How do firms comply with the FCA’s Consumer Duty?

The Financial Conduct Authority’s (FCA) Consumer Duty represents a significant shift in the UK’s financial services landscape, aiming to enhance consumer protection and ensure firms prioritise customer outcomes. As of 31 July 2023, this Duty has set higher and clearer standards across the industry, requiring firms to act in good faith, avoid causing foreseeable harm, and focus on providing good consumer outcomes.

Who do the rules apply to?

The Consumer Duty rules apply to all FCA-regulated firms that provide products and services to retail customers. This includes firms involved in the design, manufacture, sale, or distribution of financial products and services within the UK.

Who Must Comply?

The Duty applies to:

Banks, Building Societies, and Credit Unions

Insurance Companies and Brokers

Investment Firms and Asset Managers

Consumer Credit Firms (e.g., lenders, brokers)

Financial Advisers and Wealth Managers

Mortgage Lenders, Advisers, and Intermediaries

Payment Services and E-Money Firms

Fund Managers and Platforms

Essentially, any firm that determines or influences retail customer outcomes must comply—whether they directly interact with consumers or play a role in the supply chain.

Who Does It Protect?

The Duty is designed to protect retail customers, including:

• Individuals purchasing financial products or services
• Small businesses (where relevant under FCA rules)
• Vulnerable customers requiring additional support

The rules do not apply to wholesale markets, such as professional clients or large corporates, unless they impact retail customer outcomes.

Understanding the Consumer Duty

Fundamentally, the Consumer Duty introduces a new Consumer Principle. Which mandates that firms must “act to deliver good outcomes for retail customers.” This principle is underpinned by three cross-cutting rules:

1. Acting in Good Faith: Firms are expected to conduct business with honesty, fairness, and integrity, ensuring that customer interests are at the forefront of decision-making processes.
2. Avoiding Foreseeable Harm: Proactively identifying and mitigating potential risks that could cause harm to consumers is essential. This involves thorough product testing, clear communication, and robust risk management strategies.
3. Enabling and Supporting Customers: Firms should provide the necessary tools, information, and support to help customers make informed decisions and achieve their financial goals.

Most firms and consumers would hope that these cross-cutting rules were already in place, however the Consumer Duty is about embedding these across the industry. These rules are designed to foster a culture where consumer interests are integral to a firm’s operations, promoting increased transparency and trust between consumers and the financial services industry.

The Four Outcomes

To provide clarity and structure, the FCA requires firms to focus on delivering against four outcomes that fall under the Consumer Duty. These are designed to steer firms towards good practice:

1. Products and Services: Ensure that all products and services are designed to meet the needs of consumers, offering fair value and delivering the benefits that customers should reasonably expect.
2. Price and Value: Assess and demonstrate that the price of products and services represents fair value, considering the benefits provided by them and the costs incurred by consumers.
3. Consumer Understanding: Ensure that you understand customer needs properly, communicate information in a way that is clear, timely, and understandable and enable consumers to make informed decisions about new or existing products and services.
4. Consumer Support: Provide effective and accessible support throughout the customer journey, ensuring that consumers can use products and services as intended and gathering customer feedback to address any issues that arise.

By focusing on these outcomes, firms can align their practices with the FCA’s expectations and contribute to a more consumer-centric financial services environment.

Implications for Firms in Scope

The introduction of the Consumer Duty necessitates a comprehensive review of existing practices, policies, and procedures within financial services firms. It also requires them to incorporate good practice and ongoing focus on performance against these outcomes. The FCA expects firms to be able to evidence implementation plans around meeting and improving the four outcomes and for this to be broadly understood. e.g. figuring in the board report and to be firmly on the radar of senior managers as opposed to simply managed in a silo by compliance.

Key areas of focus include:

• Product Governance: Firms must evaluate their product development processes to ensure that offerings are designed with the target consumer’s needs in mind. This includes rigorous testing and ongoing monitoring to confirm that products deliver the intended outcomes.
• Pricing Strategies: A thorough assessment of pricing models is essential to ensure that charges are transparent, justifiable, and provide fair value to consumers. Firms should be prepared to adjust pricing structures if they are found to be disproportionate to the benefits offered.
• Customer Communications: Clear and effective communication is paramount. Firms should review all customer-facing materials to ensure that information is presented in a straightforward manner. By avoiding jargon and complexity that could hinder consumer understanding or create poor outcomes for vulnerable customers.
• Support Mechanisms: Accessible and responsive customer support services are crucial. Firms should ensure that consumers can easily access assistance when needed and that support channels are equipped to handle inquiries efficiently.

The FCA expects that implementing these fair value assessments and measures should form a key part of any firm’s future business strategy. The rules and guidance state that the efforts put into meeting these rules should be proportionate to size. Meaning that smaller firms shouldn’t find this overly onerous. Nevertheless the FCA are clear that all firms operating in this space should be able to evidence that they are following the rules and guidance. They need to be able to evidence on an ongoing basis that they are focusing on providing good outcomes for all of their customer groups. Particularly vulnerable as well as tracking and improving on these outcomes thus developing a culture of continuous improvement.

They may require significant investment in staff training, system upgrades, and process reengineering. However, the long-term benefits of enhanced consumer trust and satisfaction should outweigh the initial costs.

How does Consumer Duty fit with SMCR?

For those wondering how the Consumer Duty sits alongside existing rules such as Senior Management Certification Regime (SMCR), here’s how they complement each other. Essentially, both are regulatory frameworks from the Financial Conduct Authority (FCA). Aimed at improving conduct, accountability, and outcomes in financial services. While they have different focuses, they complement each other in driving better behaviour and responsibility within firms.

How the Consumer Duty builds on SMCR

1. Enhanced Individual Accountability
   • Senior Managers have additional specific responsibilities that reinforce Consumer Duty:
     • SMCR Rule 1: Senior managers must take reasonable steps to ensure their firm’s business is controlled effectively – which includes embedding Consumer Duty at all levels.
     • SMCR Rule 4: Senior managers must ensure compliance with regulatory requirements, which now explicitly includes meeting the higher standards of Consumer Duty.
   • Consumer Duty raises the bar on good customer outcomes. Meaning senior managers must include this as a focus. To ensure their firm’s policies, culture, and operations align with these expectations.
2. Duty of Responsibility
   • The Duty of Responsibility under SMCR means senior managers can be held accountable if their firm breaches regulatory requirements, including Consumer Duty.
   • The FCA expects firms to embed Consumer Duty within their governance structures. This means it naturally falls under the remit of SMFs.
3. Certification & Conduct Rules
   • Under the Certification Regime, key individuals (e.g. product managers, risk officers) must be fit and proper. to perform their roles. This now includes ensuring adherence to Consumer Duty.
   • Although no new rule, the Conduct Rules continue to apply to all staff and are considered to already align with the spirit of Consumer Duty. Include acting with due skill, care, and diligence, as well as treating customers fairly.
4. Cultural Alignment
   • SMCR was introduced to instil a culture of accountability, while Consumer Duty requires a cultural shift towards prioritising customer needs.
   • Firms must ensure their governance, policies, and performance reviews align with delivering good consumer outcomes.
5. Regulatory Enforcement & Expectations
   • The FCA has indicated that it will hold individuals accountable where Consumer Duty breaches occur. Using SMCR as a mechanism for enforcement.
   • This means clear documentation of decision-making, oversight of products and services, and active challenge from leadership are crucial.

FCA Expectations – No New Rule, But Clearer Accountability

• Statements of Responsibilities (SoRs): Senior Managers must demonstrate how their responsibilities support Consumer Duty.
• Management Information (MI): Firms should be able to evidence customer-focused decision-making.
• Certification Staff: Those in material risk roles (e.g. product oversight, risk management) must ensure products meet Consumer Duty standards.

Practical Next Steps for Firms

1. Review Conduct Rules training – Ensure Consumer Duty is fully incorporated into SMCR training.
2. Update Statements of Responsibilities (SoRs) – Make Consumer Duty part of relevant Senior Manager roles.
3. Enhance governance and oversight – Consumer Duty should be a standing agenda item at board and committee levels.
4. Monitor and evidence good outcomes – Firms should proactively assess and document customer experience metrics.

Find out how Actus Comply can help your firm to manage and report on Consumer Duty get in touch here:

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