For some years, the rules around consumer rights in relation to financial products have been tightening. Now, applicable from 31 July, there exists the Financial Conduct Authority’s (FCA) Consumer Duty.
Back in December 2021, the FCA said it was “concerned that … financial services do not always work well for consumers. The new plans will fundamentally shift the mindset of firms.” In particular, the FCA said that it had “seen practices by some firms that cause harm. These include firms presenting information in a way that exploits consumers’ behavioural biases, selling products or services that are not fit for purpose, or providing poor customer support.”
The new rules seek to combat these issues and ensure that consumers receive ‘good outcomes’ when taking up financial products and services and that firms provide evidence that these outcomes are being met. The FCA says that the duty applies to “all firms who determine or have a material influence over customer outcomes – not just those with a direct customer relationship.”
What the FCA means by “good outcomes”, is that financial organisations must provide customers with products and services that as UK Finance notes, “meets their needs and offers fair value. Customers should receive communications they can understand. They should get the customer support they need when they need it.”
There’s a real risk that firms will take a low-risk approach, which could result in the withdrawal of products and the tightening of sales criteria
The duty requires firms to provide evidence that they consistently deliver good outcomes. This means that providers will need to show that they offer products and services suitable for customers; provide clear information about products, terms and conditions, so it is easy for customers to make informed decisions; respect customers’ varied needs, including any in vulnerable circumstances; and offer genuinely helpful customer support which is easy to access.
UK Finance says that “this isn’t a box-ticking exercise. The FCA’ will make the Consumer Duty an integral part of the regulatory approach and mindset.’”
For the world of retail, the issue is very real. As PwC commented, “the rules impact all firms which distribute or manufacture products and/or services to retail customers and form a crucial part of the FCA’s 2022-2025 strategy.”
Since dealerships distribute financial products either to facilitate or complement a sale, they too, must also ensure that they are meeting the higher standards and expectations the FCA has laid out.
As the FCA told BDN: “A retailer that lends money through regulated consumer credit agreements will need to be authorised and hold appropriate permissions. Similarly, a retailer that sells its vehicles to customers and also helps the customer obtain credit from a third-party lender will need to be authorised for the activity of credit broking. Alternatively, they might become an ‘authorised representative’ of an authorised firm to undertake these activities.”
But while the change seems like it may add bureaucracy and cost, some, such as iVendi, a provider of motor retail technology, reckon that it could create new business opportunities.
The firm said that “if dealers implement the Consumer Duty correctly, it will potentially create new avenues for business. That’s because it fundamentally requires detailed information to be recorded about how buyers behave, and this provides greater insights, as well as providing a more structured and better-informed customer journey.”
In particular, iVendi thinks that rejections should reduce over time because products will become better matched to consumers. Rejections aren’t received well by consumers and don’t tend to reflect well on the retailer either.
But there could be unintended consequences of the duty. UK Finance thinks that “there’s a real risk that firms will take a low-risk approach, which could result in the withdrawal of products and the tightening of sales criteria.” And law firm Herbert Smith Freehills has previously said that the duty could lead to a smaller range of financial products for customers or higher upfront costs for certain products or services, which would be clearer for customers but may mean some end up paying more.
Either way, change has come, and those involved with the provision of financial products and services have new rules to follow.