With the City regulator having recently published its expectations for firms when dealing with consumers, Dave Timmis, founder and CEO of Leasing.com, considers the critical next steps that all retail financial services firms should be thinking about ahead of the Consumer Duty deadline.
In July 2022, the Financial Conduct Authority (FCA) confirmed its plan to introduce a new Consumer Duty. The Duty sets higher and clearer standards of consumer protection for financial services firms with the new principle and rules coming into force from 31 July 2023.
The Duty will become the FCA’s new Principle 12 when introduced and extends the regulator’s current 11 Principles for Business (PRIN) – the principles that all regulated firms must adhere to.
Principle 12 will require firms to “act to deliver good outcomes for retail customers” and, where it applies, will supersede the FCA’s Principles 6 and 7 as it sets higher standards of expected conduct than those Principles.
The FCA has said that it hopes the Duty will raise the bar for the firms it regulates and that it will promote competition and growth based on high standards.
While the Consumer Duty applies to all retail financial services firms, in the automotive industry, the new rules will require captive and independent finance houses, as well as motor dealers, brokers and other intermediaries who underwrite or promote regulated motor finance to consumers, to review their products, services, processes and culture against the new Principle 12 and rules.
Ahead of next year’s introduction, all firms are expected to have prepared implementation plans by the end of October 2022. These plans should outline the specific steps that are to be taken to meet the new Consumer Duty rules and should be approved by each firm’s board or management team.
While the new Consumer Duty is not expected to trigger fundamental changes in the way that regulated automotive firms do business, firms will need to review and adapt policies and processes accordingly. The Duty should ultimately be seen as an extension by the regulator of their existing Treating Customers Fairly (TCF) principle that regulated firms should already have embedded in their businesses.
When assessing the impact of the new rules, firms should first consider how their activities are defined by the Consumer Duty. The Duty introduces the definition of a ‘Manufacturer’ and a ‘Distributor’ and the definition of both is very broad. Manufacturers are defined as all firms that ‘create, develop, design, issue, operate or underwrite a product or service’ while a Distributor is a firm that ‘offer, sell, recommend, advise on, propose or provide a product or service.’
A motor finance company that creates and introduces a new regulated consumer hire product will meet the definition of ‘manufacturer’ while a motor dealership that, for example, then recommends and sells that consumer hire product for that manufacturer will meet the definition of ‘distributor’.
However, firms should be aware that they can meet both definitions. For example, a consumer hire (leasing) broker may recommend a finance company’s products to consumers, but could also hold FCA permissions that enable it to create, issue and operate its own consumer hire agreements to sell directly to consumers if a consumer is not eligible for the manufacturer’s product.
After determining which definition your business activities meet, firms should consider their conduct against the four key consumer outcomes that the FCA has set out. These outcomes are:
Governance of products and services
Firms should ask themselves whether all their products and services are fit for purpose, work as expected and with terms and features that match the needs of the consumers that they are targeted at.
Price and value
All products and services must give consumers fair value, be sold at a fair price that reflects their benefits and protect consumers from unreasonably high fees and charges.
Firms should ensure consumers are equipped to make effective decisions about their products and services because they have been given the right information, at the right time and in a way they can understand.
Consumer support must be responsive and accessible, and it must be as easy to switch, cancel or complain as it was to buy the product or service in the first place.
The FCA has embedded the concept of ‘reasonableness’ at the heart of Consumer Duty. The regulator has said in its guidelines that ‘reasonableness’ will underpin how it will assess how firms have interpreted the Consumer Duty rules. If we consider the four outcomes above, firms should ask themselves if it is reasonable for their customer support to only be available, for example, online. How would consumers without internet access contact them with questions about their products and services? Or would it be reasonable for telephone helplines to have very restricted opening hours? Would it be reasonable for self-employed individuals to be excluded from the terms of a vehicle hire agreement which is specifically marketed at SME business users?
So while it is difficult to give blanket advice for the whole sector, because the requirements of the Consumer Duty will vary depending on the specific activities carried out by each firm, every firm should fast-track its audits and implementation plans to put themselves in the driving seat ahead of July 2023.