2 min read
Natalie Barnes, Associate in the Financial Regulation Group
At present, the FCA is consulting on its proposal to introduce a new “consumer duty” which is envisaged to set substantively higher standards for the level of care that firms must give to their customers. The FCA has described its proposals as “a package of measures that have been specifically designed to more effectively tackle the harms [seen] in financial services markets, and their causes”.
One aspect of the proposal is for the FCA to create a suite of new rules and guidance linked to the outcomes that represent the “key elements of the firm-consumer relationship”, which includes product and service design. In particular, the FCA is proposing to make rules about product design, operation and distribution which would apply to every financial product and service that consumers use.
This is an area of regulatory policy where it can be difficult to pinpoint what is expected of firms, but this consultation paper and the recent FCA webinar give firms an opportunity to predict the FCA’s likely future direction of travel.
- The FCA has expressed serious concern about “sludge practices”, i.e. subjecting consumers to excessive “frictions” that make it more difficult for consumers to act in their best interests. For example, not clearly signposting the process for product cancellation online or requiring customers to go into a branch to close a product as these strategies can make it harder for customers to switch or exit products and services.
- Similarly, the FCA has confirmed its view that, in general, products should not contain terms that make it difficult for a consumer to switch to a better alternative (e.g. an initial “lock in period” that cannot be reasonably justified by the firm). Identifying and removing these types of hurdles would likely be viewed as a positive way of tackling sources of potential consumer harm.
- Finally, if a consumer credit product was designed so as to generate a high proportion of profits from late payment fees, this would also attract negative attention from the FCA. This feature can be particularly harmful when a firm’s target market is made up of consumers who are less likely to be financially resilient (a key driver of vulnerability) as consumers may end up incurring substantial sums in late payment fees, which in turn makes the borrowing unaffordable. In such circumstances, the FCA could require a firm to suspend sales of the relevant product.
The FCA has confirmed that the proposed consumer duty would require firms to focus on consumer outcomes and this would constitute a significant shift in culture and behaviour at some firms. This is why, when navigating the road ahead, it will be important for firms to be able to evidence how the consumer duty is being considered at every level in the organisation.