FCA Consumer Duty Guide
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.
What is Consumer Duty?
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 Road to Consumer Duty
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 Principles and Outcomes
The Consumer Duty rests on three key principles:
- Act in good faith towards retail customers: Firms must act with honesty, integrity, and transparency in their dealings with customers.
- Avoid causing foreseeable harm: Firms must act to prevent reasonably foreseeable harm to retail customers. This includes identifying and mitigating potential risks to their customers' interests throughout the product and service lifecycle.
- Enable and support retail customers to pursue their financial objectives: Provide products, services, and information that empower consumers to make informed decisions and take action to achieve their goals.
These principles underpin four key outcomes that the FCA expects firms to deliver:
- Products and services: Design products that genuinely meet customers' needs, are targeted appropriately, and offer clear value.
- Price and value: Ensure a fair relationship between the price charged and the overall benefit a customer receives.
- Consumer understanding: Communicate clearly, avoiding jargon, and ensure consumers understand how products and services work.
- Consumer support: Provide accessible and helpful support throughout the customer journey.
Key Deadlines and Next Steps
The FCA has implemented the Consumer Duty in two phases to allow firms time to prepare. Here's a breakdown:
Past Deadlines
- 27th July 2022: FCA published the final rules and guidance for the Consumer Duty.
- 31st October 2022: Firms' governing bodies needed to have agreed upon and formally documented their implementation plans.
- 30th April 2023: Manufacturers needed to complete all necessary reviews of their existing open products and services in line with the outcome rules, enabling them to share information with distributors and identify potential changes.
- 31st July 2023: Compliance deadline for new and existing products or services that were open to sale or renewal.
Upcoming Deadlines
- 31st July 2024: Firms must comply with the Consumer Duty for closed products or services
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.
Changing Systems and Culture
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:
- Monitor: Track relevant metrics and gather data on the outcomes customers experience.
- Analyse: Examine the data to identify patterns and understand the impact of products, services, and communications on consumers.
- Learn: Draw insights from the data to identify areas for improvement, particularly considering diverse customers' needs and potential vulnerabilities.
- Refine: Actively adjust products, processes, and communications to drive better customer outcomes.
"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
Consumer Duty: Guidance for Advisers
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.
Know Your Customer (KYC)
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:
- Does my current fact-finding process uncover the client's true financial aspirations and concerns?
- Am I actively listening to understand their priorities beyond just risk tolerance?
- Have I framed my questions in a way that invites clients to share their goals and anxieties openly?
- Could I incorporate more visual aids or interactive tools during the KYC process to enhance understanding and engagement for the client?
Suitability
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:
- Am I focusing my initial conversations with clients on their goals, rather than leading with specific product ideas?
- Do I have a clear understanding of the full range of products and services that could potentially meet my client's needs?
- Am I carefully evaluating whether a product's features and risks align with the client's individual circumstances and objectives?
- Can I clearly document the rationale behind my recommendation, demonstrating how it directly supports the client's desired outcome?
Designing for Fair Value
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:
- Can I clearly justify how this product/service's benefits to the client outweigh its total cost (fees, potential risks, etc.)?
- Are the ongoing benefits proportionate to the ongoing service fees charged, especially over a long time horizon?
- Have I clearly explained all fees and their impact to my client, both upfront and throughout the relationship?
- Is there a product/service from another provider that offers similar benefits at a lower cost? If so, is that a better option for my client in line with their specific needs?
Communication Tactics
| 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 |
Transparency
- Fee Breakdown The Consumer Duty demands clear and upfront disclosure of all fees and charges associated with financial products and services. This includes not only the amount of the fee but also a clear explanation of what the client is paying for. Advisers should avoid overly complex jargon and ensure clients understand the impact of fees on their overall investment returns.
- Conflict of Interest Management Financial advisers have a legal and ethical obligation to act in the best interests of their clients. The Consumer Duty reinforces the importance of disclosing any potential conflicts of interest that might arise. For example, an adviser might receive a higher commission for recommending one product over another. In such cases, the adviser should clearly explain the conflict and demonstrate how the recommended product remains the most suitable option for the client's needs, even with the potential conflict considered.
Questions for Reflection:
- Do my clients fully understand all the fees and charges associated with my recommendations?
- Have I explained the long-term impact of seemingly small fees on their investment returns?
- Am I proactively disclosing any potential conflicts of interest, even those that may seem minor?
- Can I confidently justify why a recommended product is the best option for my client, regardless of any commissions or incentives?
Risk Identification
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
- Do I have a system in place for tracking client feedback and complaints?
- Am I actively reviewing the performance of recommended products/services to ensure they continue to meet clients' needs?
- Do I feel comfortable raising concerns about products or providers with the appropriate channels, even if it could potentially harm a business relationship?
- Am I staying informed about broader market trends and potential risks that could impact my clients?
The Value of Ongoing Advice
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.
- Suitability reviews: These reviews are a cornerstone of ensuring the ongoing service remains aligned with the client's needs. In some instances, a lack of suitability review might necessitate fee refunds.
- Accessibility: The option to access advice, even if rarely used, can offer value and peace of mind to clients. It's important to explain this value proposition clearly during client onboarding.
- Engagement and Value: Firms need to actively monitor whether clients are truly getting value from the ongoing service. Consider proactive client surveys and review meeting agendas for meaningful interactions.
- Documentation: Meticulous records are crucial. Document client discussions, the rationale behind the recommended service plan, and any client feedback to demonstrate value 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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How the FCA Will Supervise and Enforce the Consumer Duty?
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:
- Demonstrate, Don't Just Comply: Firms need to collect and analyse data to show that they are delivering positive outcomes for their customers. Merely following a checklist is not enough.
- Focus on Outcomes: The FCA expects firms to track relevant metrics such as complaint rates, product switching patterns, and customer feedback to understand the real-world impact of their products and services.
- Proportionate Enforcement: The FCA understands that larger, more complex firms have greater resources. Their enforcement approach will focus on the potential harm or risk of harm to consumers, not just the size of the firm.
- Board Champions: Firms are expected to have a designated "champion" at their board level who is responsible for ensuring the Consumer Duty is central to the firm's culture and decision-making.
- Collaboration across the Chain: Manufacturers, distributors, and advisers all have a role to play in ensuring good customer outcomes. The FCA expects firms to share relevant information to enable each part of the distribution chain to fulfill its responsibilities.
- International Considerations: UK firms working with companies outside the UK must take extra care to understand the products and services they are recommending or distributing, as those entities may not be held to the same Consumer Duty standards.
FAQs
I'm a small, independent adviser. Does the Consumer Duty mean I need complex compliance systems like a large firm?
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.
The Duty goes beyond my firm's standard KYC form. What kinds of additional questions should I ask to really understand my client's goals?
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.
What if the client really wants a product I don't think is a good fit? How far do I go in pushing back?
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.
How can I break down fee structures in a way that's easy for the average client to understand?
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.
My clients often struggle to understand complex financial terms. How can I improve my communication?
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.
How can I identify and best support clients who might be experiencing vulnerability?
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.
References
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).