Building on existing conduct rules, Consumer Duty demands a fundamental rethink around how you support retail customers. It introduces a new overarching consumer principle for firms to ‘act towards good outcomes for retail clients’. This puts the consumer front and centre, and aims to create a system where products, processes and services revolve around consumer need. While this has always been the gold standard, in reality these systems are usually designed with internal processes and methodologies in mind – with consumer needs as a secondary concern.
With Consumer Duty putting retail customers first, how can you make sure your culture aligns with these expectations?
Retail customers are responsible for the financial decisions they make, and the new Consumer Duty rules don’t change that. However, consumers need access to the right information, at the right time, to make those decisions. They also need that information in the right format, in a way that’s easy to understand. Everyday phrases used in the office, or in a regulatory context, are completely alien to a consumer. You need to bridge that gap.
When assessing your culture, it’s important to stop and think: are we speaking in plain English? Am I using a regulatory term or sector specific short-hand? In addition to sales and service desk scripts, you can roll it right back to product design stage and look at the product itself in plain English. Namely, what’s the consumer problem this product aims to address – and how is it going to do it?
Going from this starting point, it’s easier to create products and materials that genuinely speak to consumers, and target them to the right market.
There are also behavioural biases to consider. People don’t always behave rationally, and under Consumer Duty, you need to make sure you’re being transparent, and aren’t exploiting these biases to sell a product that isn’t right for them. You also need to recognise the difference in knowledge, expertise and bargaining power between your organisation and the consumer – and not use it to obscure the small print.
Ultimately, you need to act in good faith, help the consumer achieve their financial objectives, and avoid foreseeable harm.
A customer-centric approach extends beyond the point of sale and this is one of the most significant shifts in Consumer Duty. It means having operatives to hand to answer any questions about the product or service on an ongoing basis. You may find that what was right for a customer at the point of sale isn’t right for them six months down the line. Their financial objectives may have changed or the product simply might not support those objectives as much as they expected. Six months, on the product could even potentially cause them harm.
Ongoing care involves making it easy for consumers to cancel a product or change to one that meets their needs a little better.
Under the new Consumer Duty rules, you need to help retail customers avoid foreseeable harm and take reasonable steps to horizon scan for potential pitfalls. A big chunk of this is making sure consumers buy products that are right for them, with pricing structures that are appropriate for the target market.
In the past, firms would develop a product, then match it to a target market and advertise it accordingly. Sales teams have been incentivised to sell and meet their targets. Stopping to consider if this is right for the consumer hasn’t been a part of the deal. But that culture needs to change.
Your sales team needs to stop and ask: is this the right product for the consumer? Are they within that target market? Can I see anything at this point – through us or a third party – that could cause harm? These are big changes, and you need to give them the right incentives to make those judgement calls and abandon a sale if it’s not right for the consumer.
Following the October 2022 deadline to agree Consumer Duty implementation plans, you have until 31 July 2023, to implement the rules for products open to sale or renewal. By 31 July 2024, you must also apply Consumer Duty to closed book products or services.
You can get started by reviewing your existing culture and behaviours, in order to successfully embed the Consumer Duty principles. Starting from the top down, firms need a consumer champion – ideally a non-executive director – to make sure Consumer Duty is on the board’s agenda. They need to ask the difficult questions about your business to put consumer needs first and factor it into every stage of the product life cycle.
Once you’ve identified the key individuals responsible for Consumer Duty, you need to consider governance and oversight arrangements, including:
This is a significant shift in outlook, and it will take time to embed the right behaviours and achieve the best outcomes for your retail customers.
To find out more on this topic, contact Tina Bhardwaj.
Our financial service experts covered the FCA's finalised guidance on Consumer Duty and gave practical guidance on meeting the FCA's expectations.
