Financial Conduct Authority (FCA) Consumer Duty — what it is and how advisers can use it
Graham O’Malley encourages advisers to use the Financial Conduct Authority’s Consumer Duty to advocate for clients
The FCA’s Consumer Duty (the Duty) launched on 31st July 2023. The associated rules and guidance are lengthy. This article aims to simplify the Duty so advisers feel able to use it to advocate for clients.
The Duty has applied to all existing and new products and services since 31st July 2023. It will apply to closed products, for example a loan product that was withdrawn from the market before the Duty came into effect, from 31st July 2024.
Whilst this article is aimed at debt advisers, consumer advisers helping people with financial services like insurances and banking, will find it helpful.
The three levels of the Duty
Level 1 — the Consumer Duty requires good outcomes (the principle)
At its simplest the Duty is the FCA’s new twelfth principle for business:
A firm must act to deliver good outcomes for retail customers
Where it is proportionate and reasonable, all consumer outcomes should be good. Where the Duty applies, the new principle replaces principle 6 (to treat customers fairly) and principle 7 (information and communication needs of clients). What is a ‘good outcome’ may be subjective.
The Duty works at individual client level for most interactions with clients. If your client has a problem with how a firm is treating them, then at least quote principle 12 in any communications with the firm.
The Duty does not guarantee the outcome your client wants. It is to be applied proportionately and reasonably. For example, a client won’t want to be taken to court for a possession hearing. The Duty might not stop that happening, but will require a firm to justify why that is fair, and consider whether earlier support was missed.
Level 2 — good faith, foreseeable harm and enabling consumer objectives (cross-cutting rules)
To achieve good outcomes under principle 12 firms must look at everything they do in the light of three themes, known as cross-cutting rules. The themes are to:
- act in good faith towards retail customers
- avoid foreseeable harm
- enable and support retail customers to pursue their financial objectives
These themes come with a lengthy set of rules and guidance in the new PRIN 2A.2 Cross-cutting obligation section of the FCA handbook. To make the Duty usable we can summarise each theme.
Good faith is characterised by:
‘…honesty, fair and open dealing and acting consistently with the reasonable expectations of retail customers.’
Foreseeable harm can be:
‘…caused by both act or omission, through its direct relationship with a retail customer, or through its role in the distribution chain even where another firm in that chain also contributes to the harm’
There isn’t an easy summary to explain what ‘enabling someone to achieve their objectives’ means. Some key features of the guidance under PRIN 2A.2.14R onwards include:
- where a firm is providing advice, as opposed to execution only sales it is assumed they know more about the client and what the client wants to achieve
- understanding the client’s characteristics, bias, and information needs
- assuming that the client has an objective to ‘enjoy’ the product in question
The term ‘enjoy’ is clearly in context. Nobody will really enjoy debt collection, but there are ways to make it a better process with a better outcome.
You don’t have to know the detailed rules. If you think one of the three themes above applies to how your client has been treated, then say so.
Level 3 — the areas the Duty aims to improve outcomes in
The Duty aims to ensure good outcomes in four areas, which are:
- products and services (PRIN 2A.3)
- fair value (PRIN 2A.4)
- customer understanding (2A.5)
- customer support (2A.6)
Again each area comes with a set of rules and guidance, but there aren’t many rules that will be new ‘silver bullets’ as such. The FCA’s ‘non-Handbook Guidance for Firm on the Consumer Duty’ includes some examples of poor outcomes including:
- a client who asked for email communications to allow them to use a screen reader, yet the firm continued to send letters
- firms making forbearance hard to access through automated options, under-resourced chat functions, and difficult online navigation
- banks having complicated arrangements for third party authorisation, especially when a client dies
These are just examples. A client who is experiencing any bad outcome triggers the Duty. The impact on the client is very likely to involve an outcome related to fair value, client understanding and / or their support needs.
Don’t make the Consumer Duty overcomplicated
As an adviser, the easiest way to consider the Duty is to ask the following questions:
- Is the client experiencing a good outcome from a firm?
- Is the firm acting in good faith?
- Is the firm avoiding foreseeable harm?
- Is the firm helping my client with a way forward that achieves what the client wants?
If you answer yes to all of the above, then the firm is unlikely to be breaching the Duty. If the answer to any of them is ‘no’ then it may be breaching the Duty, and the firm should look to put it right or do things differently.
The ‘cross-cutting’ and ‘outcomes’ rules cross over. For example, a firm not acting to avoid foreseeable harm (a cross-cutting theme), won’t be supporting a client properly (an outcome). Don’t get too bogged-down on whether a firm is breaching a cross-cutting rule or an outcome rule. Use what you think is relevant to the client’s situation.
The Duty might not feel new
Advisers already challenge bad outcomes, as it’s what you do. The Duty isn’t a prescriptive set of rules to easily quote like the rules on the Consumer Credit Sourcebook chapter 7 (CONC 7) for instance, that says what a firm should do when debt collecting.
The Duty is a behavioural shift that firms are expected to make. How powerful it will be will depend on how the FCA supervises compliance, but it is clear the FCA has very high expectations that the Duty must succeed. Quoting the Duty appropriately should put a creditor on notice.
For example, a complaint over debt collection will be similar to before the Duty, but you could also add that refusing a repayment offer breaches principle 12. It is not avoiding foreseeable harm. It is not supporting a customer as per the Duty. As the Duty is a strong new supervision tool for the FCA, firms will aim to comply.
There are new prescriptive parts to the Duty. These cover testing that communications can be understood by customers, and fair product design. We’ve not covered these in this article.
Don’t worry about the terminology
The Duty adds some terms to the FCA Handbook glossary.
A ‘product’ or ‘service’ includes regulated activities like debt collection or debt advice. For example, the service is debt advice, not a specific solution like a Debt Relief Order. It also includes products in the normal sense, such as a specific credit card or loan deal that a bank offers.
We can say ‘retail customer’ means the client you are helping and ‘manufacturers’ are, pretty much, the firm providing the service to the client. Even where the firm didn’t design the product, they are likely to be involved in the ‘distribution chain.’ They may also be providing their own ‘product’ or ‘service.’ For example, an unaffordable loan sold by a broker is not manufactured by the broker, but the broker is still providing the broker service. If the broker assessed affordability for the loan, the broker will be at fault for the assessment. If the loan has terrible default clauses, the lender is at fault when it comes to fair value.
An ‘ancillary activity’ is an activity that is unregulated but that is necessary for completing a regulated activity. For example, this could be a mortgage collections team carrying out an assessment of income and expenditure. This is not regulated but is part of the necessary act of forbearance. Ancillary activities are caught by the Duty.
Who is responsible for for a breach
Identify the firm responsible for the mistake that is driving the poor outcome. In the credit broker example above, if the loan was unaffordable then the broker is likely to be the focus. If the loan was affordable but due to a change in circumstances the client has been charged high default interest, the lender is the focus.
Financial Ombudsman Service (FOS) decision-making won’t change much
FOS resolves complaints for free, and on the basis of what is fair and reasonable. It’s not constrained by technical legal arguments. In June 2023, the Chief Ombudsman Abby Thomas gave a speech setting out how FOS will approach the Duty. In the speech, she said:
“The Consumer Duty is underpinned by concepts of fairness and reasonableness, similar to the fair and reasonable standard we judge complaints against already.
Because of this, we don’t expect it to significantly change the way we look at many of our complaints…’
FOS gives some examples where the Duty may bite specifically. Most are about sales and pricing but there are some examples we could extrapolate from:
- Complaints over fair value — the FCA is clear that fair value includes default interest and charges, and the overall cost of a product. Is it justifiable, fair, proportionate to charge a certain fee or interest rate?
- Ongoing enjoyment — the Duty does not act retrospectively to pre-Duty times, but does apply to any ongoing conduct. For example, an unaffordable arrangement set before 31st July 2023 will continue to be unaffordable now, so the Duty will apply to it
- This also covers a decision to enforce an agreement entered into before the Duty, including a mortgage. Firms should justify enforcement considering the circumstances of the case?
FOS states that it will continue to share insight on cases involving the Duty.
We do not know how courts will incorporate the Duty
It is too early to know how the courts will handle the Duty. The rules, including the principle, are FCA rules and influential. In the case of Kerrigan v Elevate Credit International Ltd (t/a Sunny), summarised on Gough Square Chambers’ site, the High Court decided:
- Breaches of FCA rules meant affordability assessments were poor. This could cause an unfair relationship
- Breaches of FCA rules could lead to damages under section 138D of the Financial Services and Markets Act 2000
The Duty is not covered by section 138D. There is no damage claim possible. The breaches of the existing FCA (CONC chapter 5.2A) rules supported the unfair relationships claim. It’s not obvious how the Duty will add anything to a court claim, or defence. The nature of a ‘good outcome’ is subjective. Court proceedings are won or lost by evidence and finding of fact. It would not hurt to mention the Duty in court proceedings but the Duty might not add much when the court considers specific evidence.
Areas where the FCA has stated the Duty applies
In theory, the Duty applies to anything the firm is doing that is regulated or ancillary. It works alongside existing conduct rules like CONC and not instead of.
The FCA has published ‘portfolio letters’ for different types of products and services. These letters target issues the FCA feels require improvement in a particular sector. Below are a few themes but the Duty will never be an exhaustive thing. Some of the themes are repeated across portfolios. You can read the portfolio letters on the FCA’s Consumer Duty page.
Forbearance, or lack of
The mainstream consumer credit letter equates forbearance with ‘avoiding foreseeable harm.’ The FCA links providing ‘customer support’ to responding to drivers of vulnerability. Therefore, a familiar complaint governed by CONC 7 rules, can now be strengthened by reference to the Duty.
Affordability and suitability
In the retail finance letter the FCA links affordability assessments with ‘avoiding foreseeable harm’. We can use this alongside CONC 5 when complaining about irresponsible lending. It might be easier quoting a line from the Duty than getting stuck in the detailed rules.
Commission structures
In the credit broker letter, the FCA details concerns about commissions driving sales. This is more acute when loans are sold in the home. Where a client has used a broker, or a salesperson has acted as broker, the Duty expects suitability to be the main factor in the sale. This will avoid the ‘foreseeable harm’ that commission incentives can cause.
Information and explanations
The motor finance letter says that motor finance products are complicated to understand. Online sales processes may lead to information not being accessible or explained. Firms may need to improve ‘consumer understanding’. If a client has not understood contract terms related to termination, ownership or excess mileage, the dealership might not have complied with the Duty.
Statute barred debts
The debt collections and purchasing letter expects firms to do more to identify statute barred debts. Firms should also communicate honestly if a debt is statute barred. Other issues include:
- threats of court action when the debt is known to be statute barred
- treating things like balance adjustments (where the original creditor provides new accurate information) as payments to reset the limitation period
- and not providing timely and accurate information to the client about their rights.
Support for clients, especially people in vulnerable circumstances
Across all sectors, the FCA requires client vulnerability to be assessed and taken into account. Firms must act according to the FCA’s guidance on the fair treatment of vulnerable customers. Specific issues highlighted in the debt collection letter include signposting to, and complying with breathing space. The broader paragraph below applies to any type of firm:
Time (and supervision) will tell
The Duty is still new. In some respects it provides nothing solid to advocate with. The issues raised in the portfolio letters are issues you would complain about using conduct rules in CONC or Mortgage Conduct of Business rules (MCOB).
However, not to encourage advisers to use the Duty, even superficially, is a wasted opportunity. This is a big deal for the FCA and how it supervises firms and we should expect firms to have the Duty in mind at all times. All firms will have a Duty Champion ensuring that boards are challenged on implementing the Duty. We should expect high levels of compliance and corresponding levels of fairness for clients. The FCA has published action it has taken under the Duty already.
There are further thoughts from Debt Camel with additional ideas. The IVA voting and economic abuse issues Debt Camel raises are further great examples of where the Duty might add to client protection. Advisers will have their own bugbears that they feel the Duty should deal with. That’s arguably the strength of the Duty — it will almost always apply to your complaint.
Let us know if you cite the Duty in complaints by emailing expertadvicesupport@citizensadvice.org.uk, or commenting below.
Graham O’Malley works as a senior debt expert in the Expert Advice team at Citizens Advice
The information in this article is correct as of the date of publication
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