Since the early 2000s, the Financial Conduct Authority has been pushing hard on its “treating customers fairly” agenda. The principles behind the new consumer duty, telling retail firms to give customers a “good outcome”, are not entirely original. But the burden put on financial services firms to be proactive in the execution of that duty – that is new.
In the past, firms could operate a buffet – they could lay out a series of options, healthy and unhealthy, and let the customer choose what option they wanted. They might offer a menu which would describe the products, list the ingredients or risk factors and leave the decision to the customer.
Now firms must consider and proactively review whether the customers understand the information provided and are choosing the right meal, and if the research shows that is not happening, firms must do something about it.
Firms must look at the financial products they are offering and take positive steps to ensure a good match between customers and financial products. They must “focus on understanding customer behaviour” to ensure the outcomes customers expect are being achieved – customers unlikely to receive the outcomes they expect must be turned away.
The equivalent is to expect a restaurateur to quiz potential diners on their health and taste and to then only serve them something which is reasonably expected to make them happy and keep them healthy.
The challenge for firms always comes when markets are under pressure. When investments underperform, customers complain, and the FCA will challenge firms to demonstrate proactive compliance with the consumer duty. It will be essential for firms to be able to evidence that they have properly and thoroughly considered the match between what the customer wants and what they are most likely to receive.
The proactivity is essential in another way. There have long been complaints that firms T&Cs are unclear and too lengthy. It is hardly a secret that most consumers do not read them and simply click through. It is also a very common consumer experience to find it much harder to get out of products or financial relationships than it is to get in.
The FCA is taking away the ability of firms to passively rely on these barriers, and preventing them exploiting behavioural biases which tip the balance unfairly away from consumers.
But the challenge will be in implementation. Firms must be brave enough to avoid creating a narrow, cookie-cutter range of products that limits consumers’ options.
Without that courage consumers may be denied products they specifically want, because firms will not take a chance on later being criticised for selling them. Safe, homogenous products may become the norm, with firms unwilling to innovate because of a lack of data they can rely on to predict future outcomes.
The costs of the proactive steps can be significant, leading to higher charges, which are ultimately passed on to consumers.
Many firms will already be doing what the FCA’s new rules ask of them. They will be conducting suitability checks, forward and backward-looking risk analysis and the like. There will be a handful of firms, however, who rely on a “buyer beware” business model, who could come under serious scrutiny.
The FCA will ask tough questions, but crucially, only when things go wrong. This inevitably skews the perception of what was and was not “foreseeable harm”. However the FCA should be wary of creating a bland array of options, ultimately hurting the very people they’re trying to help.