How the UK Consumer Duty could impact Australian financial services providers

The UK Financial Conduct Authority (FCA) is on course to materially increase consumer protections for retail customers, with the publication of updated proposals for its new Consumer Duty. Submissions on this second round consultation have now closed, and it is expected that new rules will be confirmed by the end of July 2022.

For financial services firms engaging in regulated activities in the UK, this new regime introduces an obligation to ‘act to deliver good customer outcomes’. This will likely require a fundamental shift in impacted firms’ strategies and business models, and a significant evolution in many organisations’ approach to product design, consumer interactions and ongoing testing and oversight capabilities. The FCA has estimated that implementation costs may reach up to GBP2.4 billion across supervised entities.

We expect that the FCA’s approach will influence other conduct and consumer protection regulators globally, including ASIC in Australia. Organisations should consider this likely regulatory trend and how it may impact their services and obligations within the jurisdictions in which they operate.

What does the proposed Consumer Duty involve?

The Consumer Principle establishes the overall standard of conduct for organisations. The Cross-cutting Rules then set out the ‘how’ – the key behaviours required by the Consumer Duty, to achieve the Four Outcomes which represent the key elements of the customer journey.

Past thematic reviews and other FCA guidance give important insight on practices likely to come under the microscope for failing to achieve the Four Outcomes:

• Customers paying high prices where parties in the distribution chain receive remuneration which appears to significantly exceed the costs incurred in distributing the products.
• Customer service processes that make it difficult for customers to stop auto-renewal of products.
• Encouraging credit products as a tool for long-term borrowing.
• Using a mix of different charging structures which make it difficult for consumers to understand and compare product costs.
• Processes which add friction (such as delays in receiving information) to the customer journey.

A higher standard of care for consumers

While the FCA has repeatedly stated an expectation that organisations should put customers at the heart of their business, this has not driven consistently good outcomes in the UK market. As a result, the Consumer Duty is shifting the focus so that organisations must proactively ensure that consumers get products and services which are fit for purpose, provide fair value and which they understand how to use and are supported throughout the lifecycle, however long that might be.

The onus will now be on organisations to understand their customers’ needs – and how they behave – to design and deliver products. This process should be underpinned by rigorous and ongoing monitoring of outcomes, with a strong feedback loop so that any issues are quickly addressed. This requires organisations to be thoughtful about every element of the customer journey and using understanding of behavioural norms and cognitive biases to remove any friction or barriers to customers getting the full benefit of products – including removing ‘sludge practices’.

The FCA has set out ambitious rules and guidance to drive this change, including a requirement for an assessment of fair value for every product sold – this is not just about price, but also the broader benefits and usability for the target market. Implementing these changes will require a fundamental shift in data, reporting and outcome testing – not to mention culture and mindset. Organisations that cannot evidence that they are actively delivering good outcomes for customers will find themselves under significant regulatory scrutiny, from the Board downwards.

A wide scope across retail and wholesale

The proposed Consumer Duty will apply for existing and prospective ‘retail clients’, although the precise scope of application varies depending on the activity. Interestingly, it is wide enough to capture many SMEs and high net worth individuals which could be excluded from the definition of ‘retail’ in many cases under Australian law.

The Consumer Duty is intended to apply across the retail distribution chain, from origination through to post-sale servicing, capturing all organisations that could have an impact on retail customer outcomes. This could include organisations that operate in the wholesale market if they could materially influence the design, operation or distribution of retail products. For example, an investment bank that designs a structured product for sale to retail customers, despite having no direct relationship with the end consumer, may be captured. Close attention will also need to be paid to outsourcing arrangements to ensure that agreements with third-party service providers adequately reflect the behaviours and standards set by the Cross-cutting Rules.

As a financial services firm outside of the UK, what should you be thinking about?

Financial services firms outside of the UK should consider the potential impact on their own services and operations, should key provisions of the proposed Consumer Duty be adopted and implemented within their domestic jurisdictions. In particular, measures around product design and performance, monitoring and compliance, executive accountability and fair treatment of vulnerable customers should be carefully addressed.

_{A&O Consulting is a global practice with deep expertise in helping entities respond to regulatory change and embed robust risk management and compliance solutions. Our global team includes former regulators and financial services industry experts located in Australia, the UK and the US. We are an accredited s166 provider for the FCA and the PRA in the UK and have experience acting as independent expert for Australian regulators in enforcement action and remediation.}