The Financial Conduct Authority (FCA) has set a new standard for the financial services industry with its Consumer Duty. This isn't just another regulation to follow – it's a fundamental shift in how firms must design products, deliver advice, and interact with their customers. The days of mis-selling scandals, where products were prioritised over people, are over. The Consumer Duty demands that consumers' needs are the driving force behind every financial decision. This comprehensive guide will help you understand what the Consumer Duty means, why it's crucial, and how your firm can successfully implement it.
More than £5bn of adviser payments were made for ongoing services in 2022, a sum significantly outnumbering payments for initial, one-off, and ad-hoc services, according to Financial Conduct Authority data. The FCA's recent scrutiny of ongoing advice practices signals its commitment to ensuring consumers get fair value for these fees. The Consumer Duty demands that advisers go beyond traditional box-ticking and demonstrate the real benefits their services provide to clients.
At its core, the Consumer Duty demands that firms take all reasonable steps to prevent foreseeable harm to their retail customers. For advisers, this means re-orienting your entire approach around understanding your clients' needs and ensuring your advice consistently drives positive results for them.
The FCA is clear: treating customers fairly must be central to every aspect of a firm's operations. The Consumer Duty applies across the entire retail distribution chain, from product manufacturers and distributors to financial advisers and platforms.
The FCA's Consumer Duty represents a significant evolution in the regulator's approach to consumer protection within the financial services industry. Its origins can be traced to the Financial Services Consumer Panel's advocacy for a strengthened "duty of care" framework. In 2017, the Panel expressed concerns that the emphasis on "Treat Customers Fairly" (TCF) was not always sufficient in ensuring firms prioritised the best interests of their customers. This sparked the FCA's extensive consultations, where it sought industry feedback on how to drive a more proactive, outcomes-focused approach to consumer wellbeing.
The Consumer Duty rests on three key principles:
These principles underpin four key outcomes that the FCA expects firms to deliver:
The FCA has implemented the Consumer Duty in two phases to allow firms time to prepare. Here's a breakdown:
Important Note: The FCA emphasises that the Consumer Duty is an ongoing commitment, not a one-time project. Firms should be prepared to continuously evaluate their approach and adapt as needed to meet the evolving needs of their customers.
The Consumer Duty goes beyond mere adherence to a new set of rules. It demands a cultural shift within firms, fostering a mindset of "is this right?" rather than simply "is this within the rules?". This ongoing mindset shift is at the heart of the Consumer Duty. It goes beyond adhering to a new set of rules and demands a true cultural transformation within firms.
The FCA envisions a model where firms continuously:
"The Duty isn’t something where you can tick the Consumer Duty box on your to-do list and move on. It’s something that needs to become part of who you are as a firm, your culture, and how you do business, running across your whole organisation from Board to front-line delivery, from product design to communications and customer support." - Nisha Arora, Director of Cross Cutting Policy and Strategy at the FCA
The Consumer Duty places advisers at the heart of delivering good client outcomes. To fulfill this responsibility, you must deeply understand your clients' needs, provide suitable advice that prioritises those needs, maintain clear and transparent communication, and proactively manage risks to your clients' well-being.
The Consumer Duty begins with understanding your clients. First, we'll explore the importance of going beyond surface-level Know Your Customer data to truly uncover your clients' financial goals and priorities.
Understanding Needs: The Consumer Duty demands that advisers move beyond surface-level Know Your Customer (KYC) data and gain a deeper understanding of their clients' financial needs, goals, and priorities. This focus on outcomes means tailoring advice to what the client truly wants to achieve, rather than simply gathering basic financial information.
Questions for Reflection:
Outcomes vs. Products: The Consumer Duty emphasises that advisers must prioritise the client's desired outcome over simply recommending a specific product or service. This means starting with a clear understanding of the client's financial goals, risk tolerance, and other relevant circumstances, then finding the most suitable solution to achieve them.
Questions for Reflection:
The Adviser's Role: As a financial adviser, you play a crucial role in ensuring that the products and services you recommend offer fair value to your clients. The Consumer Duty demands that you consider not just the price of a product or service, but the overall benefits it provides in relation to its total cost. This means aligning recommendations with your client's individual needs, goals, and risk tolerance.
The FCA's Concerns: The FCA has identified concerns about firms charging fees along the distribution chain that might mean the overall cost to the end consumer does not represent fair value. This highlights the importance of advisers carefully evaluating all costs and their impact on the client's financial well-being.
Questions for Reflection:
| Communication Tactic | Consumer Duty Outcome | Adviser Applications |
|---|---|---|
| Simplified Language | Consumer Understanding | Break down complex terms into plain language |
| Use visual aids (charts, graphs) to compare fee structure | ||
| Potential long-term impact, offer summaries in addition to full documentation | ||
| 'Worked Examples' of Costs | Price and Value | Clearly illustrate the impact of different fees on investment returns over time |
| Compare potential product performance under different fee scenarios | ||
| Show the cumulative effect of seemingly small ongoing fees | ||
| Adviser Activity | Consumer Support, Price and Value | Schedule regular reviews to ensure products/services remain aligned with evolving client needs |
| Assess whether clients are actively using the benefits they pay for | ||
| Initiate contact if market changes or life events could impact product suitability and value proposition | ||
| Tailored Materials | Addressing Vulnerability, Consumer Understanding | Proactively identify clients who might benefit from alternative formats (large print, audio) |
| Prioritise accessibility in all client communications |
Questions for Reflection:
Proactive Monitoring: Under the Consumer Duty, advisers have an ongoing responsibility to monitor for potential risks to their clients' financial well-being. This includes identifying trends of client complaints related to particular products or services, emerging vulnerabilities, or gaps between a product's promised features and its real-world performance. Promptly escalating these concerns to product providers or distributors demonstrates the adviser's commitment to protecting their clients' interests.
Questions for Reflection
The Consumer Duty places a strong emphasis on firms clearly demonstrating the value clients receive in exchange for ongoing fees. This means rethinking the way value is determined. Ongoing advice isn't just about activities or meetings; it's about delivering positive outcomes for clients over time.
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Traditional Focus
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Focus Under Consumer Duty
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|---|---|---|
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Suitability
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Initial Product Fit
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Evolving Needs and Goals
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Client Engagement
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Number of Meetings
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Meaningful Interactions
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Adviser Activity
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Transactions Made
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Proactive Risk Identification
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The FCA will take a proactive approach to ensuring firms are meeting their obligations under the Consumer Duty. Here's what you need to know:
No. The FCA focuses on good customer outcomes, not the size of your firm. Document how your actions drive positive outcomes for your clients, even if the methods are simpler.
Focus on open-ended questions that invite clients to share their aspirations and concerns. Rather than just asking about risk tolerance, frame questions like: "What does financial security mean to you?", "Are there any big life goals you're saving for?", "What worries you most about your financial future?" The FCA emphasises that understanding your clients' circumstances helps you better tailor advice and support, improving outcomes.
The Consumer Duty prioritises outcomes, not just ticking boxes. Your role includes: Clearly explaining why you feel the product is unsuitable, relating it back to their specific goals. Use clear examples. If possible, suggest a more suitable alternative and explain why it's a better fit. If they insist on the unsuitable product, fully document your advice, the rationale behind it, and the client's acknowledgment of risks. This demonstrates you've fulfilled your duty in informing them.
The FCA stresses transparency and avoiding jargon. Here are a few strategies: Use charts or graphs to compare fees on different products, or to show how even small fees compound over time. Translate percentages into actual potential losses ("This 1.5% annual fee means that over 20 years, your £50,000 investment could be reduced by roughly £X..."). Have the client explain the fee structure back to you to ensure comprehension.
Remember, the Duty is about ensuring clients truly understand, not just giving information.Try these approaches: Avoid jargon; use analogies and everyday examples. Ask clients to explain key concepts in their own words. Gently correct misunderstandings. Provide a concise written summary of key points, especially after meetings. Emphasise to clients that there are no 'bad' questions and that you're there to help them understand.
The FCA expects firms to be proactive. Here's how: Understanding the subtle signs of vulnerability (recent stress, difficulty grasping concepts) is key. Your firm may provide specific training. Adjust communication pace and style. Offer alternate formats for explanations. Be ready to suggest helpful resources within your firm or approved external organisations (if applicable). Building trust is essential; let the client guide the pace of decision-making whenever possible.
Cheung. C (2024). 'What does the FCA’s survey mean for ongoing services?', FTAdviser. Available at: https://www.ftadviser.com/regulation/2024/02/27/what-does-the-fca-s-survey-mean-for-ongoing-services/ (Accessed: 03 May 2024).
Financial Conduct Authority (n.d.). Consumer duty, Available at: https://www.fca.org.uk/firms/consumer-duty (Accessed: 03 May 2024).
Financial Conduct Authority (2023). Consumer duty: Not once and done, Available at: https://www.fca.org.uk/news/speeches/consumer-duty-not-once-and-done (Accessed: 03 May 2024).