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Raising the bar: New Consumer Duty rules come into force
There are very few people working within the UK financial services industry who would not have been aware that 31st July 2023 was a significant milestone.
This was the day the long-awaited Consumer Duty rules came into force, aiming to “set a higher standard of consumer protection in financial services”, according to industry regulator the Financial Conduct Authority (FCA). Commentators have variously described the introduction of the Duty as “a true step change”, the advent of “a brave new world”, and the biggest regulatory shake-up in a decade.
And yet the audience set to benefit from this shift most – consumers of financial services products – can be forgiven if the 31st July milestone passed them by. Research has shown that just a third (33%) of clients receiving financial advice were aware of the rules ahead of their implementation.
Awareness and understanding will undoubtedly grow as the Consumer Duty becomes more embedded, but to summarise the core premise, the rules demand that firms are honest in their dealings with customers, helping them avoid harm and supporting them in pursuing their financial goals.
For consumers, this objective will manifest itself in three key ways: getting the support you need, when you need it; receiving communications you understand; and accessing products and services that meet your needs and offer fair value. A complete list of the promises that financial services providers must adhere to under the Consumer Duty rules is available on the FCA website.
Already making impact
For financial services companies, the introduction of the Consumer Duty has necessitated a great deal of behind the scenes planning and administration to ensure compliance at the point of launch. This work will continue as the rules only currently apply to new and existing products and services, with legacy products being brought into scope from 31st July 2024.
Industry body UK Finance has highlighted how the impact of the Consumer Duty is already being felt by mortgage lenders. It cites the example of the recently introduced Mortgage Charter, which includes a provision for customers to opt to switch to interest-only payments for six months, with an automatic return to a capital and interest at the end of this period, without affordability checks. Here, Duty rules relating to consumer communications and understanding come into play for providers, says UK Finance.
For consumers, the impact of the change might be felt more indirectly, but there are early signs of its influence. On the same day that the rules came into force, the FCA also set out a 14-point action plan aimed at ensuring banks and building societies are passing on interest rate rises to savers “appropriately”. This follows questions over a perceived disconnect between the rates that savers have been able to secure in the wake of consecutive hikes in the base rate by the Bank of England.
While the plan was not prompted by the Consumer Duty, the FCA has made it clear that the Duty provides the justification for enforcement, with firms required to prove they are offering customers “fair value” and being challenged to step up communications with customers about their options.
Securing better outcomes
The rules are also designed to make it easier for customers to engage with financial providers. This comes in light of the FCA’s Financial Lives report, which revealed that 7.4 million people unsuccessfully attempted to contact one or more financial services providers during the 12 months to May 2022, a situation which it says can be particularly difficult for vulnerable members of the population.
Building confidence is a key part of the Consumer Duty’s overall ambition, something it aims to achieve by securing “better outcomes” for consumers. While this is a broad term, one study suggests that certain outcomes are prioritised by more consumers than others, with clear explanation of fees and charges at the top of the list (44%), followed by checks and balances to avoid fraud (34%), and ease of contact (27%).
A separate study points to the fact that, while the vast majority of people working with a financial adviser are happy with the service they receive, they are less certain about what exactly constitutes a good outcome, underlining the importance of raising awareness in this area.
Ultimately, it will be down to financial services providers to step up to challenges such as these as they meet the demands of the new standards, and it will be down to the FCA to judge compliance. Whether or not we are truly entering a “brave new world”, only time will tell.
The information contained within this communication does not constitute financial advice and is provided for general information purposes only. No warranty, whether express or implied is given in relation to such information. Vintage Wealth Management or any of its associated representatives shall not be liable for any technical, editorial, typographical or other errors or omissions within the content of this communication.
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