The Consumer Duty one year on

The financial services industry has now had just over one year to embed the Consumer Duty for existing products and should now be in the position to do the same for closed products and services. Boards (or the equivalent management bodies) should also have approved their first annual report.

With no further milestones on the horizon, the Financial Conduct Authority (FCA) has taken care to remind us that the Consumer Duty is not ‘once and done’ and the relentless focus on good consumer outcomes is expected to continue.

The FCA intended for the Consumer Duty to represent a significant shift in its expectations of firms, so what changes have we seen in the past year?

Insurance

In the past year, the FCA raised concerns about the value provided by certain general insurance products. The FCA’s value measures data gave an early indication of the FCA’s view. For example, the FCA highlighted issues with the sale of Guaranteed Asset Protection (GAP) insurance.

The GAP sales suspension gave a clear message on commission levels being too high and distribution being a key component of value. The FCA also conducted significant work with firms on motor total loss claims settlements after issues with fair value and outcomes monitoring. New rules to address poor outcomes for leaseholders in the multi-occupancy buildings insurance market were also introduced.

The life insurance sector faced slightly different challenges based on the long-term nature of such products, especially in dealing with gone-aways or disengaged customers. We expect the FCA will be interested to understand if life insurers follow its guidance to successfully implement the Consumer Duty for closed products.

Retail banking

In the retail banking sector, the FCA identified issues with closed products and services. The FCA’s previous multi-firm review looked at customers in financial difficulty, how bank accounts of deceased or incapacitated customers were dealt with, fraud and security breaches, business current accounts and debt consolidation.

Towards the end of 2023, the FCA commented on significant improvements in the savings rates available as it began scrutinising the cash savings market, including banks’ and building societies’ fair value assessments.

Consumer credit

In the consumer credit sector, the FCA raised concerns about the affordability and suitability of credit products. The FCA wants to make sure that firms do not exploit vulnerable consumers and that products are offered responsibly.

The FCA’s review of motor finance discretionary commissions will have a significant impact on that sector. There is also a continuing focus on the value of premium finance and regulatory action may still be taken.

Investments

The FCA emphasised the need to review fee structures and justify the costs based the benefits provided by investment products. The refund of fees paid by investors for annual reviews has been a major headline this year.

Would the FCA have acted in these areas without the Consumer Duty?

Likely yes, but they may have taken longer to conclude that a firm had not ‘paid due regard to the interests of its customers and treated them fairly’. What we have seen is a different threshold for the FCA now that a firm must ‘act to deliver good outcomes for retail customers’. Going forward, expect quicker action and a continued focus on customer outcomes.

In the next twelve months we suggest that firms keep a keep close eye on FCA warnings and concerns, though there is of course an expectation that they self-identify any risk of non-compliance with the Consumer Duty. When it comes to embedding the new requirements, most firms will be using a new framework, but we expect it may take longer to evidence the cultural shift expected by the FCA to consistently deliver good customer outcomes throughout the organisation.