Consumer Duty: What It Means For Your Business

Consumer Duty

Vision Funding is committed to making motor finance transparent, helping dealers increase sales and boost revenue. We provide the tools to connect customers with the right motor finance for their needs, as fairly and simply as possible.

We believe that by doing the right thing and putting customers first, meeting the requirements of the Consumer Duty is not that difficult to achieve. Ultimately, it will open the door to even more customers and better business retention.

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What makes up the Consumer Duty?

The Financial Conduct Authority (FCA) has introduced the Consumer Duty (the Duty) for the purpose of requiring businesses to act in the customers best interests and protect them from harm. The Duty is made up of an overarching Consumer Principle with new rules that firms will have to follow, setting the standard of care that consumers should receive.

The Consumer Duty is structured to consist of 3 core elements:

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‍What is the Consumer Principle?

This is a new principle introduced by the FCA and is the overall standard of behaviour that they want to see all firms deliver:

• “a firm must act to deliver good outcomes for retail customers"

Being compliant with the Consumer Principle must be in place for all new in-scope products and services (all new products and services, and all existing products and services that remain on sale or open for renewal) from 31 July 2023.

The FCA wants the finance industry to raise the bar by imposing higher, more exacting standards, and a broader application than the existing Principles, particularly:

• Principle 6 - “a firm must have due regard to the interests of its customers and treat them fairly”
• Principle 7 - “A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading”

Only acting in accordance with guidance on Principles 6 and 7 can no longer be relied upon to consider how to comply with the Duty, as they no longer fully cover the FCA’s expectations.

By now, firms should have set a common standard across the entire business to build on, and this is an important factor. Often, it will involve applying adjustments to specific products or services and target customer groups, and the ability to be clear about the differences.

All firms must take the responsibility of delivering good outcomes for customers. However, there will be differences in expectation of this delivery depending on the firm’s size and activity. Positive, proactive, collaborative action, plus a clear understanding of everyone's expected role is needed from every actor in the distribution chain to make complying with the Duty successful. Focusing on delivering good customer outcomes and protecting them from harm must be at the heart of all decision making.

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‍What are the Cross Cutting Rules?

The FCA’s Consumer Duty includes three cross-cutting rules which helps firms interpret the four outcomes.

The cross-cutting rules require firms to:

• Act in good faith towards retail customers
• Take reasonable steps to avoid causing foreseeable harm to customers
• Take reasonable steps to enable and support customers to pursue their financial objectives

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What is Their Relationship with The Consumer Duty?

The cross-cutting rules set new standards and outline how firms are expected to deliver good outcomes. These three rules apply both at the wider target market level and for the individual customer, taking into consideration their needs and circumstances.

The cross-cutting rules work closely in conjunction with one another, meaning that if one rule is neglected, it’s likely to result in a breach of others.

For instance:

Acting in good faith is key to fully explaining the product or service being offered, and allowing the customer enough time to consider its suitability for their needs. This will avoid causing foreseeable harm and builds an environment which enables customers to pursue their financial objectives.

Acting in bad faith would be knowingly selling a product which does not meet the customer’s needs, or failing to fully explain the details of a product or service being offered. This could cause foreseeable harm for the customer and would not allow them to act in their own best interests and pursue financial products suitable for their needs.

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What are the Four Outcomes?

1) The Governance of Products and Services

This means:

• Providing the customer with goods and services that are fit for purpose and do not cause them financial harm
• Products and services on offer must be suitably designed for the firm’s target audience
• Testing, monitoring, and analysing results are crucial to ensure that they remain fit for purpose

2) Price and Value

Not only do the products and services need to be suitable for the target audience by addressing their needs, they must also represent fair value.

Customers must be able to have the ability to choose a product and/or service that is good value to them in terms of quality, characteristics, and price. Importantly, firms should be able to demonstrate ongoing monitoring, to support that they are always putting the consumer at the heart of all their decision making.

3) Customer Understanding

To ensure that consumers have the appropriate product and/or service, communication needs to be:

• Clear, simple, accurate, and given to the customer in good time so that they can consider whether it’s suitable for their needs
• Available in several communication channels and used appropriately to target the right audience
• Particular attention needs to be given to customers who have diverse needs including those deemed vulnerable. This is to ensure they fully understand the product and/or service being delivered to them

4) Customer Support  

By delivering the first three outcomes, great customer support will already have been given at the point of the service and/or the product being offered.  

However, the support cannot stop here, as all unreasonable barriers must be removed before, during, and after the point of sale or service. Consumers should have reasonable access to all businesses within the distribution chain who have taken part in offering the service/product.

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The Distribution Chain

The FCA expects all firms to be clear about their role in the distribution chain and understand the associated responsibility.

This then raises the question as to whether the firm is a manufacturer, co-manufacturer, distributor, or a combination of roles?.

Manufacturers and Co-Manufacturers

Firms are manufacturers if they create, develop, design, issue, manage, operate, carry out, or (for insurance or credit purposes) underwrite a product or service. There may be more than one manufacturer for a single product or service.

For example, if the motor dealer issues, manages, or operates a service relating to an insurance or credit product, they may be considered manufacturers.

A co-manufacturer is where a firm can determine or materially influence the manufacture of a product or service.

An example of this has been highlighted by the FCA: "if a lender negotiates an APR price-point with a dealer or broker firm, the firm may need to consider whether the lender is making the pricing decisions or if the dealer or broker has a material influence on this".

Product Distributor

If the motor finance broker or motor dealership sells a financial product designed and manufactured by someone else, they may be considered a product distributor.

For example, the motor finance broker has arranged the finance with the customer ahead of them choosing a vehicle with the motor dealer, they may be the distributor of that finance product.

As a product distributor, they’d still have responsibilities for ensuring the product meets the customer’s needs and complies with regulatory requirements, but they’d be less than a co-manufacturer.

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When firms collaborate in the distribution chain, the FCA suggests that firms should have written agreements outlining the roles and responsibilities of their roles to comply with the Consumer Duty expectations.

Firms must ensure that the distribution strategies in place are appropriate and customers are clearly made aware of these with no foreseeable harm caused to them.

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Recording, Monitoring and Evidencing Outcomes

Firms must be able to define, monitor, evidence (prove), and be responsible for the outcomes that their customers are experiencing. These are possibly regarded as one of the most significant changes that firms are having to adapt to. In particular, being able to identify customers experiencing poor outcomes and then being able to evidence any appropriate action taken to rectify the situation is expected by the FCA.

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‍The Reasonableness Test

The Consumer Duty is subject to a reasonableness test and wants firms to show good judgement in understanding the needs and characteristics of their customers. Firms need to define these by monitoring and reviewing them over time to see if they alter. The average customer group can be used as a reference point but the diverse needs and/or characteristics of vulnerable customers must also be taken into consideration.

Firms need to deliver services/and or products in a clear, simple, and fair manner. Staff are expected to have the skills and knowledge to show good judgement towards all customers throughout their entire journey with the firm, which includes post-sale.

Vulnerability and diverse characteristics amongst target audiences need to be carefully addressed, and should always be considered when testing and reviewing products and/or services being fit for purpose.

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Our Conclusion

It is important to ensure that Consumer Duty is practised both top-down and bottom-up within a firm to make this work effectively and without negative friction. The leadership team and senior managers must be accountable for embedding Consumer Duty. They must ensure that all staff work together, have appropriate knowledge with ongoing training, and are fully aware of their responsibilities.

Customer-facing staff need to feel comfortable in creating good friction with the leadership team to keep the firm focussed and moving forwards.

Confidence in appropriate controlling and reviewing measures being in place also need to be part of the company culture. This ensures that all outcomes are accurately recorded with any improvements quickly implemented.

Firms need to be responsible for their role in the distribution chain and prepared to collaborate with all those in the chain to ensure that the customer receives the best possible outcome.  

It is important to understand the needs of vulnerable and diverse customers in the target audience and ensure that frontline staff have the necessary skill and capability to fulfil these needs. More can be found in the FCA Guidance of vulnerable customers.

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There are lots of components making up the Consumer Duty which simply cannot be covered in one blog. An example of further reading that could prove useful is the improvements expected by the FCA to Appointed Representatives regime.