The FCA’s new Consumer Duty enters into force in July 2022, with full implementation expected by April 2023.
Despite being a regulatory duty, its implications go well beyond the Legal and Compliance department, extending to Product, Marketing, Sales and Customer Support.
The new duty presents a hugely exciting opportunity for Legal to lead from the front and deliver on both the legal and operational changes required to provide customers with a fundamentally better user experience.
In this blog, we'll provide you with everything you need to know about the duty and a practical plan of action to deliver it successfully.
Why is the FCA introducing a new duty?
The FCA wants to see a higher level of consumer protection in retail financial markets. They’ve identified that too many firms are failing to adequately consider the needs of their customers or prioritise good consumer outcomes.
The result?
Customer harm and eroded customer trust.
So much so in fact that only 10% of consumers in a recent survey ‘strongly agreed’ that they had confidence in the UK financial services industry. On top of that, only 35% of respondents agreed that firms are honest and transparent in their dealings with them.
What types of behaviours is the FCA concerned about?
Some examples of behaviour the FCA has identified as leading to poor customer outcomes include:
- Companies providing information which is misleadingly presented or difficult to understand
- Companies exploiting information asymmetries and behavioural biases
- Products and services which aren’t fit for purpose
- Products and services that do not represent fair value
- Poor customer service
This results in consumers finding it harder to make informed decisions, buying products which aren’t appropriate for them and/or finding it more difficult to switch or get a better deal elsewhere.
Let’s break it down
Firstly, the duty will apply to all regulated firms, which includes firms regulated under PSD2 and the EMRs.
Secondly, it applies only in relation to retail customers, so B2C companies should pay attention.
Finally, it’s made up of three distinct elements:
Consumer Principle. The overarching principle that firms must act to deliver good outcomes for retail clients.
Cross-cutting Rules. Rules spread across the FCA Handbook designed to amplify the Consumer Principle. They require three key behaviours, requiring that firms take reasonable steps to:
- avoid foreseeable harm to customers
- enable customers to pursue their financial objectives
- act in good faith towards customers
Four Outcomes. A more detailed set of rules and guidance setting out expectations for firm conduct centering around:
- Communications
- Products and Services
- Customer Service
- Price and Value
Communications: a case study
So far, so good. But this all sounds pretty broad. What does it all actually look like in practice?
Let’s take ‘Communications’ as an example.
The Problem
The FCA has found that firm communications with their customers don’t support good consumer outcomes.
Key pieces of information are hidden in large amounts of text. New terms and conditions are issued without any summary of the updates. Communications often aren’t tailored to the communication channel - people read a lot less if they’re buying products on their phones.
The Solution
The FCA expects firms to:
- Put yourself in your customers shoes. Consider whether your communications give them the right information at the right time to assess your products and services and make a decision about whether it’s right for them. That includes all of your legal communications!
- Consider legal design. The FCA specifically recognises that you may need to use certain language in customer contracts to achieve a degree of legal certainty. But they also require you to think about how you bring the most important information the attention of your customers and ensure your contract is as accessible as possible. That might, they suggest, include designing your contract in a ‘layered’ way so consumers can click out to more detailed terms.
- Test. Just like any good product manager would with a new release, the FCA expects you to test your comms and adapt them as necessary to make sure they’re understood by consumers.
Beyond communications
But as the Outcomes above indicate, the new duty is about much more than just how you communicate with your customers.
It’s about developing products and services that are fundamentally better for customers, providing excellent customer support and delivering on price and value.
Beware of the sludge
On the products and services side, the FCA is particularly keen to stamp out the ‘sludge practices’. These practices take advantage of our behavioural biases as human beings to hinder our ability to make decisions that are in our best interests.
For example, a firm may not clearly signpost the process for product cancellation
on its website, making it harder for customers to switch.
To deliver on this, the Consumer Duty needs to be understood and embedded across your organisation both at a leadership and individual team level, including Legal, Product, CS, Marketing and Design.
Ok, but where to start…
The rules may seem a while off yet but there’s a lot you can be doing now.
Buy in. You should start your buy-in journey early. Even though this is a regulatory change and compliance isn’t optional, don’t take buy-in for granted. And without it, you’re in for a long drawn out process and/or regulatory risk. Identify your key stakeholders, create a sense of urgency and really identify the benefits for your organisation.
Gather information. Start to identify:
- What products and services are you offering?
- What do your user journeys look like?
- What do your terms and conditions and comms look like?
- Do you currently measure the success or failure of your user journeys / documents? What MI do you have?
- How will you measure the success of changes you make?
Plan. Start building out a detailed project plan for what needs to be done once the rules are released and your strategy around delivering it.
At the point at which the new Policy Statement goes live, you’ll be able to hit the ground running with the design, delivery and testing phases of your project - and ultimately, give your organisation a competitive advantage by delivering a better and fairer experience for your customers.
Need some inspiration?
Here’s how we helped a B2B saas company design a new customer journey, create engaging, customer-focussed terms and decrease time to signature by 50%!
Let’s chat
If you want to discuss how we can help you, drop us a line at hello@tlb.law or get in touch here.