial services markets and are equipped with the right information to make effective, timely and properly informed decisions about their products and services

Overall the FCA want to know whether consumers experience improvements in these 4 outcomes.

We now know what the FCA are trying to achieve and the outcomes they’d like to see, so Gregor can you explain what the new consumer duty is please?

Thanks Craig, here’s a brief summary of what the consumer duty is:

There’s a new Consumer Principle (principle 12) which requires your business (and ours of course) to ‘act to deliver good outcomes for retail customers’ supported by three cross-cutting rules requiring firms to:

• Act in good faith
• Avoid causing foreseeable harm
• Enable and support retail customers to pursue their financial objectives

There are also extensive rules and guidance on the four outcomes – products and services, price and value, customer understanding and customer support. There’s also a considerably greater focus on culture, governance and accountability.

Let’s just make it clear up front that the Consumer Principle doesn’t mean individual customers will always get good outcomes or will always be protected from poor outcomes. It also doesn’t impose an open-ended duty that goes beyond the scope of the firm’s role and its ability to determine or influence customer outcomes, or protect customers from all potential harms. For instance, firms aren’t expected to protect customers from risks that come from the nature of the product (such as investment risk), where they have complied with their obligations under the Duty and have good reason to believe the customer understands and accepts that risk.

Thanks Gregor, we’re going to look at these 3 cross cutting rules and the four outcomes in a little more detail. 

So first up the three cross-cutting rules. Gregor, what has the FCA said about each of these?

The FCA stipulates firms must act in good faith towards customers. This is a standard of conduct characterised by honesty, fair and open dealing, and consistency with the reasonable expectations of customers. Acting in good faith is a key part of creating an environment for customers to pursue their financial objectives. It’s also a key part of acting to avoid causing foreseeable harm which is the next rule we’ll look at. It supports the other cross-cutting rules by focusing on the intent behind the actions or indeed the inactions of the firm.

So seeking to exploit consumers’ lack of knowledge and understanding would be a clear sign a firm is not acting in good faith. This would include seeking to exploit customers’ behavioural biases, such as tendencies to be influenced by the way things are presented, overvaluing immediate impacts and undervaluing future ones or attaching less weight to effects that are further off, such as termination or renewal fees.

What it doesn’t do is create a fiduciary relationship (for example, a requirement to act only in a client’s interest and not to profit from the firm’s position as fiduciary) where it doesn’t already otherwise exist between the firm and the customer. The requirement for firms to take appropriate action to remedy harm doesn’t require a firm to remedy the effects of risks inherent in a product that the firm reasonably believed the customer was aware of, understood and accepted.

Secondly firms must avoid causing foreseeable harm to customers. Firms can cause foreseeable harm to customers through their actions and omissions. This can occur not only when the firm is in a direct relationship with a customer but also through their role in the distribution chain even where their actions or omissions aren't the sole cause of harm.

Both your own and our obligation to avoid foreseeable harm applies throughout the customer journey and lifecycle of the product or service. Regular reviews provide an opportunity to identify any new or emerging harms.  So for example if an advice firm providing an ongoing service to a customer identifies a change in the customer’s circumstances that means the previous advice may no longer be appropriate, the firm should update its advice to the customer. 

Please remember if you’re doing client reviews, to document them, as in the eyes of the Regulator, if they’re not documented then they never happened!

The final rules confirm the FCA is placing a major emphasis not only on delivering good outcomes but evidencing this through Management Information (MI). The guidance does say appropriate MI will vary depending on the size, client base and types of products or services offered – so expectations of adviser firms will differ from those of manufacturers.

A key part of the Duty is that advisers assess, test, understand and are able to evidence the outcomes their customers are receiving. You have to be able to identify poor outcomes and take appropriate action to rectify the causes of the poor outcomes.

So clearly you need to identify relevant sources of information to identify if your clients are receiving good outcomes or not.  The great news is at Royal London we have lots of MI which can help you.

What this cross-cutting rule doesn’t do is mean that consumers can or will be protected from all harm. – Sometimes harm will occur because of circumstances that were not reasonably foreseeable. For example, wider economic or market conditions could change the relative attractiveness or suitability of certain products for certain clients.

Sometimes firms might only be able to identify the harm when it’s too late to act. For example, a consumer’s circumstances may have changed suddenly in a way that affected their insurance cover shortly before they needed to claim. Or the nature of the harm may be such that there was no way a firm could act to avoid it. However, where a firm could reasonably be expected to act, they should do so.

And the third of the cross-cutting rules, firms must act to enable and support customers to pursue their financial objectives. This rule is concerned with the financial objectives of the consumer in relation to the financial product or service and applies throughout the customer journey and life cycle of the product or service.

This rule doesn’t remove the responsibility that consumers have for their actions. But consumers can only take responsibility where they are enabled and supported to make informed decisions in their interests through firms creating the right environment. Firms must proactively and reactively focus on putting customers in a better position to make decisions in line with their needs and financial objectives. This would include recognising and taking account of consumers’ behavioural biases and the impact that characteristics of vulnerability can have on their needs.

What it doesn’t do is require firms to carry out regulated activities outside of their scope of service and/or permissions (for example it doesn’t require firms without advice permissions to provide advice).  This wouldn’t of course stop you referring them on to another adviser who does have the relevant permissions.

We’ve looked at the 3 cross cutting rules, now I want to pass you on to Craig to discuss the 4 outcomes.

Thanks Gregor.  As a reminder the four outcomes are – Products and services, price and value, consumer understanding and consumer support.

So first up is Products and Services – This outcome requires advisers to understand if products and services are suitable for their clients in the long term.  To help meet this outcome, you should stay informed about how providers design and update their products to meet the changing needs of their target market.  This means you need to evidence that your product recommendations are in line with client needs and that any ongoing advice you provide continues to support the ongoing needs of your clients.

Adviser firms may wish to revisit how they describe their various service propositions, with each designed to meet the needs of clients in the target market. As part of this, you should also consider the range of services you’re providing to your clients and to help with this, we have a cost of services template on our consumer duty hub.

One specific example the regulator highlighted was of charging a high or fixed monetary adviser charge. Here, the target market may need to exclude clients with small amounts to invest as the fixed charge may not represent value.  You must regularly review the recommended products in line with intended target markets – and provide such information on request to manufacturers to support manufacturers’ reviews. If issues emerge, firms must act – including preventing further harm and informing others in the distribution chain.

The second outcome is Price and value.  Now this doesn’t imply a price cap, or a requirement to be the cheapest in the market. It does, however, mean that firms cannot simply charge as much as they think they can get away with. The FCA has said ‘Firms should avoid designing products and services to include elements that exploit consumer lack of knowledge and behavioural biases to increase the price paid’. Essentially what the FCA are saying is that firms need to ensure the price a customer pays for a product is reasonable compared to the overall benefits that the customer gets from the product. The FCA highlighted some instances of financial products that represent poor value. Insurance for example where the customer actually receives few benefits in terms of the cover that they get in relation to what is often quite a significant premium or where they pay broker commissions that can be unreasonable relative to the benefits of the products that they get.

Some products can take advantage of customers’ natural inertia so for example longstanding customers that have been in a product for a long time can often, for example receive quite low interest rates or another example is high charges.

So these could be considered examples of poor value and what the price and value outcome is trying to do is to put the onus on firms to address this, to really examine and challenge themselves about whether products are really a reasonable cost compared to the benefits that they give to the customer.

As well as assessing value for your services on a standalone basis, advisers must also assess whether clients will continue to receive fair value from the product after they’ve added in their own remuneration.  Advice is valuable and what you charge is a personal decision but please make sure you make it absolutely clear what your charge is and what your client is receiving for that charge. 

The third outcome is Consumer Understanding - Here, the new Duty introduces a high-level requirement for the overall package of communications to support good outcomes.

Things like, use clear and plain language, keep it simple as possible.  I realise this isn’t always going to be possible with our financial lingo so if it’s unavoidable perhaps have a glossary of terms as an appendix.  Remember to check your client understands what’s being stated. Also try and avoid long sentences wherever possible.  People switch off when faced with long convoluted sentences – I’m sure you’ve come across people who love to use these but instead try and get in to the habit, if you’re not already doing so, of using bullet points which helps break up the text and will hopefully help with a client’s understanding and encourage them to read on.  Remember the Plain English campaign recommended written sentences are no longer than 20 words as a guide. 

One key concept highlighted by the FCA is that of ‘layering’ where the most important information is placed or summarised at the beginning with the least important to the back where it is least likely to be read.  Finally the use of colours, bold text etc will draw a client’s eye to pertinent parts of your report and break up repetitive dull text.

The FCA provided an example of good practice in their finalised guidance which I think we’re all familiar with.  In their example a consumer applied to take out a financial product and were sent prescribed documents to comply with legislative and regulatory requirements, along with detailed terms and conditions.  So the usual half a rainforest.

However, best practice was the firm identified that the cumulative package of information was complex and therefore could be difficult for the consumer to navigate.  So the firm organised the information in a logical way and included a cover sheet which clearly set out the key information upfront and signposted to further detail in the package. The cover sheet also highlighted the action the consumer needed to take and the product’s key features, benefits, risks and costs, so the fundamental information the firm judged the consumer needed to make an effective decision.  

The fourth outcome is Consumer Support – Although this outcome may be more relevant to providers, so things like don’t have barriers for clients to contact them, don’t have barriers to make it difficult switching funds/products on or indeed off platforms, there are still elements which you as advisers need to focus on.  

Here, as with all outcomes, the new Duty places considerable emphasis on taking account of characteristics of vulnerability. The final rules include references alongside vulnerabilities to customers with protected characteristics.  As I mentioned, although this outcome is mainly targeted at providers, there are areas which need to be addressed by advisers with regards vulnerability and protected characteristics and we have a section on our adviser hub to help you understand vulnerability, identify clients with vulnerabilities and support them.

Now, if you meet the requirements of all four outcomes, then all your clients should:

• gain a better understanding of what your service offers and the products that you recommend to them
• have the information and understanding to make more informed decisions about products and their own financial future pay a price for your service and the products you recommend that’s reasonable, when compared to the benefits they’ll receive
• be made fully aware of any risks, charges, fees and price changes that may appear over the life of a product
• receive clear, transparent and jargon-free communications at the right time, in a way they can understand – including clients with accessibility needs and receive a consistent level of customer support from both you and providers – including vulnerable clients.
• To help you meet the requirements of each outcome, you’ll find lots of useful resources that you can use to deliver a better client experience, including guides, tools, templates and more on our Consumer Duty support hub.

Next up Gregor let’s take a look at the deadlines:

As you’ll already know, firms’ boards (or an equivalent management body) were required to have scrutinised and signed off their implementation plans by the end of October 2022, and to maintain oversight of the implementation work to ensure they remain on track and meet the standards of the Duty. Research has shown that many many adviser firms haven’t completed this so please don’t worry if you’re in this position.  The good news is there is still time to meet the main deadline of 31st July and we at Royal London can support you with this work.  

Remember the final rules and guidance place much more emphasis on culture, governance and accountability. Firms must appoint a new Duty ‘champion’ who alongside the Board Chair and CEO will make sure the new Duty is considered in all relevant discussions from strategy down. The FCA will also use the Senior Manager and Certification Regime to hold relevant individuals to account. Of course if you are a smaller firm then you may not have a board of Directors and if you’re a one man band then YOU will be the duty champion. 

The FCA is giving firms until July 2023 to implement the new rules for all new and existing products and services that are currently on sale. The rules will be extended to closed book products 12 months later (that’s July 2024),  to give firms more time to bring these older products, that are no longer on sale, up to the new standards.  

One of the biggest challenges with implementation is how different firms in the distribution chain will work together. The FCA has helpfully set an earlier 30 April 2023 deadline for manufacturers such as ourselves at Royal London to provide adviser firms with relevant information on target markets and outcome of product value assessments.

Boards or equivalent management committees must produce their first annual report on compliance with the Duty by end July 2024.

Ok let’s move on to how Royal London can support you:

We know that delivering good client outcomes is a shared objective. And believe that by working in partnership we can do this.

Our Consumer Duty support hub aims to help you get ready for the July deadline and embed the principles and practices of the Consumer in your business going forward.

It’s filled with helpful guidance and practical resources including templates to help you:

• document your implementation plan – a key requirement of the FCA
• identify areas of your business where changes or improvements are required
• identify which products and services may be best suited to your clients through every life stage
• understand vulnerability, how you can identify clients with vulnerabilities and support them
• demonstrate the fair value of your firm when recommending a Royal London pension or protection policy
• evidence the cost of delivering your advice service
• and assess if the outcomes your clients are experiencing are in line with expectations.

Our Fair Value Assessments for our open pension and protection products, provide information on how Royal London is complying with the Consumer Duty.

To help you meet the specific requirements of the four Consumer Duty outcomes, our Consumer Duty support hub has sections dedicated to each outcome, where you can access the most relevant support tools and resources.

Royal London’s purpose is “Protecting today, investing in tomorrow. Together we are mutually responsible” and this purpose allows us to focus on doing the right thing at the right time for our customers and for you.

As a champion of impartial financial advice, we take on responsibility of supporting advisers by continuing to provide you with services, such as our consumer duty hub, that support you and your processes because we know that great customer outcomes are achieved together.

Thank you very much for listening to this video, we do hope you found it useful and if you have any questions then please speak to your usual RL contact in the first instance.