The fair, understandable, supportive guide to the FCA's Consumer Duty

Compliance with regulations might not be the main offering which attracts clients to financial services firms; however, they are the driving force behind many operations. After all, failure to meet regulations means failure to conduct business.

However, the Financial Conduct Authority (FCA) is not just focused on regulations such as CASS 7 to ensure that client funds are safeguarded. Since July 2023, through the creation of Consumer Duty, the FCA has also been enforcing rules to make sure that customers of payment firms, credit unions, retail banks, asset management firms, and more are treated fairly.

On paper, this sounds like a given yet for the FCA and consumers alike, it is rightly something which they want to be guaranteed. With time having passed for everyone to wrap their heads around the requirements of Consumer Duty, in the spirit of what it hopes to achieve, let's review it in a fair, understandable and supportive way.

What is the FCA’s Consumer Duty?

After multiple briefings, in July 2023, the FCA introduced Consumer Duty – a collection of measures to ensure that firms improve the care they offer to their customers.

To ensure that firms fulfil these requirements, Consumer Duty focuses heavily on products and services, price and value, consumer understanding, and consumer support. Collectively, from these elements of a firm-consumer relationship, clients should experience fairness and support and understand everything that they need to know.

Why does the FCA’s Consumer Duty matter?

The concepts behind finance remain elusive for most people – a fact often overlooked by those who work in the sector. As a result, 45% of UK adults don’t feel confident in managing their money, resulting in financial opportunities going to waste. Despite this lack of self-confidence on financial matters, higher levels are not found in others. In fact, fewer than half of UK adults have confidence in the UK financial services industry.  

Consumer Duty aims to rectify this issue by compelling firms to ensure that individuals have a greater understanding of the financial products available to them and receive a better level of support for the ones which they have. In turn, the FCA hopes that a variety of benefits will be experienced by customers, firms, and themselves as an organisation:

• Customers will grow their trust in financial firms – in a survey of 19,000 UK adults, only 36% agreed that most were honest and transparent in their treatment of clients – prompting them to increase their engagement with financial products and services that are both suitable and beneficial to them. At the same time, they will receive a higher standard of support, something which was in dire need of improvement prior to July 2023 considering that between May 2021 and May 2022, 7.4 million people were unsuccessful in trying to contact one of their financial service providers.
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• Firms will be given the opportunity to fulfil another regulation aimed at acting with customers’ best interests in mind. As a result, firms that succeed in meeting Consumer Duty will instantly gain respect and, in turn, greater loyalty plus custom.
  
  In addition, as part of the FCA’s wish for firms to go beyond delivering fair results for clients and instead “achieve good outcomes”, they will be incentivised to acquire data on customers. This drive will lead to firms understanding their audience better and producing more attractive offerings.

‍The FCA is already gaining plaudits from across the world for their action on creating Consumer Duty. It was perceived as a radical shakeup at first but with other similar organisations across the world now looking to imitate Consumer Duty in their own jurisdictions, the FCA is leading the way.

What has been learnt?

Prior to other jurisdictions like the EU implementing similar regulations to the FCA’s Consumer Duty, such as their planned Retail Investment Strategy (RIV), a review of what has happened since July 2023 will be fundamental. This is unlikely to be to consider whether certain aspects of the FCA’s Consumer Duty should be removed – in reality, much of what it demands should already be standard practice – instead, it is to pre-empt the impact it will have on organisations that it will apply to and where regulators might need to intervene.

For instance, despite there being plenty of planning time available before Consumer Duty came into effect, and most firms preparing well for it, upon implementation, there have been instances which has seen the FCA feel that they have had to mediate. Regularly this has resulted in a ‘Dear CEO’ letter being sent, with wealth management and stockbroking firms, investment platforms, and SIPP operators all receiving one.

The content of these letters has inevitably been different based on who they are addressed to; however, their mere posting demonstrates that compliance with Consumer Duty is no easy feat to achieve. For example, in the letter addressed to wealth management firms, there was a strong emphasis upon some firms not providing “clear and consistent disclosures on fees and charging structures” and/or offering products that were too complex or high risk for consumers.

Other points which the FCA has raised includes the practice of “double dipping” by investment platforms and SIPP operators. Effectively, this means that some have been benefitting from interest on customer cash balances plus management fees. With interest rates being unusually high over the last few years, this has made the revenue they are taking from these two streams increasingly questionable when they don’t release all the interest profits back to their clients. Tellingly, the earning potential of interest rates has been a topic of conversation in the media too, with many boldly questioning why higher rates aren’t being offered to customers. This therefore shows that the FCA’s Consumer Duty is successfully doing the bidding of what people wish to see in terms of fairness being enacted.  

Unsurprisingly, with a look to achieve what people care most about, the FCA has also been emphasising the requirement for anti-fraud systems to be in place. This has seen reminders being issued on providing good support to victims of fraud and on the need to make sure that customer vulnerability is taken into consideration when setting up accounts.

Of all the actions by the FCA after they enforced Consumer Duty however was the “not once and done” speech delivered by Nisha Arora, Director of Cross Cutting Policy and Strategy for the FCA. Her clear message to firms bound by Consumer Duty was that they must continue to invest in “delivering good outcomes” for their clients through perpetual reviews of their communication, systems, services and products. A key learning from Consumer Duty for years to come is therefore that it is of high importance to the FCA and something which they wish for firms to be proactive about – it is regulation not about maintenance of static standards but continual improvement.

How can firms meet the FCA’s Consumer Duty regulation?

With teething issues continuing to persist when it comes to complying with Consumer Duty, here is a breakdown of the fundamentals which must be met:

Be fair

Whenever any business relationship begins, no matter whether it is B2C or B2B, both parties wish to be treated fairly. However, day-to-day this is rarely the case with products such as Apple’s iPhone 14 having a markup of roughly 100%.  

Yet when it comes to financial services and products, due to money being the main driver, attaining value for money should be under much greater scrutiny. As such, the FCA have made it paramount for firms to treat their clients fairly when it comes to delivering value.

Fairness is not just limited directly to money matters though. The FCA also wishes for it to be the case throughout all customer interactions. For example, reasonable adjustments should be available to those with disabilities such as sight impairments, guaranteeing quick access to pivotal information.

Ultimately, The Duty aims to create a “fairer and more consumer‑focused playing field on which firms can compete and innovate in pursuit of good consumer outcomes”.

Be understandable

Taking care of money matters makes complete sense to those who have dedicated financial knowledge. However, for others, spending money and time on improving their financial situation by seemingly only small gains might at first be hard to understand.

Yet given the importance of financial security for people at all stages of life and the potential of compound interest to deliver exponential growth, understanding the value that the correct financial products can attain for people, is very important. The FCA therefore makes “clear that firms must consider consumers’ limited experience and behavioural biases at all stages of [...] product lifecycle[s]” by providing them with intel that they can understand.

Given that The Duty “require[s] firms to consider the needs, characteristics and objectives of their customers”, a diverse communication strategy will therefore be necessary for firms to cater for all types of customers that they have. For instance, to make money matters intelligible to everyone, firms are likely to need different communication strategies for Gen Z – who are becoming financially literate through FinTok trends - compared to older generations who value face-to-face interactions.

Be supportive

With finances being an extremely influential part of everyone’s lives, but few having expertise on the matter, those who do have relevant knowledge must be prepared to be accommodating and willing to support. Along with this expectation, the FCA also wishes for firms to be flexible in how they support clients.

After all, providing support usually becomes pivotal when something out of the ordinary arises. As such, The Duty demands that firms’ ability to support clients is versatile, not brittle. For instance, beyond the basics of making sure that clients know what support is available and how to access it, Consumer Duty also explicitly states that “firms should be able to continue providing a reasonable level of support to their customers” even in the event of IT failures including cyber-attacks. In addition, they must be fully prepared to react and resolve uncommon support issues.

Ultimately, The Duty therefore seeks for firms’ support services to be extremely resilient, making sure that they are well-thought out and themselves held-up by a supportive, adaptive infrastructure. Hardly surprising for a set of regulations that wish for consumers to be put first.

Put your clients first

For centuries, businesses that put their customers first have always tended to do better. In the last decade, with the growing buying-power of Millennials and Gen Z, this has grown even stronger with loyalty and bias towards established brands dwindling. Now, the FCA has made it a regulated necessity to put clients first.  

Crucially, the FCA has emphasised that this is not achievable through a handful of one-off actions. Instead, compliance with Consumer Duty is to be a continuous activity, ensuring that consumer standards never decline and continue to meet contemporary expectations. As such, firms need to devise a long-term strategy to always put their clients first.  

On paper, this might sound like a near impossible task; however, the answer is as surprising as it is simple – automated reconciliation. Despite reconciliation being a back-office activity which very few customers are likely to be know about, it in fact holds the key to many benefits that can positively impact clients in a way which the FCA’s Consumer Duty wishes.

Security of funds

For starters, reconciliation is a fundamental financial control, playing a leading role in protecting client money under CASS regulations. As such, reconciliation lays the foundation for “good outcomes” to be attained for customers like Consumer Duty requests by firstly making sure that it is properly protected and not vulnerable to being mismanaged.

Planning ahead

Reconciliation is not only conducted to ensure that client funds are securely segregated from company money. Another outcome of reconciliation is that it verifies corporate numbers, and when automated reconciliation software is exercised due to its speed, real-time cash positions can be attained. As a result, automated reconciliation allows for firms to make informed future decisions, putting them in a better position to deliver positive outcomes for their customers.

Prevent fraud

As mentioned, the FCA has been reminding firms of the need for anti-fraud systems to be in place to meet their Consumer Duty requirements. However, anti-fraud systems can still be liable to breaches. More often than not, the best way to stop fraud is therefore to deter it from happening in the first place. Fast reconciliation through automation can deliver on this too thanks to it flagging anomalies for investigation in seconds – a deterrent to any fraudster who believes that they can commit the perfect crime with no reparations.

Efficient data collection

Although Consumer Duty is all about putting people first, to make this happen, the FCA does not shy away from the fact that cold hard data is needed. With firms managing millions of transactions which must be processed and securely regulated, sometimes leveraging the data which they produce as a by-product is overlooked due to a lack of time or resources. However, as an automated reconciliation platform with over 600 APIs, Aurum is able to accumulate data from infinite amount of sources and reconcile it in seconds before giving users access to customisable data dashboards which they can manipulate in any way that works best for them.

Proof of compliance

As part of Consumer Duty, firms will be expected to show their own numbers to the FCA to illustrate that they are providing financial value and fairness to their customers. Without reconciliation, no numbers can be verified as official. As such, without reconciliation, meeting Consumer Duty is not possible.  

Overall, the FCA’s Consumer Duty is a groundbreaking set of regulations; despite being written in black and white in 2023, it expects constant iteration, evolution and improvement from firms that must comply.  

These ambitions align with what we deliver for our clients. Together with aurum.solutions, financial professionals benefit from a fully adaptive next-gen reconciliation platform to assist them with the everchanging regulatory landscape and make the most of their data to deliver better outcomes.

Book a demo today to continue to do right by your customers.