The Financial Conduct Authority's (FCA's) new Consumer Duty comes into force for all open products and services on 31 July 2023. Its introduction arrives more than one year on from the publication of the final rules and guidance, in order to give firms sufficient time to prepare and ensure they implement this new flagship piece of regulation on time.
The Consumer Duty applies to the vast majority of the circa 58,000 firms regulated by the FCA that are part of distribution chains, whether as manufacturers or distributors, for financial services products and services intended for retail consumers. Essentially, the Duty requires firms to act to deliver good outcomes for retail consumers.
We have previously summarised the key aspects of the Consumer Duty in our article following the announcement of the new rules last summer. The focus of this latest piece is on the obligations of FCA regulated merchants in the retail and leisure sectors whose permissions are limited to credit broking activities (i.e. introducing customers to third party finance products).
Importance of compliance
The Consumer Duty is a cornerstone of the FCA's three-year strategy and the regulator has made it clear that firms of all sizes should be prepared to discuss the Consumer Duty. It also specifies that companies should be able to provide the FCA with information on the reviews and assessments they have conducted as part of the embedding process.
Firms who do not meet the new standards may face enforcement action, with the FCA making clear that once the Duty is in force, it will prioritise the most serious breaches and act swiftly and assertively where it finds evidence of harm, or risk of harm, to consumers. It will use its full range of powers to tackle serious misconduct, which includes fines, removing permissions, securing redress for consumers and potentially prohibiting individuals.
While credit brokers may consider that they have a limited role in the distribution chain, they play a significant customer-facing role and, in the context of the current cost of living crisis, the FCA is likely to pay close attention to the implementation of the new Duty by the credit broking sector.
In March 2023, the FCA considered the implementation of the Consumer Duty on a sector by sector basis and produced portfolio letters, highlighting the improvements needed for specific sectors, including for credit brokers. We remind credit brokers of the key findings below.
What does the Consumer Duty mean for credit brokers?
Credit brokers should be tailoring and adapting their approach to consumers to ensure all consumers receive "good outcomes" in the context of the following four key areas:
- Products and services: The design of the credit broking services should accurately reflect the information the customer is given about the service and should meet the needs, characteristics and objectives of a specified target market (credit brokers should work with lenders closely in this regard to understand the specified target market for the lending products). Services should not contain barriers that restrict consumers from acting in their own best interests and services should not exploit consumers' behavioural biases. Firms should also have processes to effectively manage any potential conflicts of interest that could arise from the firm's, or staff's, remuneration. Firms should identify risks in their incentive structures and manage them to help ensure they do not drive behaviours that result in poor customer outcomes (e.g. mis-selling due to incentive structures). If consumers are passed to other companies, such as other brokers, consumers must be made aware of this and the reasons why – the referral should not happen in a way that will cause foreseeable harm to customers.
- Price and value: Credit brokers should offer products and services that provide fair value with a reasonable relationship between the price consumers pay and the benefit they receive. The fees for any brokerage service should be disclosed to consumers, along with details of when it is payable and when consumers may be entitled to a refund; including, how and when a refund is available under section 155 of the Consumer Credit Act 1974.
- Consumer understanding: Credit brokers should communicate in a way that supports consumer understanding and equips consumers to make effective, timely and properly informed decisions. This includes providing consumers with prominent, sufficient and timely information about the nature of the credit broking services being provided (e.g. which lenders does the firm have credit broking arrangements with, and does it receive commission for these? Are consumer details being passed on to other intermediaries? If recommendations are being provided to a consumer, have the customer's needs and circumstances been considered, including any factors that might make it unsuitable?). Financial promotions should be clear, fair and not misleading, and not designed to exploit customers' behavioural biases. Firms should avoid causing foreseeable harm, and should consider this especially where they are selecting an audience for a financial promotion. Consumers should not be told, or have it implied to them, that credit is available regardless of their financial status. A firm's regulated status should be made clear to customers, along with what the firm is authorised to do, in a transparent fashion.
- Consumer support: Credit brokers should provide support that meets consumers' needs throughout the life of the product or service they provide. This includes ensuring that staff who broker credit and other financial products have sufficient training, knowledge and experience to accurately assist consumers with queries, and frontline staff have the appropriate skills to identify vulnerable consumers and respond appropriately. Firms should have clear complaint procedures and be able to deal with these effectively, and not create unreasonable barriers in the complaint process. Firms should act in consumers' interests and should support consumers in financial difficulty, especially in the current context of the cost of living crisis.
Vulnerability is a key concern for the FCA, and is considered in detail within the new Consumer Duty – fair treatment of vulnerable customers in all aspects of the firm-consumer relationship is embedded within it. This is especially relevant for credit brokers, who may be dealing with consumers in financial trouble and in difficult circumstances. A special focus on support for the most vulnerable consumer is therefore advisable, such as encouraging consumers to contact lenders for support with loan repayments and helping consumers understand the money help or guidance available. Special guidance on how to create a culture enabling the fair treatment of vulnerable consumers has been provided by the FCA and should be considered, and adopted, by credit brokers.
What will credit brokers need to show to demonstrate compliance with the new Consumer Duty?
Firms will now be expected to evidence the outcomes their consumers are receiving, and so should consider what sources of data they have available to demonstrate this. For credit brokers, this could include complaints data, records of services usage, focus groups or transaction data – with no "one-size-fits-all" model stipulated by the FCA. The data stored will very much depend on a firm's size and scale, and what data gathering software it has available to it. With the implementation deadline inching ever closer, any company that has not yet conducted a review of its internal processes and data gathering methods should address this as a matter of priority.
In particular, firms should consider how they can evidence their compliance with the Consumer Duty in the context of the four key areas detailed above; such as, records of staff training logs and manuals evidencing consumer support, or maintaining records of reviews of financial promotions to ensure prohibited terms are not used (evidencing consumer understanding).
What is key for the FCA is the ability of firms to show that they can identify where consumers are receiving poor outcomes, that they understand how this has happened and that they have processes available to address the issues which arise. Brokers should therefore keep records of issues that have been identified and be ready to detail what action was / is being taken to resolve the problem.
In the context of vulnerable consumers, records of reference to the aforementioned FCA special guidance, along with strategy plans detailing how a culture to reduce potential harm for vulnerable consumers has been adopted, will also be useful for credit brokers.
Are you ready for the new Consumer Duty?
The FCA has confirmed that it expects substantive compliance with the new Consumer Duty by the implementation date of 31 July 2023. Under the FCA's Principle 11, which requires FCA authorised firms to be open and cooperative with the regulator, firms must notify the FCA if they do not believe that they will be able to complete the work necessary to be compliant before the implementation date.
If you consider that you may not be ready by 31 July or have any queries relating to the Consumer Duty, please contact Sushil Kuner.