The FCA's new Consumer Duty - a guide for firms




What is the FCA Consumer Duty?


The Consumer Duty sets the standard of care that firms should provide customers. It sets expectations that apply to services, products and business models and aims to protect consumers from harm whilst driving business innovation, competition and new ways of serving customers.



What does the Consumer Duty comprise?


The Consumer Duty is comprised of the following:


1. Consumer Principle - this reflects the overall standard of behaviour the FCA expects from firms.

2. The cross-cutting rules - These set out the three requirements that explain how firms should act to deliver good customer outcomes. The cross-cutting rules also aim to help firms interpret the four outcomes.

3. The four outcomes - these are a set of rules setting out the expectations on a more detailed basis, across the four areas of

a. governance of products and services

b. price and value

c. consumer understanding, and

d. consumer support



Consumer Duty and ‘reasonableness’


Reasonableness is a key and underlying aspect of the Consumer Duty. It is an objective test and means that standards are to be applied as you would reasonably expect from a prudent firm.



The FCA’s expectations from firms under the Consumer Duty


  • firms are required to put customers at the heart and centre of their business, ensuring good customer outcomes

  • ensure that their products and services are designed to meet the needs of their customers.

  • communicate and engage with customers so that they can make informed and better decisions about financial products and services

  • not seek to exploit customers' lack of knowledge or vulnerability

  • help the customer understand the benefits and features of products and services

  • ensure that customer interests are central to the firm’s culture

  • regularly monitor and review the customer outcomes


What type of firms the Consumer Duty applies to


The Consumer Duty applies across retail financial services. It applies to the regulated activities of all firms authorised under the Financial Services and markets Act 2000 (FSMA), the Payment Services Regulations 2017 (PSRs) and Emoney Regulations 2011 (EMRs, with regards to products and services for customers.


For example:

  • consumer credit firms providing credit-related activities

  • deposit-taking firms e.g. banks and charities

  • insurance firms

  • investment firms

  • mortgage providers

  • payment service providers e.g. payment institutions

  • electronic money institutions e.g. e-money issuers


Consumer Duty application outside the UK


The Consumer Duty only applies to firms conducting regulated activities in the UK.



How the Consumer Dut applies to unregulated activities


The Consumer Duty applies to firms regulated by the FCA. It will therefore not apply to unregulated businesses. For example, it will not apply to business lending as business lending is outside the scope of FCA’s supervision and regulations.



Application to products and services sold before the Consumer Duty comes into force


The Consumer Duty does not have a retrospective effect. That means, that it does not apply to products or services sold in the past.


The Consumer duty applies to:

  • existing products and services

  • closed book products and services I.e. products and services that are no longer on sale to new customers or available for renewal by existing customers


Accordingly, firms must review and identify issues with their existing products and services and ensure that any problems are addressed before they are sold to customers. For example, you may need to amend your existing contract before selling to customers. Firms are also required to address any harm to customers with existing contacts.



The Consumer Principle


The Consumer Principle, Principle 12, requires firms to act to deliver good outcomes for retail customers. It sets a higher standard than both principle 6 and principle 7.


Principle 12 requires firms to:

  • pro-actively delivering good outcomes for customers

  • ensure they have sufficient understanding of customer behaviour and how products and services function

  • regularly review themselves to ensure that their actions are compatible with delivering good outcomes for customers


The FCA’s cross-cutting rules


The Consumer Duty imposes three cross-cutting rules setting out how firms should act in delivering good outcomes or customers.


They require firms to:

  1. act in good faith toward retail customers

  2. avoid causing foreseeable harm to retail customers

  3. enable and support retail customers to pursue their financial objectives


The cross-cutting rules set out the standards of conduct the FCA expects from firms in delivering good outcomes.



Acting in good faith


Firms are required to act in good faith toward customers. This is demonstrated through firms being honest, fair and open in their dealing with customers. For example, a firm would not be acting in good faith if it fails to take account of customers' interests, perhaps in the way a product is designed, or the way information is presented to them. Exploiting customers’ lack of knowledge is a clear sign of a firm not acting in good faith.



Avoid causing foreseeable harm


Firms are required to avoid foreseeable harm to customers. Harm can be caused by a firm’s actions or omissions. This can occur either directly I.e. a direct relationship with a customer or through their distribution chain. Consumer Duty also applies across the distribution chain.


Examples of foreseeable harm include:

  • consumers being unable to cancel a product or service that isn’t right for them because the firm’s processes are unclear

  • poor performance of products and services due to a lack of appropriate product testing

  • vulnerable customers being unable to access or use a product or service due to poor customer support

  • product switching is difficult due to the firm’s onerous or unclear switching processes



The product and services outcome


Firms must ensure that their products and services are well designed. Consumers are only able to purchase suitable products and services and avoid harm if they are fit for purpose. Accordingly, Firms acting in good faith should design and distribute their products and services to meet this aim.


Firms should:

  1. ensure the design of the product or service meets the needs, characteristics and objectives of customers

  2. ensure their distribution strategy is appropriate for the target market

  3. carry out periodic reviews to ensure that their products and services continue to meet the needs, characteristics and objectives of the target market




The price and value outcome


Retail customers experience harm when they do not receive value for their money. A lack of fair value essentially results in customers not realising their financial objectives whereas firms cannot act in good faith if they are knowingly creating or distributing poor-value products or services. Fair value is more than price. It could include products with unsuitable features that can lead to foreseeable harm.


Accordingly, firms should ensure that the price is reasonable compared to the overall benefits I.e. product features and benefits.


Questions firms should ask themselves about the price and value duty of the Consumer Duty:

  • are elements of the pricing structure in such a way that it could lead to foreseeable harm to the customer?

  • are fees or charges justifiable or are they high compared to the benefits and features of the product or services?

  • should any changes in the product benefits be reflected in the pricing?


Assessing value


In assessing whether a product or service provides value, firms must consider at least the following:

  1. the nature of the product or service, including its benefits and qualities

  2. any product or service limitations

  3. the expected total price the customer will pay over the lifetime of the relationship between the customer and firms


Where a product or service does not provide value to customers, then firms must take appropriate actions to mitigate this and prevent harm. The value should be assessed at the product design stage. The value must also be assessed on an ongoing basis. When a firm identifies that it is not offering fair value it must take appropriate actions to address this issue.





The consumer understanding outcome


Firms are encouraged to support their customers by helping them make informed decisions about financial products and services. Firms should be given the information they need, at the right time, and presented in an understandable way.

Under Principle 7, firms are required to communicate with customers in a clear, fair and not misleading manner. In addition to this, under Principle 7, firms are required to:


  • support their customers' understanding by ensuring that their communication meets the communication needs of the customers

  • tailor communication to the customer, taking into account the characteristics of the customers, their vulnerability, the complexity of the product and the communication channel used

  • when interacting directly with a customer on a one-to-one basis, tailor communications to meet their information needs

  • test, monitor and adapt communications to support good customer outcomes



Summary of the FCA’s Consumer Duty




The consumer support outcome


Firms are required to provide support that meets customer needs. The support should enable customers to realise the benefits of the products and services they buy. In assessing whether firms are applying good customer support standards, they should:

  • make it easy for customers to switch products

  • ensure post-sale support is well designed

  • ensure the post-sale support is as good as the pre-sale support

  • not make it difficult for customers to contact firms. For example, should review their call waiting times

  • ensure that the service is not slow

  • ensure that the channels of support meet the needs of the customers

  • ensure that the customer helpline is well-resourced

  • have a well-designed website that makes it easy for customers to navigate and find key information online






Culture and the Consumer Outcome


Firms are required to ensure that their customers' interests are central to their culture and embedded throughout the business. A firm’s board and senior management should review and approve an assessment of whether the firm is delivering good outcomes for its customers, at least annually.


There are four key components of culture are:

  1. Purpose – a firm’s purpose should be consistent with the Consumer Duty. Staff should understand how the firm’s purpose is relevant to delivering good outcomes for customers.

  2. Leadership – a firm’s leaders should be competent and accountable, and they should be able to demonstrate commitment to delivering good customer outcomes.

  3. People – delivering good outcomes should be reflected in the way people are being managed and rewarded. Training should be provided to staff to ensure that they are able to deliver good customer outcomes.

  4. Governance – a firm’s internal controls and processes should be able to identify where it is not delivering good outcomes for its customers and it should have a strategy to work on those areas and tackle areas where poor outcomes are being delivered.





Consumer Duty monitoring outcomes


Firms are required to assess, test, understand and evidence the outcomes their customers are receiving. This is important as it enables firms to assess the effectiveness of how well their products and services are working and are in line with the Consumer Duty.


Firms are expected to review and identify poor outcomes and take appropriate actions to rectify and correct the causes of the poor outcomes.


Accordingly, firms are expected to:

  • monitor and review their customer outcomes

  • ensure products and services are delivering outcomes consistent with the Consumer Duty