One of the biggest shake-ups of financial regulation came into force almost a year ago to improve how providers such as mortgage lenders and investment firms treat customers, but many consumers are struggling to see any difference.
The Financial Conduct Authority (FCA) introduced “Consumer Duty” rules on 31 July 2023, placing a responsibility on firms to deliver fair value and good customer outcomes on products such as mortgages, current accounts, credit cards, investments and insurance.
But almost a year on, and just weeks before the scope of the rules are applied to a wider range of products, research suggests that customers are not seeing the benefits yet.
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A survey of 2,000 consumers by Moneybox found only a fifth said they have already noticed improvements in how they are treated by regulated firms.
However, when asked about improvements to customer outcomes, 13% said firms have failed to deliver good quality support and aftersales care, while 12% said firms have failed to offer communications that help make effective financial decisions.
Another 10% felt firms failed to offer suitable products and services that meet their needs.
So what do good outcomes and fair value mean for customers?
As the rules approach their first anniversary, we look at how financial companies have responded to the rules so far - has anything improved for customers? - as well as what further changes may lie ahead this year.
What is the Consumer Duty?
Under the Consumer Duty rules, banks, building societies, insurers, investment firms and financial advisers have all been warned they must improve and track how they communicate with and treat customers.
Any that ignore the rules and risk harming consumers will face swift action from the regulator, such as interventions or disciplinary sanctions.
It currently applies to newly-sold products but will cover all existing customers from 31 July 2024.
The Consumer Duty exists alongside other FCA rules and principles aimed at reducing consumer harm, as well as rules derived from general laws, such as consumer protection legislation.
The main rules apply to existing products and services, meaning those on sale to new customers, or available for renewal by existing customers. It does not have a retrospective effect and does not affect legacy products.
The Consumer Duty applies to regulated firms that provide services to retail customers, such as investment firms marketing funds to retail clients, plus banks, building societies and insurers that serve consumers.
The FCA said it wants to see evidence of good outcomes for financial services customers when it comes to products and services, price and value, consumer understanding and consumer support.
The regulator expects each firm to produce a report “at least annually” assessing whether it is acting to deliver good outcomes for its customers.
It also requires firms to evidence that they are offering fair value to customers, and expects them to appoint someone as a Consumer Duty Champion, to drive through the culture change within their business.
What do “good outcomes for customers” mean?
The Consumer Duty is slightly vague in that it doesn’t dictate how financial products should be sold or, say, impose a cap on fees.
The FCA has made it clear that the rules are not a tick-box exercise; instead, it’s a holistic approach that revolves around companies giving customers value for money and making it easier for them to buy the right products - and cancel them or complain if they’re unhappy.
Good outcomes for customers could mean making it easier to cancel or switch investments, telling customers if a better mortgage rate is available, scrapping onerous fees, and having clearer terms and conditions.
For example, if someone suffered a family bereavement and needed money from their bank account, the bank may be expected to waive exit fees. Meanwhile, a customer with a life insurance policy who subsequently has a life expectancy of less than 12 months may find it difficult to navigate the claims process when they are clearly vulnerable, so their provider would be expected to help them to avoid “foreseeable harm”.
Jenny Davidson, commercial proposition director at the wealth manager Quilter, says firms must do more to help people navigate financial choices.
“Vulnerability can be a deeply personal issue,” she says. “Customers are unlikely to shout about it or may be unwilling to discuss it, so a crucial challenge for all companies is to identify customers on this spectrum of risk.”
Have any firms made changes as a result of the Consumer Duty?
James Daley, managing director of consumer group and ratings provider Fairer Finance, calls the Consumer Duty a "significant raising of the bar in terms of financial services conduct".
He said that while it started slowly last summer, there is growing evidence of its impact across all financial services sectors.
Fairer Finance has spotted the following "positive Consumer Duty examples" in recent months:
- First Direct and Santander have axed their charges for using debit cards overseas to improve their case that they offer fair value
- St James’s Place has removed its exit fees
- Average maximum APRs for credit-builder credit cards have fallen from 44.7% to 41.3%
- Virgin Money has added a new line into its savings terms and conditions committing to letting customers know at least once a year if there are accounts where they could get a better interest rate
- Lloyds Bank has removed its fee for customers who order duplicate statements
- Many investment platforms have increased the interest rates for those who have cash balances in their accounts
- A number of firms have invested in SMS text messaging systems so they can provide more timely updates to customers at key moments like product renewal, or deal end
- Many banks and insurers have begun to better disclose the downsides and risks of their products
- Monzo and Animal Friends have launched audio versions of their terms and conditions
Daley says: “The most noticeable changes are in response to the fair value and customer understanding elements of the Duty. Firms have been forced to look at their pricing and ask whether they can justify their rates, fees and charges – and in many cases, the answer has been no."
He added that not all firms have responded to the rules, "gambling that Consumer Duty is a flash in the pan that won’t amount to much". He commented: "This is a risky strategy as the FCA has already shown that it intends to deep-dive into how firms are doing on a sector-by-sector basis – following up with Dear CEO letters where it finds shortcomings. It will be a brave CEO who shrugs their shoulders and ignores these prompts.”
Has the Consumer Duty worked a year on?
The FCA has been monitoring how regulated firms comply with the Consumer Duty since it was introduced at the end of July 2023.
A report issued by the regulator in February 2024 highlighted the progress made as well as areas that need to be improved.
For example, the FCA said it has seen firms improve customer communications and offer better interest on savings.
But it said it would like to see financial providers do better at justifying the value and service they provide in return for the fee charged.
In one example, the FCA said some investment providers are failing to consider the amounts customers invest and the value they receive for the risks they are taking.
The regulator also highlighted that some customers may be charged for services they aren't using such as annual reviews from financial adviser.
The FCA showed how seriously it is taking the rules in May 2024 when it fined HSBC £6.2 million over how it treated customers in financial difficulty.
What other changes could we see in 2024?
Areas that Fairer Finance predicts will be a focus in 2024 include credit cards and the cost of paying for insurance in instalments.
According to Daley, credit card business models rely on bad customer outcomes for their profitability – and it won’t be long before the regulator weighs in. "Credit cards do far too many things, are far too complex, and are far too expensive," he noted.
The high cost of paying for insurance in instalments (particularly in the car insurance market) could also come under the spotlight. This is often seen as a tax on the poor – especially as many other insurance sectors, like pet and travel, don’t charge to pay in instalments. Motor insurers could find they are banned from forcing customers to pay their annual premium upfront - and banned from charging a fee or interest to pay in instalments.
Meanwhile, terms and conditions will get clearer and easier to understand, predicts Daley. "Across 2024, we will start to see new, clearer documents published. Not everyone is stepping up to get to grips with this work – but the pressure will start to rise on the laggards as they spot their competitors upping their game."
Philip Deeks, a director at the consultancy KPMG, says having easier-to-understand communications can only be a good thing, as it will “better equip consumers to make effective decisions about financial products and services”. He adds: “A better-informed customer making better-informed choices is a very positive step in building confidence in this sector.”
A spokesperson at the trade body UK Finance agrees, saying the Consumer Duty should mean we see “clearer explanations of products and services, communications that are easier to understand, and continued improvements in customer support”.
The FCA expects that consumers should be able to buy and engage with financial products without facing unreasonable barriers. For example, firms should make it as easy for customers to leave as it was to join. So, requiring a customer to physically go into a branch to cancel their contract could be a breach of the rules.
According to Deeks, punitive penalty charges will be replaced with costs more reflective of the work required to action a customer request. This could mean a large exit fee to switch to another product breaks the rules.
Deeks adds: “So-called ‘sludge practices’ will be targeted by firms - essentially anything that uses behavioural economics (intentionally or otherwise) to place unreasonable barriers in a customer’s way. Customers will experience slicker processes and more timely responses when they need to contact the firm about making a withdrawal, making a claim, or cancelling a product.”
The risk of being mis-sold could drastically reduce this year, thanks to the Consumer Duty. Deeks explains: “Firms will be required to evidence how the product is designed to meet the needs of consumers, and sold to only those whose needs they meet. With firms being clearer about who the product is (and isn’t) designed for, it helps minimise the risk that customers mis-buy a product.”
Regulated firms will need to apply the rules to their legacy and closed books from the end of July 2024. That means it will apply to all products.
The FCA has already written to firms to detail what it expects, including how they treat disengaged and vulnerable customers.
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