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Consumer Duty – the bigger picture

Read AMI Senior Policy Adviser Stacy Penn's latest article, published in Moneyfacts

The FCA recently released a 2023/24 Business Plan, detailing its work and commitments over the next 12 months. Unsurprisingly, Consumer Duty features heavily and provides a snapshot of the FCA’s supervisory work post 31 July.

To fund this work, the FCA has allocated £5m of spending to Consumer Duty. To put this in perspective, this is more than double the FCA’s planned spend on its Consumer Harm Campaign (£2.3m for the year). The FCA will continue to integrate the Consumer Duy within the organisation, from authorisation, to policy development and supervision and enforcement and the £5m funding will help it undertake sector-specific supervisory work, primarily focused on the priorities detailed in its Consumer Duty Dear CEO letters.

We know from the FCA’s Dear CEO letter to mortgage intermediaries that second charge and lifetime mortgages have been highlighted as parts of the mortgage market with existing issues that firms need to tackle as part of their implementation work. Given the regulator has previously aired concerns about these segments of the market, particularly the lifetime mortgages market, firms operating in these areas must sit up and act.

The Dear CEO letter was another warning shot from the FCA and should firms fail to implement the Consumer Duty as intended, regulatory scrutiny and intervention is likely to intensify. In fact, we don’t have to look far to find a recent example of the FCA’s approach where market led change is slow or non-existent.

In the General Insurance (GI) market the FCA indicated on numerous occasions that it had concerns about firms’ egregious pricing practices in the home and motor insurance space. Price walking was identified by the FCA as an issue; this is where existing customers’ insurance premiums are hiked year on year, eventually bearing no resemblance to the price that would be quoted to a new customer.

Firstly, the FCA gave firms the opportunity to address the issue, sitting quietly and waiting patiently in the wing, watching progress. However, when firms failed to change their practices and price walking continued, it had no option but to consult on wide sweeping reforms that led to the banning of price walking. As a result, home and motor insurance firms cannot charge an existing customer more than they would a new customer.

It’s why it’s imperative for firms to take the Consumer Duty seriously; it should not be viewed as simply a re-working of the Treating Customers Fairly Initiative (TCF) as it goes much deeper and wider than this. Whilst much of the rules and guidance represents good business practice, the Duty introduces new concepts that are unfamiliar to the mortgage market.

One new concept is fair value, where advice firms are required to assess whether there’s a reasonable relationship between the price of their service proposition and the benefits received by consumers. Many firms are finding this a challenging exercise. Firms should allow ample time to identify the information needed to complete the assessment, to complete the assessment itself and consider how they will document their rationale and outcome.

Firms are likely to find themselves in a difficult position with the regulator if, upon request, they are unable to present a coherent and well supported fair value assessment. Again, if we look across to the GI and pure protection sector where firms are further ahead on fair value with rules that came into force last year, it seems progress has not been as fruitful as the FCA had hoped.

It made somewhat scathing comments in its Consumer Duty Dear CEO letter sent to GI and pure protection firms in February 2023, commenting that it ‘question[s] the extent to which firms are complying with [fair value] rules’ as it is ‘not currently aware of any products being taken off the market due to fair value concerns’. This shows the FCA is expecting all firms within scope of the fair value requirements to challenge themselves, make changes where appropriate and to not accept the status quo.

The FCA has stated as part of its Business Plan that it will carry out targeted multi-firm work on fair value and armed with insight into the application of fair value rules in other sectors, this will likely be a top priority once Consumer Duty comes into force.

With the clock ticking, if firms haven’t started their Consumer Duty work they should start now. There is ample support available, from the help of compliance firms, regular updates and podcasts from the FCA as well as guidance from trade bodies such as AMI aimed to break down the Consumer Duty into digestible chunks. The FCA also plans to identify further examples of good and poor practices, which should help contextualise expectations.

Looking at the bigger picture, the Consumer Duty should not be seen as another regulatory regime but as an opportunity. It will equip businesses with well-defined propositions, services that are transparent and provide value for money, communications that build consumer trust and customer service that encourages healthy competition in the market. However, to reach this firms must commit the time and energy needed to not only implement but embrace the ethos that underpins the Duty. If executed well, it’s not only consumers that will reap the rewards but firms too.

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