Money firms will have to prove that they are offering us decent value and delivering ‘good outcomes’ or else face the wrath of the regulator.
New rules are being introduced this week which will force financial firms to justify the way they treat customers and prove they offer real value to us.
The Consumer Duty regulations come into effect from 31st July, and run alongside existing rules established by the Financial Conduct Authority (FCA), the main financial regulator.
They apply to financial firms that offer products and services to retail customers ‒ basically, the likes of you and me, covering things like savings, mortgages, credit cards, and insurers.
The Consumer Duty rules are about financial firms having to demonstrate that they are delivering fair value to customers, putting the onus on them to deliver “good outcomes”.
That means acting in good faith towards customers, making sure that any foreseeable harm is avoided, providing clear and understandable communications, as well as customer support that you can access easily.
In a nutshell, firms have to treat us properly ‒ and prove it ‒ communicate openly and ensure that we can get support when needed.
'But we already treat customers fairly'?
Does Consumer Duty represent much of a change from the way financial firms already operate?
That’s a matter of debate among those running these businesses.
There are some I’ve spoken to who believe that Consumer Duty represents a real change to the way they operate, with a greater burden on them to justify the way they act and the decisions they make.
Others are a little less convinced, suggesting that the way they conduct themselves is already compliant and that these new regulations are little to worry about.
What has driven the implementation of these new rules is the belief ‒ held not only by us customers, but the regulators too ‒ that too often financial services businesses act in ways that are unethical, or at least not easily defensible.
That might be relying on unclear communication, knowing that customers then make decisions which are not in their own best interests.
Alternatively, they might not be sufficiently clear about the fees involved.
In the end, it’s the providers that benefit from this approach, while we are left paying the price.
So will the new regulations actually change anything?
How Consumer Duty could make a difference
One area where Consumer Duty already looks likely to make an impact is on the savings market.
Providers will have to justify how their products offer fair value to customers anyway, but the FCA is promising to keep a close eye on savings.
Those offering deals with the lowest rates will have to justify those deals by the end of August, or else the regulator says it will take action.
In effect, Consumer Duty ‒ if it is effective ‒ will make it much harder for providers to get away with offering poor value on their various products.
Another example lies in insurance claims.
Recent research from Which? found that three quarters of car insurance customers who had a claim rejected or only partially paid did not get an explanation from the insurer.
Given the Consumer Duty requires financial businesses to ensure they support “consumer understanding”, this seems a pretty clear failing.
What lies ahead?
Consumer Duty may well have an impact on what financial services look like.
The way that products are designed may be changed ‒ there have been some who argue that this should sound the death knell for products that are only appealing for a set period of time, like those credit cards with an initial 0% interest period.
Others suggest that the costs of meeting these higher expectations will feed through into the prices we pay for products and services.
Ultimately, we won’t know how effective the Consumer Duty is for some time, while it will also come down to just how proactive the FCA is in enforcing it.
If the regulator shows its teeth whenever financial businesses fail to meet the standards, then they will inevitably do some good.
However, we have seen that firms are unlikely to do the right thing for customers as a matter of course unless they are forced to do so.
Given that fact, if the regulator is somewhat passive, then providers will continue to push to see what they can get away with.