Kevin Paterson, managing director at Enduralife, examines how the incoming Consumer Duty from the FCA will work in action, considering elements including the governance of protection products, price and value, and consumer support.
It's hard to believe that the Treating Customers Fairly (TCF) regime was launched by the Financial Services Authority almost 16 years ago. At the time it was viewed not only as revolutionary and, in some quarters, stating the obvious, but also as Armageddon by many in the industry, with the tables tipping significantly in favour of the ‘Nanny State' and absolving consumers of any responsibility - whilst putting the onus squarely on the shoulders of the adviser.
Like all significant change introduced by the regulator, the TCF regime is now an integral part of the entire financial services food chain, and most cannot imagine it not being present in any customer-orientated conversation today.
So, it has been surprising that the FCA now wants to ramp this up with the introduction of a new Consumer Duty, described by some as "TCF on Steroids".
The new proposed Consumer Duty will be underpinned by a new consumer principle and may replace two existing principles, namely principle 6 - Customer interests and principle 7- communication with clients.
The proposal is that this new principle will set out four consumer outcomes on what the FCA expects firms to do when dealing with retail customers. At this stage, the proposals are open for consultation (CP21/13), however having gone through one round of consultation it is unlikely that these will change much, except provide further clarity around what the FCA expects firms to do in order to comply.
Like all new principles and guidance there is a broad interpretation by every firm affected, but here are a few simple examples that I can think of based on the four outcomes.
- Governance of products and services
In insurance we have seen a bit of a mission creep in areas such as oversight, where things like delegated authority or secondary distribution are in place with manufacturers, with the insurer taking a much closer look at the way the distributor sells their product requiring much more information in the process, so that they are able to demonstrate their duty of care throughout the distribution chain of their product.
- Price and value
In other words, is the product or service offered providing good value for the consumer? A poor example might be a product add-on that can be brought for a couple of pounds wholesale by the distributor but sold on to the customer at a greatly inflated price, with little or no likelihood of a claim because of the way the add-on is rolled up into the main product.
- Consumer understanding
This will require firms to ensure that at every point in the journey the consumer has a clear and unambiguous understanding of the options and services open to them to enable them to make effective, timely and properly informed decisions. A poor example here might be overly complex or confusing paperwork.
- Consumer support
Making firms much more accountable and responsible in providing the appropriate level of support to consumers so that they can use the products as they would reasonably be expected to do and not face barriers to doing so. An example here might be making it difficult for a consumer to cancel a policy or even contact a firm in the way that they wish.
We have already seen many examples of how this has impacted on the industry in different areas in the last few years, such as displaying the previous year's premium on renewal documents or stopping firms from offering a better price for new business than it does for a renewing customer (price-walking). These are a couple of examples of where the FCA focus on avoiding consumer harm has had an impact.
So, what are the likely impacts if taken to their logical conclusions? Well, if, as a firm, you do not offer products or services that the consumer would reasonably expect you - protection-based products for mortgage brokers as an example - then the firm would be expected to either do so or signpost where this would be available to the consumer in an appropriate and timely manner.
The FCA doesn't like ‘dabblers' so a firm will either have to do it properly or not at all which could be a matter of enforcement, ultimately. Equally, I can't really see how standalone execution-only businesses can survive without diversifying their distribution base to ensure the right processes are in place to create the right consumer outcomes; nor so-called ‘fat' products where distributors can obtain inflated commissions by selling higher premiums.
These are just some of the areas that immediately spring to mind, but this is a juggernaut that will have as many far-reaching implications as TCF did 16 years ago, so we all need to get our heads around it now.
Kevin Paterson is managing direcor at Enduralife