The City regulator has issued new guidance on Consumer Duty, urging service providers to adjust to a new way of doing business, with a hard deadline of April 2023 to implement it. Are you ready? Chris Farnell reports.
By now motor finance professionals would probably have heard that the Financial Conduct Authority is setting out new rules and guidance on “Consumer Duty” in the FCA Handbook, which it expects to be implemented and ready for auditing by April 2023.
The FCA said it will finalise the rules in a statement expected on 31 July 2022, but the primary expectations are clear enough.
The goal of the rules and guidance is to bring about clear changes in culture and behaviour across the financial sector, including motor finance. The new guidance includes a “Consumer Principle”, to set a clear tone and language that reflects the behaviour expected from finance companies, as well as “Cross-cutting Rules” to clarify expectations and how the principle should be applied.
Finally, the FCA has highlighted “Four Outcomes”. This is the real meat of the new regulations, a detailed suite of guidance and rules aimed at improving key elements of the firm-customer relationship.
This means not just acting to achieve those outcomes, but firms continually assessing the impact of their actions, monitoring, testing and adapting policies, practices and processes to keep customer outcomes in line with the FCA’s expectations.
Those four outcomes are- “Products and Services”, “Price and Value” “Communication”, and “Customer Service”.
“Products and services” dictates that products and services need to be fit for purpose, designed to meet the needs of customers and targeted towards the right markets. The new criteria will look harshly on credit products designed to draw profits from late fees or re-lending, unreasonable exit fees and other “sludge” practices that discourage customers from leaving, and insufficient controls to prevent customers from being sold products they won’t benefit from.
Lenders need to review their products and services, and the terms and conditions in place with their funders while taking a look at their own terms and conditions with customers to ensure they are acting in good faith and avoiding foreseeable harm.
“Price and Value” is the simple proposition that products and services should be fit for purpose and offer fair value to the customer. Under the new rules, companies will be expected to assess how their products and services are priced at the design stage, and then continue to monitor that. The benefits of a product must be reasonable relative to its price.
This guidance should not be mistaken for a price cap, however. It doesn’t dictate what prices should be, and the rule is not intended to introduce price caps or other price interventions. Instead, it encourages firms to review and assess their prices and the value they offer from conception onwards.
“Communication”, also referred to as “Consumer understanding” is about ensuring consumers are given the information they need, as they need it, in a way they can understand. Consumers need to understand the features of products and services, what costs and benefits they will incur, and if a product meets their needs. The FCA has clarified that this means a clamp down on “framed” communication, such as giving a daily rate rather than the whole cost of borrowing, or crucial information buried in a large volume of other data. Information needs to be sufficient; consumer attention needs to be drawn to key changes, and communication must be tailored to its channel.
Businesses need to ask if their communication highlights and explains lists adequately, whether they are providing necessary calls to action to avoid negative impacts, and if consumers have the option to communicate with firms through their chosen channels.
Finally, “Customer Services” covers the design processes of products and services and how they take consumer needs into account, as well as how those processes are monitored, reviewed and recorded. It asks if the firm’s after-sales process meets existing requirements, looks for unrealistic barriers that could harm customers, and ensures these processes are monitored and recorded.
Consumer Duty: preparation
To ensure financial service providers are compliant with these regulations, by April 2023 they will need to implement appropriate data gathering to not only assess how they meet the new duty but also to provide a paper trail for auditors.
On a practical level, firms need to carry out a gap analysis between their current practices and those required by April 2023 and then structure their approach to meet that deadline.
According to business publisher Forbes.com, a gap analysis “is a process in which a business compares its current performance to its performance expectations or goals.”
The four outcomes must be monitored proactively for consumers to provide effective management information, and staff must be trained in their obligations under the Consumer Duty.
In terms of how the sector has been responding to this deadline, there has been a mix of reactions.
“Certainly, I’m seeing some sophisticated project plans from some, and some great teams in larger businesses that are really working on this,” said Jo Davis, CEO of Auxillias at the BVRLA’s industry webinar, Spotlight on Consumer Duty.
“We’ve seen a wide pantheon of responses from smaller businesses waiting for the final outcomes to start acting, and at the other extreme are businesses with designated people looking after this, generating sophisticated product plans,” added BVRLA’s Legal & Membership Director, Shashi Maharaj. “The wait and see approach is unlikely to be the best way forward. The FCA is expecting full implementation by April.”
Many believe this new guidance presents an opportunity to the industry, with BMW Group Financial Services and Alphabet (GB) Ltd’s Head of Compliance, Leanne Christmas, pointing out, “It gives us an opportunity to reflect on processes and customer outcomes, but it will be a challenge. The FCA covers the whole of the financial regulated market, and our challenge is working out what it means for us and how we’re going to implement it. What does fair value really mean? That’s where the challenge is going to be.”
Consumer advocate, Peter Tutton of StepChange agreed, “I’m excited about it. I’m hoping it will raise the bar on the expectation of outcomes on consumer services. It’s happening because we’ve seen this long train of consumer problems in the past that leads us to a low level of confidence in the consumer protection framework.”
But while the Duty codifies a lot of things that had not been articulated so directly before, Christmas insisted that while there is work to do, it will not be that big a change to the sector.
“A lot of organisations do outsource monitoring, but you could never outsource the responsibility,” she said. “The actual activity you can carry out how you deem fit and that won’t necessarily change going forward, but outsourcing will mean monitoring is further away and less in control so you probably wouldn’t want to continue with that. I think that’s one of the main areas that need strengthening overall anyway.
First-line monitoring what data we get into the organisation to understand how that product is working in the market. Is it being sold to its target audience? What is the governance process behind it?”
Christmas continued, “April 2023 seems quite reasonable when you realise there’s nothing new in there that we shouldn’t already be doing today. It’s changing the systems and the processes to make sure they’re fully embedded and making them robust.”