BestAdvice fires questions on Consumer Duty at Phil Lewis, head of compliance and risk at Source Insurance.
BestAdvice (BA): What are the building blocks of the Consumer Duty?
Phil Lewis (PL): In the Financial Services Act 2021, the UK Government legislated for the FCA to hold a consultation about whether it should make general rules ensuring that financial services firms owe a duty of care to consumers. This was the “first step” in making the Consumer Duty a reality – something which consumer groups have long lobbied for.
From the FCA’s point of view, their building blocks go back to “Treating Customers Fairly (TCF)” – a regulatory concept which was introduced in 2006. This was underpinned by Principle 6 – A firm must pay due regard to the interests of its customers and treat them fairly. The Consumer Duty is now being introduced to set a higher standard of consumer protection than TCF. Along with it comes a new Principle, Principle 12, which states, “A firm must act to deliver good outcomes for retail customers”.
In the General Insurance sector, a few elements of the Consumer Duty have already been piloted, with Fair Value Assessments being introduced in 2022. One could also argue that the GI Pricing Practices, which banned renewal ‘price walking’, was also a precursor of what the Consumer Duty expects to achieve.
BA: What is the FCA’s latest stance on the Consumer Duty?
PL: Given that some of the concepts underpinning the Consumer Duty are not terribly well defined, feedback from the FCA has so far been frustratingly unhelpful for most smaller firms.
In October 2022, the FCA collected a sample of Consumer Duty implementation plans from larger firms with a dedicated supervision team. This is likely to mean only large firms with significant resources would have been targeted by this review. Whilst the feedback concentrated on a few key areas (effective prioritisation, embedding the substantive requirements and working with other firms), it was so high-level it is unlikely to be of much use to smaller firms working on their own implementation of the Consumer Duty.
In May 2023, the FCA reviewed 14 Fair Value Assessments but again focused on large firms. Whilst the feedback from this exercise was a little more specific, it was still unlikely to be really helpful to smaller firms. The exercise identified 4 things that firms should consider further:
- collecting and monitoring evidence that demonstrates that products and services represent fair value
- clear oversight and accountability of the necessary remedial actions if they do not provide fair value
- where relevant, ensuring sufficient analysis of the distribution of outcomes across groups of consumers in the target market, beyond broad averages, to demonstrate how each group receives fair value
- summarising and presenting fair value assessments in a way that enables decision-makers to robustly discuss whether the product or service represents fair value, such as by being clear on any limitations in the analysis or evidence
The FCA has continued to hold roadshows and webinars to further underscore some of the key concepts behind the Consumer Duty and provide help to firms.
Whilst much of the focus, understandably, remains on larger firms, however, there is a risk that smaller firms fall behind in implementing some of the less clear concepts that sit within the Consumer Duty. Implementation is often followed by sample-checking and feedback, hopefully, the next round of feedback will give enough detail to help sharpen the focus on some of the concepts within the Consumer Duty that are more challenging for smaller firms to really pin down.
BA: What should brokers be aware of when approaching their GI?
PL: Letting a customer “go it alone” with a price comparison website may not always deliver the right outcome for consumers. Whilst they undoubtedly have a part to play in the GI marketplace, they are not for everyone. As a result, ignoring GI is probably not the right thing to do to in order to meet the Consumer Duty.
The first question a broker should ask themselves is whether a customer would reasonably expect them to provide a GI service. This is likely to be fairly clear cut for mortgage brokers for example, but may be less clear cut for IFA’s. If a customer would reasonably expect a broker to offer a GI service, then that broker needs to decide whether they want to offer such a service and what that service looks like. Given the crucial part that ‘evidence’ plays in the Consumer Duty, all of this should be documented.
If you decide that providing a ‘full advice’ GI service isn’t right for you and your customers, then an Introducer arrangement may be appropriate. Signposting your customer to a trusted source of information or advice is more likely to align with the Consumer Duty than declining to offer any service at all.
BA: What should firms expect from the Consumer Duty?
PL: The FCA has poured a significant amount of regulatory capital into the Consumer Duty, so firms should expect it to have a noticeable impact across the market. The FCA will be highly motivated to show that the Consumer Duty is delivering on its objectives, following reports that the City of London minister was scathing about it back in February 2023.
The Consumer Duty sets a higher standard of requirements than the market has seen before, but many of the core principles have some way to go before they are clearly defined. As ‘formal’ Consumer Duty implementation plans had to be signed off by the Boards of firms by 31st October 2022, a lot of work on the Consumer Duty should already be underway and is likely tying up a lot of resource. My own feeling is, however, that more work (and rework) will need to be done after the deadline to implement the Consumer Duty for open products, 31st July 2023, has passed.
One of the thorniest concepts contained within the Consumer Duty is that of “fair value”. Who decides what is “fair”, and how does one go about evidencing that? There is still a very open question about the role of commission, particularly renewal commission, and how compatible it is with the Consumer Duty. In response to a direct question, the FCA recently told me “Our rules don’t ban renewal commissions. However….” and for me, it’s the word “However” that speaks the loudest. Under the Consumer Duty, it may be increasingly difficult to justify traditional percentage-based commission, especially renewal commission. Any withering of renewal commission is likely to have quite an impact on the intermediated general insurance market.
Some of the most noticeable impacts have been seen at the product provider end of the market. Through the Consumer Duty, the FCA has implicitly moved many responsibilities towards product manufacturers. This means that product manufacturers now have new responsibilities for their distribution chain, including brokers. Product providers will therefore be paying much more attention to who distributes their products and how much they charge for them. This scrutiny is likely to come in the form of questionnaires and or surveys, so brace yourselves!
One of the clearest things to come out of the various conversations about the Consumer Duty is that evidence will be almost everything. I say almost because the FCA talks a lot about “outcomes”. It is becoming clear, however, that evidence about how and why certain “outcomes” are delivered will likely be more important than the outcomes themselves. So, whenever firms make a decision about the services they offer, they should document how and why they have arrived at the conclusion that it is compatible with the requirements of the Consumer Duty.
There will also be an awful lot more reporting for many firms as the FCA uses the Consumer Duty to pivot towards being a more data-driven regulator. This will undoubtedly appear to be a burden in the short term but should help the regulator become more efficient, which should help to manage the upward trend of regulatory fees.
BA: How does this affect consumers?
PL: The central principle of the Consumer Duty is that firms are required to put their customers’ needs first. The very fact that the Consumer Duty exists implies that a significant number of firms are currently not putting their customers’ needs first, maybe not even second, and perhaps for some firms they are just an afterthought. In theory, as of 31st July 2023 a consumer should know they are buying a financial services product or service that is designed to provide them with a good outcome. The reality is that most firms, in my experience, do at least try to deliver good outcomes already, particularly in the broker space. Doing anything else will lead to firms with a very short lifespan as customers vote with their feet.
The FCA has stated that one of the outcomes they expect from the Consumer Duty is that firms start to compete on elements other than price. Whilst it is a potentially tricky issue for firms, consumers should expect to benefit from “fair value”, with many firms innovating to provide better services whilst simultaneously driving down prices. At least, that’s the idea.
Consumers should also benefit from clearer communications with firms. One of the historic criticisms of financial services products has been the abundance of jargon and small print. Whilst work to simplify product information was already underway in many sectors, the Consumer Duty gives further impetus to this work. The Consumer Understanding outcome also goes beyond product information and will also include letters, emails and phone calls. Of course, in order to properly balance the Consumer Understanding outcome the FCA will also have to look at the amount of regulatory disclosures that are still required, but hopefully, the day for that will come.
BA: What does the future look like?
PL: I feel that the market has some way to go before the full impact of the Consumer Duty has really taken shape. I expect us to go through a few cycles of feedback after the implementation date of 31st July before we really know what “good” looks like, particularly for smaller firms where the gains may be more marginal due to their highly personalised nature.
I don’t expect the market to reach the 31st July, breathe a huge sigh of relief and think, “Job done!”. I expect the Consumer Duty to form an ongoing piece of work for many firms, and all future regulatory changes are likely to further build on the concepts introduced as part of the Consumer Duty. Like TCF before it, I expect the Consumer Duty to be talked about for many years before it becomes “business as usual”.