The FCA’s Consumer Duty aims to raise standards in credit markets — is there a catch?

The proposed Consumer Duty is a welcome step forward in consumer protection, but more work will be needed in the long run to better serve financially vulnerable consumers

By Adam Butler, Public Policy Manager

Consumer advocates have long made the case for a ‘duty of care’ in financial services. Examples of poor practice that have led to strong FCA intervention and remediation, such as the concentration of excessive unauthorised overdraft fees on vulnerable consumers, show that the present regulatory framework does not effectively prevent harm.

The idea of a duty of care stems from the belief that regulated firms should be required to act in the best interest of consumers. StepChange has gone further and argued for a duty that embeds a ‘fair by design’ standard for products and protects consumers against exploitation of behavioural bias, vulnerabilities or constrained choice.

In 2018, the FCA sought responses to a discussion paper on a duty of care and alternative approaches to address deficiencies in consumer protection. After pausing this work during the pandemic, in May this year the FCA published proposals for a new ‘Consumer Duty’.

What is the Consumer Duty and what does it do?

The FCA’s proposed Consumer Duty consists of a new Consumer Principle that would be added to the principles that regulated firms must meet. The Principle would broadly require firms to act in the best interests of their customers.

The new Consumer Principle would be supported by a set of ‘cross-cutting rules’ that set expectations for firm conduct. As drafted, the rules require that firms ‘take all reasonable steps to avoid causing foreseeable harm, enable customers to pursue their financial objectives and act in good faith toward customers’.

The Principle and rules are in turn supported by four outcome statements covering key areas of firms’ activities. (These are communications, products and services, customer service, and price and value.) For example, the proposed communications outcome is that communications ‘should equip consumers to make effective, timely and properly informed decisions about financial products and services’.

There is no shortage of ambition in the FCA’s vision for the Consumer Duty. The FCA is clear that the Duty would ‘set higher expectations for the standard of care that firms provide to consumers’ and that for many firms this will ‘require a significant shift in culture and behaviour’.

We are particularly glad to see the FCA articulate a clear analysis of drivers of harm to consumers, including practices that exploit information asymmetries, consumer inertia, behavioural biases or vulnerabilities.

In essence, the FCA wants to shift the balance so that, rather than harms emerging that require a strong regulatory response, firms ‘get it right in the first place’.

What’s the catch?

The Consumer Duty is extremely welcome. The FCA has acknowledged gaps in the consumer protection framework and set out coherent, well-designed proposals to address them. The Duty will, once implemented, provide powerful support for the FCA’s recent Vulnerability Guidance.

Nevertheless, in responding to the FCA’s initial consultation on the Consumer Duty, we have sought to highlight areas where the proposals can be developed:

• The clarity, urgency and ambition of the language used by the FCA to describe the intent of the Consumer Duty does not yet carry fully into the language and design of the Duty itself. The Duty is arguably not sufficiently different to the present Treating Customers Fairly (TCF) framework. We would like to see a strong tone-setting message that firms should not seek to profit from exploiting information asymmetries, consumer inertia, behavioural biases or vulnerabilities embedded in the Duty itself.
• We have some concerns that the reasonableness test set out in the consultation paper, as currently framed, risks anchoring the Consumer Duty too closely to existing levels of consumer protection. The language here shifts focus to process rather than outcomes and echoes an approach the FCA rightly highlights has limited the effectiveness of the TCF framework.
• There is some disconnect between the high-level Consumer Principle and the four outcomes. The outcomes (excluding price and fair value) look similar to the existing TCF outcomes, raising the question as to how the FCA will ensure that firms do not continue to focus on narrow compliance rather than good customer outcomes.
• There are also areas of firm activity that fall within scope of the Duty but do not appear to fall fully or clearly within the scope of the outcomes. Notably, supporting customers in financial difficulty is not highlighted as an area of focus. Further development of the outcome areas, and clarification of their relationship to the high-level Duty, would be welcome.

Is this a duty of care?

The Consumer Duty falls short of being a statutory duty of care, although the FCA’s powers mean the Duty will have plenty of regulatory bite. Does this matter? We think it does, for several reasons:

• While the Consumer Duty helps bring together the FCA’s consumer protection and competition objectives (set out in the Financial Services and Markets Act 2000), those objectives would benefit from an update to align their wording with the aims of the Duty and developments such as the digitisation of financial services that affect the nature and balance of responsibilities between consumers and firms.
• The Consumer Duty will be more effective if supported by steps to meet the needs of consumers the market is not currently (safely) meeting. This is best achieved by a new financial inclusion objective set in legislation, reflecting aspirations commonly articulated by government, the FCA and others to find solutions to financial exclusion issues.
• For the same reason, roles and responsibilities at the interface of regulatory and social policy should be clarified so that, with compromising the FCA’s independence, government and the regulator are better able to act in concert where the aim of one cannot be met without the support of the other.
• While the FCA has made welcome efforts to include consumer perspectives in developing regulation, including the Consumer Duty, in the long run, the consumer voice should be ‘hardwired’ into FCA policy making at the legislative level.

The limitations of the present consumer regulation framework, at least to some extent, stem from the Financial Services and Markets Act 2000.

Without statutory change, there is likely to remain some tension between the aspirations of the Consumer Duty and the constraints of the FCA’s remit and tools.

Where does this leave us? The Consumer Duty is undoubtedly a step forward in consumer protection and one that StepChange welcomes. The final language of the Consumer Duty, and the supporting rules and guidance, matter a great deal in how effective the Duty will prove to be. And in the long run, many of the hardest challenges of consumer protection and financial inclusion need a concerted push from both the regulator and government.

• Read StepChange’s full response to the FCA’s consultation here.