Having deployed a series of regulatory tools over the years to try and improve customer outcomes in markets, with varying degrees of success, the FCA introduced the UK’s Consumer Duty in July 2023 to set clearer and higher standards and attempt to get firms to focus on good consumer outcomes. In this analysis, financial regulatory expert, Andrew Barber, a partner at Dentons, looks at the drivers behind the Duty, new areas of focus for the FCA, and how firms are responding to their obligations some 18 months on from the introduction of this significant development.
The implementation of the UK’s Consumer Duty, which sets high, clear standards for consumer protection across financial services and requires firms to deliver good outcomes for retail customers, has brought significant scrutiny to how authorised financial services firms treat their customers.
The new duty also looks to further strengthen the work the Financial Conduct Authority (FCA) had been doing to ensure the fair treatment of vulnerable customers.
Introduced in July 2023, the Consumer Duty has been many years in the making. It is the product of a series of FCA interventions in particular areas of the of the UK’s financial services market where it has identified consumer harm.
One area of intervention was the regulator’s decision to crack down on the high-cost short term credit (HCSTC) market, which the FCA was first tasked with regulating in 2013, to protect consumers from excessive charges.
The FCA identified some HCSTC providers were charging interest rates as high as 4% per day with a typical customer taking out six loans per year, causing significant harm to consumers.
The FCA dealt with this by closely supervising this market and introducing new rules including a price cap on HCSTC loan rates.
The following decade saw a series of further interventions in various areas, including insurance, motor finance and premium finance, which undoubtedly cumulatively fed into the scope of the Consumer Duty.
Impact of the Consumer Duty
The Consumer Duty represented a significant change in the FCA’s approach to regulation of authorised financial service providers, as it inserted a new principle (Principle 12) into the FCA’s rulebook, namely that it requires firms to act to deliver good outcomes for retail customers.
Because the Consumer Duty is principle-based and designed to cover all firms whose activities can have an impact on outcomes for retail customers, the rules and the guidance have not always perfectly aligned with particular segments of the market.
This has meant some firms have found the rules and guidance do not consistently provide absolute clarity around its application in certain areas. This was demonstrated by the FCA’s recent decision to class an outsourcer – specifically a prominent wealth management platform provider – as a co-manufacturer under the Consumer Duty.
However, overall, financial services providers cannot escape the clear understanding of what the FCA expects of them in terms of delivering good customer outcomes.
This increased level of FCA scrutiny has put significant pressure on firms’ compliance resources – an additional cost burden that some firms will undoubtedly pass on to customers, which was possibly not an outcome the FCA intended.
How firms are responding
More than a year since its introduction, the market has been mixed in its reception of the Consumer Duty.
While many firms tend to operationalise regulatory changes quite successfully, technical understanding of the rule changes and their implications for the business are not always implemented effectively, which can create compliance issues and expose firms to FCA intervention.
Some firms fall into what the FCA would class as “good practice” providers; for these firms, the Consumer Duty in most instances crystalised what they were doing already, and helped them focus on particular areas where they could improve.
Others have been slow to appreciate the impact the duty was intended to have on their business, particularly the FCA’s power to investigate their practices and put them under intense supervision, culminating in enforcement in cases of particularly poor (and persistent) practice.
In general, large, established organisations with commensurately sized and sophisticated compliance functions are more likely to have implemented the Consumer Duty in the way the FCA envisaged.
Other smaller and younger organisations may find complying with the Consumer Duty more challenging.
One market segment – payments and E-money firms – has already been the subject of a multi-firm review by the FCA to analyse how firms in this bracket have implemented the Consumer Duty.
The FCA found that a substantial minority of the firms reviewed had only partially implemented the duty and required significant work to comply with it. The FCA asses these firms as presenting either moderate or higher risk of poor consumer outcomes.
This might be attributable to their smaller compliance functions and resource constraints, but also because many seemed less aware of the impact the Consumer Duty would have on their business and have been slower to respond. This lack of awareness was demonstrated by the FCA’s portfolio letter to firms in February 2023.
Broadly, however, as a consequence of 10+ years of FCA regulation and the imposition of the Consumer Duty, there has been a noticeable trend in firms of all sizes reviewing current and historic practices through the lens of consumer harm and undertaking meaningful remediation exercises.
In a recent speech marking one year since the implementation of the Consumer Duty, the FCA’s Executive Director, Consumers and Competition, Sheldon Mills acknowledged the positive strides authorised financial services firms have made towards improving consumer outcomes.
Nevertheless, having embedded this new duty, the FCA clearly remains far from satisfied with the level of consumer protection in UK financial services and is moving on to other areas area where it sees potential consumer harms.
In January 2024, the FCA announced it will be reviewing the historical use of Discretionary Commission Arrangements (DCAs) in the motor finance market which were banned in 2021.
However, the FCA subsequently paused the time firms have to respond to consumers about complaints involving DCAs, and recently extended the time for firms to respond to consumers about other commission arrangements in the motor finance market.
This is likely due to the sheer amount of information the regulator has uncovered and needs to process and the need to await the outcome of the appeal to the Supreme Court on Hopcraft, Wrench and Johnson – a key motor finance commissions case – before taking decisive action.
Not wanting to let the dust settle on its efforts to protect consumers, in October 2024 the FCA announced it is conducting a market study on the premium finance market, covering home and motor insurance providers who allow customers to pay their premiums in instalments.
While observers of financial regulation can only guess at what the outcomes of the market study might be, it is highly likely it will be presented from the perspective of the Consumer Duty and ensuring good outcomes for retail customers.
Andrew Barber is a partner at Dentons specialising in Financial Regulation and Fintech.
