With less than three months to go until the Consumer Duty comes into force, Sheldon Mills, executive director, of consumers and competition at the Finance Conduct Authority (FCA), delivered the following speech hosted by EY.
Cast your mind back to late 19th-century New York City.
Reporter Nellie Bly was determined to prove that she could travel around the globe more quickly than Jules Verne’s hero, Phileas Fogg.
But she had a rival – fellow reporter Elizabeth Bisland. The fact that Fogg – and his quest – were based on the fictitious classic, Around the World in 80 Days, did not dissuade either young woman.
On 14 November 1889, they set off: Bly by steamship, Bisland by train.
Both women – travelling alone through what was then named Ceylon, London, Yokohama and Hong Kong – beat Fogg’s fictitious record of 80 Days.
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I won’t tell you which one of these trailblazers triumphed or why as that would spoil the surprise depicted far more eloquently in the book, Eighty Days.
But what you need to remember today is that if two, young women in the 19th Century – propelled by nothing stronger than steam engines and their own courage – managed to conquer the world in under 80 days, firms in the 21st-century UK can and should be able to implement the final stages of Consumer Duty in 82 days.
You have had an epic head start. We have talked about the Consumer Duty for years. And the 31st of July – the deadline for its implementation – is rapidly approaching.
Parliament took a significant step by asking us to consult on introducing a duty of care. It provided a strong legislative signal for a step change in consumer protection in financial services.
Since we published our final rules and guidance in July last year, the financial services industry has worked with us to meet Parliament’s will to implement the new Consumer Duty.
I would like to personally thank every firm, every member of staff, and yes, every consultant, who has worked tirelessly to meet this deadline.
Many firms are on course to meeting it, according to our own research.
And they realise, that if they get implementation right, firms will deepen their trust with customers and deliver better outcomes for people and small businesses.
The 52 million financial services consumers in the UK rely on the sector to deliver good outcomes and should be even better protected from harm, particularly in these challenging economic times.
Our job at the FCA is to encourage and support firms but also to enforce against serious harm.
I know the Consumer Duty expects high standards of you, but it is right that it should do so and that you should strive to continue to meet them.
Benefits of the Duty for firms and the UK
The Duty’s outcomes run with the grain of what good firms should seek to deliver. Those firms who do the right thing and show leadership should welcome action to tackle poor practice by competitors who drive down standards.
The common thread, the thing we are interested in above all else in our work, is reducing harm to consumers and ensuring firms deliver good outcomes for consumers.
And the Consumer Duty should deliver this, by fundamentally changing culture: not just yours, but ours too.
We will all become ever more outcomes-and data-driven – which means focusing on results over processes – ever more attuned to the needs of consumers.
As a regulator, the Duty will provide us with a lens through which we can assess our rules so that in future, we do not duplicate regulations that are already implicit in the Duty. This should, over time, simplify some of the complexities in our rule book.
The FCA expects to have soon a secondary objective to facilitate the international competitiveness of the UK economy and its growth in the medium to long term. This is being introduced as part of the Financial Services and Markets Bill which is currently going through Parliament.
The Duty will help UK firms flourish and remain world-leading proponents of financial services, as it makes all firms think harder about innovating and competing to find better ways to serve customers.
With the Duty, we want firms to understand what outcomes we consider important, so they can stay agile when rolling out new products and services, or when using technology such as AI thoughtfully to deliver better outcomes.
If applied correctly by firms, the Duty should help firms retain and attract customers and will enhance the competitiveness of our financial services sector.
It will bolster the UK’s position as a beacon for high standards and trust and radically reform our reputation for service and value.
We want consumers to buy insurance, take out mortgages, borrow credit sensibly, and invest in their future knowing that firms are providing them with the right products for their needs.
Creating this foundation of trust, a key driver of productivity, will be vital to attracting steady inward investment and efficient movement of money through the economy, driving medium to longer term economic growth.
Firms should already be asking themselves:
- Does your purpose and culture align with your obligations under the Duty and support the delivery of good outcomes for customers?
- Is the Duty being considered in all relevant discussions such as strategy, remuneration and risk?
- Have you made sure your remuneration and incentive structures drive good outcomes for customers?
- Are you prioritising delivering good outcomes for customers in a changing external environment?
These are the types of questions we will ask, and the types of questions the Duty champion and Chair should ask internally.
Area of focus: Fair value
Price and value is one of the four key outcomes that firms need to assess under the Consumer Duty and we regularly hear it’s the one that firms find the hardest.
So, we’ve done some work to review firms’ fair value frameworks which we publish today.
The price and value outcome is based on ensuring the price the customer pays for a product or service is reasonable compared to the overall benefits.
The findings of our review suggest that some firms may not be able to give us adequate evidence for why their products or services provide fair value.
Some firms didn’t seem to be properly considering outcomes for different groups of their consumers, relying instead on broad averages. This could hide where certain types of customers – such as those on low incomes or in vulnerable circumstances – are receiving poor value – perhaps because they are unable to benefit from important product features, or are more likely to pay charges, such as late payment fees.
Some firms didn’t seem to be challenging themselves enough on uncomfortable questions – such as, are high-profit margins on a specific product a sign that those customers are not getting fair value? Of course, profit is not a bad thing, and it is possible to deliver both fair value and profit. We expect to see all firms taking an honest and critical approach to their fair value assessments.
These are areas that will need renewed focus in the weeks ahead.
Firms should use the time remaining in the run-up to 31 July to ensure that their fees are fair and transparent and that particular groups of consumers are not disproportionately disadvantaged.
I recognise that the cost of doing business is also rising for firms, but it does not absolve firms of their duty to make sure that their customers are paying a fair price for their product or service in relation to the benefit they receive from it.
According to Ipsos Mori’s latest financial research survey, half of consumers are finding repayment of bills and credit commitments hard. Feedback from consumers is that they have reduced their costs by cutting discretionary spending and luxuries but still feel that this cannot cover the shortfall in their personal finances.
If you look at our recent Consumer Duty ‘Dear CEO’ letters, you will see that fees and charges are referenced across multiple sectors.
For instance, we have asked firms to ensure that top-up charges on e-money accounts are appropriate for vulnerable customers using those products and that redemption charges are commensurate with the costs incurred by firms.
We have made clear to lenders that they should not charge unreasonably high fees or interest rates to some customer groups, such as those with persistent debt or those with poor credit history.
We have also asked banks to ensure that exit fees on fixed-term savings accounts are cost-reflective and not unreasonably discouraging or preventing savers from switching accounts or providers.
But fair value is also about more than price: Value should include consideration of the quality and benefits of the product or service.
We want firms to look at their product and really examine and challenge themselves about whether the cost of a product or service really is reasonable relative to the overall benefits.
The assessment is crucial, not only in terms of the upfront price and value but also throughout the lifetime of the product.
The cost that a customer pays for a product is an amalgam of charges that are levied throughout the supply chain, so it’s vital that manufacturers and distributors assess fair value across the whole value chain. Complex charging structures may carry a greater risk of poor outcomes especially if they are poorly understood.
We have also seen customers pay broker commissions that can be unreasonable relative to the benefits of the products that they get.
These are usually invisible to the end consumer but can greatly affect the price and suitability of the product they receive. And they have led to high-profile problems in the past such as PPI.
The Consumer Duty is an opportunity for manufacturers and distributors to really understand the impact that different commission models have on the value that consumers receive, and we will be taking a close interest in this aspect of the Duty across sectors.
Manufacturers and distributors need to share information to assess value, but if you are being asked for information that you are unsure fits with our rules, query it with the firm asking you the questions.
These issues are usually resolvable through dialogue, but firms can alert us if they still have concerns. We don’t want firms to create overly burdensome processes, going above and beyond what is required by us, so we are working with industry bodies to clarify expectations.
Our role in the Consumer Duty going forwards
It is worth remembering that Parliament asked us to consult on the Duty, and it had cross-party support. We are giving effect to Parliament’s wish by making the rules and will be supervising and enforcing them.
It is now up to firms, and us regulators, to make sure we get the implementation right.
When the Duty comes into force, firms need to make sure – and be able to show us – that they are acting to deliver good customer outcomes and protect consumers from harm.
They need to show they are equipping customers with communications they can understand, providing products and services that meet their needs and offer fair value, and offering the support their customers need.
So what can firms expect from us from 31st July?
Our supervisory and enforcement approach will be proportionate to the harm – or risk of harm – to consumers.
We will prioritise the most serious breaches and act swiftly and assertively where we find evidence of harm or risk of harm to consumers.
In some cases, firms can expect us to take robust action, such as interventions or investigations, along with possible disciplinary sanctions.
The Duty is outcomes-based, and a key part of the Duty is that firms understand and evidence the outcomes their customers are receiving. This enables them to monitor their compliance and to tackle potential breaches at an early stage.
We want firms to harness the benefits of data and technology to improve their services and understand the outcomes they achieve for their customers.
We understand that some firms will need to continually improve in this area. We will be pragmatic and open in working with them on the way they use data and analytics to demonstrate compliance.
This is new territory for us too and we will listen to feedback and adapt our approach where necessary.
I would stress that the Duty does not have a retrospective effect and does not apply to past actions by firms. It will apply to existing products and services on a forward-looking basis.
For new and existing products or services that are open to sale or renewal, the Duty will come into force on 31 July 2023.
For closed products or services, the Duty will apply from 31 July 2024.
Principles 6 and 7 and consumer protection law would continue to apply to conduct outside the scope of the Duty, where they apply at present.
We have worked closely with the Financial Ombudsman Service to ensure a joined-up approach of how the Duty applies. And we will continue working under the Wider Implications Framework on its interpretation going forward while respecting our respective roles.
The Financial Services and Markets Bill that is going through Parliament will introduce a duty on the Ombudsman, us and the Financial Services Compensation Scheme to cooperate on matters with significant implications for one another, and to consult others, such as The Pensions Regulator and Money and Pensions Service, where appropriate. We welcome this, and we envisage that our close working relationships under the Wider Implications Framework will stand us in good stead for the introduction of this statutory duty to cooperate.
Thank you for your efforts to date to meet the deadline and demands of the Duty.
For those who are not up to speed, don’t delay. Don’t panic but do act! You still have time, but only just.
Our focus will be on tackling the greatest harms. We have provided support through roadshows, guidance, podcasts, portfolio letters, webinars and speeches, and we will continue to do so.
You have 82 days left – it was more than enough time for two young women to conquer the world in the 19th Century in the days before air travel.
It is more than enough time for firms to implement the final stages of the Consumer Duty in the 21st. So take the steps, with us by your side, and go deliver good outcomes for the market. And the world.