At the end of last year, the FCA published its second consultation paper for its proposed Consumer Duty regulation.

The release was widely reported in the press which perhaps gives an indication of the significant impact many commentators believe it will have on the financial services industry.

The proposals cover all firms involved in the manufacture and supply of financial products and services to retail customers. But at their core, they’re about the industry demonstrating its focus on good outcomes for customers. That goal might sound familiar, and for the investment and long-term savings’ markets it should. However, be under no illusion. The regulator is looking for a step change in behaviour and will follow up on firms to ensure that’s happening.

Working to the standards already adopted by compliant firms

This second consultation paper highlights where the industry must demonstrate its conduct for good consumer outcomes in the areas of products and services; price and value; customer understanding and customer support.

For those firms which do comply with the legislation and place the customer at the heart of their business, nothing really changes. However the FCA will expect firms to be able to show what that looks like in practise and demonstrate how they focus on delivering good outcomes for customers as there will be checks by the regulator.

Most importantly though, the Consumer Duty is about ensuring the industry as a whole works to the high standards already adopted by compliant firms which do deliver good outcomes for their target markets.

A requirement to tighten up processes and controls

Of all the industry players, advisers are closest to their clients as they meet the FCA’s suitability requirements which focus on individual client outcomes. A duty to comply with the Product Governance rules also means advisers are clear on their target markets. To even be able to give advice in the first place, advisers must know and understand their clients’ needs to deliver good outcomes for them.

While the Consumer Duty may mean some additional work for advisers in terms of documenting processes, this shouldn’t be onerous as much of this is already carried out for existing regulatory requirements. There may also be some changes to internal reporting, perhaps clarifying what good looks like and tightening up on controls to make them clearer.

However, the Consumer Duty also gives clear opportunities in the wider financial services industry for adviser firms complying with the rules.

The confidence to hold providers to account

The second consultation’s sections on customer understanding, in other words effective communications, and customer support, or in other words effective service, will be particularly relevant for advisers.

The rules clearly state that the regulator wants products, services and communications to be designed to suit the needs of target markets.

This is good news for both advisers and their clients. It means providers will have to comply with higher standards in these areas. Communications must be designed to deliver better outcomes for consumers, which means they must be easy to understand with clear language about what to do next. If providers are sending out literature which is complex and illegible, then clients will continue to get in touch with their adviser to ask them to clarify what it says.

Some providers will have to up their game and advisers will have a regulatory lever to hold them to account, challenging them about why they’re sending out unintelligible communications and referring to obligations under the Consumer Duty.

Similarly, the Consumer Duty’s proposals around customer support highlight the importance of ongoing service for good consumer outcomes and not creating barriers.

The Consumer Duty will not fix all servicing issues advisers and their clients face, but the FCA is serious about improving standards and advisers and their clients can have the confidence to hold providers to account here too under the rules.

The proposals within the customer understanding and customer support sections are not a panacea as some issues are complex. The regulator still needs the industry as a whole to comply with complicated regulatory requirements and clients will still receive large amounts of regulatory material. However the Consumer Duty is a step in the right direction to help reduce confusion and frustration.

A need for clear communication and improved servicing

Considering the needs of vulnerable customers is also a theme of the Consumer Duty’s consultation papers. Firms will have to demonstrate not only that they’ve taken the needs of vulnerable customers into account, but that flexibility has been built into the customer journey for when they may face challenging times.

This is a positive step and can only help lead to better outcomes. This proposal also supports the need for clear communication and improved servicing.

The Consumer Duty looks set to have a significant impact on the financial services industry when it likely comes into force by 2023. But it should be a welcome piece of regulation for advisers because of the benefits it will bring to both their business and their clients as they continue to deliver good outcomes for them.

The deadline for responses to this second consultation document is February 15, 2022 with the final policy statement published by July 31, 2022. For more information, visit here: https://www.fca.org.uk/publication/consultation/cp21-36.pdf

Alastair Black’s second article will take a closer look at the requirements for adviser firms under the Consumer Duty.

Read Alastair Black’s articles, The pandemic, attitude to risk and the link to capacity for loss and How digital can help advisers develop a business model fit for the future.

The value of investments can go down as well as up and your clients could get back less than they paid in.

The views expressed in this blog should not be regarded as financial advice.