Consumer Duty reforms to shake up retail banking in 2023

Firms are racing to ready for the FCA’s new Consumer Duty – a wide-ranging slab of regulation that is a catalyst for lasting change in financial services


FCA Financial Conduct Authority HQ in International Quarter London in Stratford East London

When the Financial Conduct Authority (FCA) confirmed in late 2021 that it would introduce the Consumer Duty, there was little pushback from firms. Perhaps this was because they thought it an inconsequential development that would have little impact on how they do business. Yet the new duty – proposed in 2017 by the Financial Services Consumer Panel – is among the most wide-ranging reforms the FCA has overseen. 

The core requirement for companies to “focus on supporting and empowering their customers to make good financial decisions” sounds simple and most firms will say they already do that. But drill deeper and the ambition of the change is evident. 

Joanne Owens is a consumer finance and retail financial services regulatory partner at Eversheds Sutherland. She says the consumer duty is a seismic change and “arguably the most significant shake-up of FCA regulation since the introduction of the Financial Services and Markets Act 2000”.

Principle 6 of the FCA’s Principles of Business obliges firms to pay “due regard to the interests of customers and treat them fairly”, while Principle 7 concerns “due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading”. The new duty replaces those principles with one that applies higher standards of conduct: “A firm must act to deliver good outcomes for retail customers.”

The duty lists four key outcomes: customers are equipped to make informed decisions; products and services are fit for purpose; service meets customer needs; and products and services represent fair value. “This is a sea change in how the FCA regulates, with companies having to prove on an ongoing basis that they are delivering good customer outcomes,” says Fairer Finance MD James Daley. “It could stimulate a race to the top on quality.”

But with the FCA expecting the new duty to be fully implemented by 30 April 2023, firms must move quickly. “No doubt the whole retail financial services sector is working hard on initial assessments and a gap analysis to understand where the current delta is between existing policies and procedures and the new higher standards,” Owens says. 

This is a sizable task, given the duty’s wide scope and application to new and existing products. The new rules make it clear that firms are not to continue with business models that rely on poor outcomes. This places certain product lines under threat; 0% no-fee credit cards, for example, rely on some customers not clearing their balance and paying higher interest rates as a result. Similarly, it will be harder to justify leaving mortgage customers on high standard variable rates.

This is an opportunity for businesses to shape and define their products and services

The extent to which customer choice might reduce in some product areas because of the reforms will partly depend on how firms judge whether they can still deliver value for money under the duty, says Neil Mitchell, head of customer risk at TSB Bank. “There is also a risk of a lack of consistency in approach as firms follow their business models in how they do that.”

Price increases might be necessary, to cover the costs of implementing the duty. The FCA estimated the one-off direct costs at up to £2.4bn and ongoing annual direct costs ranging from £74m to £176.2m. Firms might change how they value products, as prices must be proportionate to the overall benefit to the consumer. 

“This is not just about assessing financial cost, but other non-financial costs to the consumer, including the use of their data,” Owens explains. “This could have an impact on the length of distribution chains for some introduced products, particularly where a commission is charged.” The scale of the challenge means some businesses will see the consumer duty as a threat, although others will see the opportunity, Owens says.

“This is an opportunity (for businesses) to shape and define their products and services and to think about how they deliver the right outcomes for their existing and future customers.”

TSB Bank established a programme to comply with the new requirements in January 2022, Mitchell says. “We are assessing all business units in TSB on their current position against the consultation and draft rules – this is our discovery phase. Once the rules are finalised, we move into our delivery phase.”

Much of the initial work by firms focuses on communications. Providers often write their terms and conditions through the lens of compliance – if the FCA signs it off, it’s fine. But the duty will require them to ensure that customers can understand what they are being told.

“The customer understanding outcome means customers must understand communications and we know that people can’t make head or tail of the terms and conditions (T&Cs) documents or the letters they get from companies,” says Daley. 

“We’ve been helping companies rewrite letters and T&Cs for years but we’re seeing a spike in interest.” The challenge for banks is the tension between the customer understanding outcome and meeting existing consumer credit rules that require them to include prescribed statements in customer communications. 

The duty’s cross-cutting nature gives it the potential to be a catalyst for cultural change in banks and across the industry. It will likely change how customers are treated, what and how retail products are sold, and to whom they are sold.

The desired long-term outcome from a regulatory perspective is a more stable market that needs less intervention and fewer rule changes. 

“From a consumer perspective we won’t see a big change overnight, but over time it has the potential to improve standards and the quality of financial services,” says Daley.

With the final rules expected in July 2022 and firms expected to be fully compliant by April 2023, there’s no time for firms to waste.