The consumer duty has arrived. From July 31 the Financial Conduct Authority's latest consumer safeguarding initiative applied to all existing products and services for sale or renewal.
By the end of July 2024, it will further apply to all closed products or services.
The regulator is using the consumer duty to drive a major shift in financial services and push treating customers fairly rules to a new and much more demanding level.
Unlike the previous regime, where firms were obliged under principle six of the principles for businesses to "pay due regard to the interests of customers and treat them fairly", the new principle 12 takes a radically different approach. This requires firms to always "act to deliver good outcomes for retail customers".
Firms have to now consider "the needs, characteristics and objectives of customers and how they behave, at every stage of the customer journey". Additionally, much higher levels of due diligence are required to identify and handle what are termed vulnerable consumers.
Weighing up the risks
While the aim of consumer duty is laudable, there is undoubtedly a significant risk that it will usher in an era of more risk-averse lending.
The ability to demonstrate ‘good outcomes’ for borrowers with challenging credit profiles is undoubtedly going to become more difficult.
Some lenders may start to question whether it is worth servicing some demographics at all. Why, for example, bother with more borderline customers when it is going to be trickier to prove good outcomes for those in financially vulnerable circumstances.
The calculus for risk versus reward is being pushed firmly in the direction of more risk by the FCA.
Finance providers are not charities and there is no obligation for them to provide services to those areas of the population that they view as presenting too much of a risk.
How can it be feasible to lend to customers that, for example, engage in regular gambling, or those who do not speak English well and may therefore fail to properly understand their contractual obligations?
There are less obvious aspects of the consumer duty that are similarly bound to sway lenders more in the area of risk avoidance.
One of the many stipulations of the new regime is that firms notify all parties in a distribution chain, and the FCA, when they identify consumer harm and non-compliance.
The FCA’s intention is obviously to foster self-regulation, but there is a real danger here that some firms may become overly sensitive to non-compliance, even ‘game’ this to their advantage by reporting competitors’ products.
This can only mean that firms will exercise an extra level of caution at customer touch points and in all written communication.
What is going to become apparent in the coming months as the new regime beds-in is that more and better use of data will be the only effective mitigation tool for such unintended consequences.
