FCA unpacks fairness: the Consumer Duty

Retail investors have too often tended to be treated badly by financial institutions. The scale of the multi-billion pound restitutions for mis-sold payment protection insurance (PPI) are strong evidence of that, as are the ongoing issues of poor advice regarding the use of pension freedoms. There are many smaller and less publicised ways in which consumers have been exploited. Is upping the ante on fairness the answer to this running sore?

The Financial Conduct Authority (FCA, the UK’s financial regulator) seems to think so. It already expects retail investors – ordinary consumers – to be treated fairly by the financial industry. This is in its Principle 6:

“Customers’ interests: A firm must pay due regard to the interests of its customers and treat them fairly”

The FCA is now consulting on what it calls a Consumer Duty. Essentially, it seems that the regulator is seeking more teeth to enable better enforcement of this existing requirement of fair treatment. It is nearly 15 years since what was then the FSA (Financial Services Authority) opined on the need for fairness to be embedded in financial institutions’ management information. And already 3 years have passed since the FCA first discussed a duty of care to consumers. It seems to have concluded that much more is needed, though it is a shame it has taken so long to reach this conclusion.

The current Consumer Duty consultation – open until the end of July – states its aim as “we want to see firms putting themselves in their customers’ shoes, asking themselves questions such as ‘would I be happy to be treated in the way my firm treats its customers?’, or ‘would I recommend my firm’s products and services to my friends and family?’.” The core question is what outcomes would consumers fairly expect of their interaction with the financial institution, and how the institution will ensure that it consistently delivers on those fair expectations.

Stymied by their weaker bargaining position and asymmetries of information, consumers too often lose out when buying financial services. The FCA concludes that it is not fair for financial institutions to take advantage, and that greater efforts must be made by the industry to protect consumers. The FCA finds that too often institutions do in fact exploit their customers. Its description of what it calls ‘sludge practices’ – delaying tactics that place friction in the way of consumer action – is particularly effective. Sludge ensures that consumers cannot change providers as they might want, making this a far from perfectly competitive market, which in economic theory should be frictionless.

What the FCA is attempting is to set out what it means by fair treatment of consumers with more clarity and bite. Its proposals are relatively simple but if enforced effectively could have profound implications. It puts forward two options for its planned Consumer Principle: either “A firm must act to deliver good outcomes for retail clients” or “A firm must act in the best interests of retail clients”. The first seems the better, though naturally this blog would prefer ‘fair outcomes’ to ‘good’ ones – a move that would have the benefit of not removing all the burden of responsibility from the shoulders of consumers, which the FCA states to be part of its aim.

The chosen Principle would be supported by 3 underpinning behaviours, proposed as requiring financial services firms to:

Take all reasonable steps to avoid causing foreseeable harm to customers.
Take all reasonable steps to enable customers to pursue their financial objectives.
Act in good faith.

None of these seems terribly ambitious nor a particularly high bar to reach, unfortunately. It is not at all clear that delivering these behaviours would result in a delivery of the Consumer Principle. It is therefore this area where I would argue more work is needed if the proposals are to have any practical effect.

The Consumer Principle and behaviours would be supported by 4 outcomes, relating to: Communications; Products and Services; Customer Service; and Price and Value. This is odd as the FCA already has similar, and perhaps better, fairness outcome standards. For all its failings as a regulator (among them not effectively enforcing its rules on TCF, treating customers fairly), the FSA’s 6 TCF consumer outcomes continue to stand up to scrutiny. They are still in place today, and the FCA acknowledges that the new proposals would sit alongside them, though it considers disapplying them when the Consumer Principle applies. Yet these outcomes should remain core to our ambition for a fair financial industry, and perhaps would be a better articulation of what is meant in practice by the Consumer Principle:

Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture.
Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly.
Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale.
Where customers receive advice, the advice is suitable and takes account of their circumstances.
Consumers are provided with products that perform as firms have led them to expect, and the associated service is both of an acceptable standard and as they have been led to expect.
Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint

The one way in which the FCA’s new proposals seem stronger than these is in specifically stating that firms should set prices so that they represent fair value for their target customers. The new proposals are weaker in a number of ways, not least the loss of the expectation that products should perform as consumers have been led to expect, surely a core element of fair consumer protection.

In many ways the proposals feel like an extension of the FCA’s recent Guidance on the fair treatment of vulnerable customers: “We want vulnerable consumers to experience outcomes as good as those for other consumers and receive consistently fair treatment across the firms and sectors we regulate.” Perhaps the conclusion was that expecting vulnerable customers to be treated as well as other consumers did not deliver enough protection, given the financial industry’s track record in relation to consumers as a whole.

Certainly, when one reads some of the statements in this Guidance about what is expected of financial firms, it is hard to see how these expectations should be restricted solely to situations of consumers who are particularly vulnerable. Take for example: “Embed the fair treatment of vulnerable consumers across the workforce. All relevant staff should understand how their role affects the fair treatment of vulnerable consumers.” Or: “Senior leaders should create and champion a firm culture that prioritises the fair treatment of vulnerable consumers. They should ensure that governance, processes and systems support staff to meet the needs of vulnerable customers when carrying out their role.” This is simply an articulation of what is necessary to deliver fairness, and should apply more generally.

One hopes that this will be delivered by the FCA’s current consultation. For the sake of all of us as consumers, we should hope that the bulk of the proposals survive the consultation process without being notably watered down, and that there is an intent properly to enforce the standards. The length of the process leaves scope for such dilution: there will be yet another consultation on detailed rules before the end of this year, and the new rules would be introduced only in July 2022. Let’s be clear: enough time has been spent on this already, with the original discussion paper on a duty of care to consumers dating back to July 2018. The new duty needs to be delivered.

It’s a shame that it takes a regulator’s intervention to deliver greater fairness for customers. A healthy industry should deliver that by its nature – and clearly some financial services businesses already do – but where the odds are so stacked against the ordinary consumer, in terms of asymmetries and complexity, it may be little surprise that the regulator needs to intervene. It is already beyond time for it to do so. Let’s hope change, either on the ground or by the regulator, doesn’t have to wait for yet another 12 months.

The simple aim that “consumers need to be able to trust that the range of products and services they choose from are designed to meet their needs, and offer fair value” should not be too much to ask.

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Published by Paul Lee