Understanding Consumer Duty & Its Impact on Financial Advisers: Key Points to Know

Written by Fraser Stewart
Reading time 4 minutes
Understanding Consumer Duty & Its Impact on Financial Advisers: Key Points to Know image

The Financial Conduct Authority (FCA) has introduced a significant regulatory change with its new Consumer Duty. This change is on par with the pension simplification in 2006 and the retail distribution review in 2012, marking a fundamental shift in how advice firms must operate.

The final rules and guidance were published on 27th July 2022, and this article highlights the crucial information you need to know.

What is the purpose of Consumer Duty? 

According to the FCA, the new regulation aims to "establish higher and more explicit consumer protection standards across financial services and mandate firms to prioritise their customers' needs."

The scope of this regulation is extensive, affecting all firms in the retail distribution chain, including product manufacturers, platforms, financial advisers, and mortgage brokers.

While the introduction of new regulations may create challenges for advice firms, Consumer Duty will ultimately lead to better outcomes for consumers. It aims to rebuild consumer trust in the financial system by ensuring fair treatment and access to suitable products and services tailored to individual needs.

How will the rules impact IFAs? 

Consumer Duty revolves around three primary rules that firms must:

  1. Act in good faith towards retail customers;
  2. Avoid foreseeable harm, and;
  3. Enable and support retail customers in achieving their financial goals.

The FCA provides further clarification on these rules, emphasising honesty, fairness, and transparency in dealings with retail customers. Advisers should take necessary actions and communicate any concerns with relevant parties if they foresee potential harm to their clients.

Additionally, the FCA expects IFAs to create an environment that empowers consumers to make informed decisions, considering their behavioural biases and any vulnerabilities.

What are the four outcomes?

The FCA expects the Consumer Duty to improve outcomes for consumers in all areas of business between firms and customers. The Duty's four outcomes cover the key elements of the firm-consumer relationship.

These outcomes mean that consumers should receive comprehensible communications, products and services that meet their needs and offer fair value, and the customer support they need when they need it.

Firms are expected to carefully consider the substantive requirements set out in the FCA's final rules and guidance (including Chapters 4 to 9 of their Finalised Guidance), identify where they fall short, and make the necessary changes to their products, communications, systems, and processes to meet the Duty standard.

Products and Services

They must be designed to meet the target customers' needs and characteristics and be distributed appropriately.

The FCA states "We want all products and services for consumers to be fit for purpose. We want them to be designed to meet the needs, characteristics and objectives of a target group of customers and distributed appropriately. These are essential steps if firms are to act to deliver good outcomes to consumers."

Price and Value

Assess products and services to ensure a reasonable relationship between price and consumer benefit.

The FCA states "We want all consumers to receive fair value. Value is about more than just price, and we want firms to assess their products and services in the round to ensure there is a reasonable relationship between the price paid for a product or service and the overall benefit a consumer receives from it.

Consumer Understanding

Ensure customers comprehend how products work, providing necessary information in an understandable format.

The FCA states "We want firms’ communications to support and enable consumers to make informed decisions about financial products and services. We want consumers to be given the information they need, at the right time, and presented in a way they can understand."

Consumer Support

Offer support that meets consumers' needs throughout their relationship with the firm.

The FCA states "We want firms to provide a level of support that meets consumers’ needs throughout their relationship with the firm. This means firms’ customer service should enable consumers to realise the benefits of the products and services they buy and ensure they are supported when they want to pursue their financial objectives"

Good practice across the four outcomes

Good practice examples have been provided for various aspects of the Duty, including products & services, price & value, consumer understanding, and consumer support. In these examples, firms have taken steps to define good customer outcomes in the context of their business, considered how to deliver these through improvements, and developed metrics to monitor their success.

Data strategies 

A key aspect of the Duty is that firms assess, test, understand, and evidence the outcomes their customers are receiving. Without this, it will be impossible for firms to know if they are meeting the requirements set out in the Consumer Duty.

Firms will need to use their judgment to identify data sources as evidence against the outcomes of the Duty. Chapter 11 of the FCA's Finalised Guidance provides examples of the types of data firms could collect.

Good practice involves firms considering the consumer outcomes they aim to deliver, carrying out exploratory work to understand data and metrics available, and setting out plans to advance the functionality of their systems and data collection.

Compliance deadlines

The initial implementation date was April 30, 2023, but the FCA has proposed a phased approach due to industry concerns. Compliance for new and existing products and services open for sale or renewal is now required by July 31, 2023, while closed-book products have until July 31, 2024.

Next steps

Start by reviewing your existing business practices, focusing on communication, transparency in charging structures, and ensuring products and services offer fair value. Pay particular attention to vulnerable customers, as the FCA is keen to provide additional protection for them.

In conclusion, although Consumer Duty represents a significant shift in the industry, well-run advice firms have little to worry about. The focus should be on placing customers' needs at the heart of all aspects of the firm's advice offerings.

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