NAVIGATING THE MAZE
THE IMPORTANCE OF CREDIT AND THE CONSUMER DUTY

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Inflation is biting. Food, petrol and energy bills – the essentials for many are rising at rates not seen for a generation. Many households are struggling and will continue to have to make some difficult choices through these challenging times.

The demand for credit is therefore likely to rise, as is the support that existing borrowers are likely to require. As a result, the focus on the consumer credit sector from the FCA will be a key priority.

This was the key message from Brian Corr, Interim Director of Retail Lending at his recent speech at the Credit Summit 2022, where he emphasised the focus of the FCA on ensuring firms are delivering the right outcomes for consumers who use credit products and ensuring that borrowers get the right help and support from their providers when they get into financial difficulty.

As a result, the regulator is focusing on key outcomes and raising the bar through the implementation of the new Consumer Duty. As part of this article, we will look at the key read across to the sector for the Consumer Duty.

WHAT IS THE NEW CONSUMER DUTY?
The new duty is a package of measures that consists of a new principle, rules, and guidance. There are three key elements which underpin the proposed duty, which are as follows:

1. THE CONSUMER PRINCIPLE
This is designed to improve overall standards of behaviour and the current wording which is under consultation is as follows: ‘a firm must act in the best interests of retail clients’ or ‘a firm must act to deliver good outcomes for retail clients’.

2. EVIDENCING SPECIFIC BEHAVIOURS
The regulator wishes to see three key behaviours from firms:
a. taking all reasonable steps to avoid foreseeable harm to customers
b. taking all reasonable steps to enable customers to pursue their
financial objectives
c. and to act in good faith;

3. FOCUS ON FOUR OUTCOMES
The duty is expected to set more detailed expectations around four specific outcomes: communications, products and services, customer service and price and value.

In brief, under these proposals, firms will have a duty to make sure their customers are receiving fair value and fair products, that they understand how to use their products/services and receive the support they need to do so.

Firms will have to consider the needs of their customers (including those in vulnerable circumstance) and how they behave, at every stage of the product/service life cycle, extending their focus beyond ensuring narrow compliance with specific rules, to also focus on delivering good outcomes for customers.

Whilst some firms may already be meeting some or all of the expectations above, a key challenge for many firms ahead of any rules being finalised will be how to evidence the steps taken. The broad nature of the consumer principle alongside a requirement to evidence ‘outcomes’ will put further emphasis on the firm’s culture, governance, management information and recording keeping.

FCA EXPECTATION OF FIRMS
The FCA has consulted twice on the proposals and expects to have a policy statement and any new rules in place by the end of July. Expectation from the industry at this point is that there will be little deviation from the proposed rules, although we believe there is likely to be a small extension to the implementation timetable, giving firms twelve months rather than the nine months proposed currently (please don’t quote us on this, unless we’re right).

In his recent speech, Brian Corr encouraged firms not to wait for the final rules, suggesting that firms get a head-start now by making sure they have the right ‘mindset, culture and data in place’, and looking for gaps between where they are now and where firms will need to be.
The regulator states that the new rules will be backed up by assertive supervisory and enforcement action and that the Consumer Duty will be an integral part of their regulatory approach and mindset, from authorisation to supervision and enforcement.

WHAT ARE WE SEEING IN THE MARKET AND WHAT SHOULD FIRMS BE DOING?
Most firms have started raising awareness, socialisation and debate across the business and not just within Compliance. This is a critical part of the process and we’re encouraging firms to commence activity by initially taking a step back, engaging with senior managers and other relevant stakeholders to truly understand the purpose and intent behind the Consumer Duty. We have seen many firms change their initial thoughts, perceptions and views on the new Consumer Duty following broader engagement and understanding.

Thereafter, and this is where most firms are today, firms are starting to commence their gap analysis. We would encourage firms not to underestimate the task at hand here. Firms will need to assess the extent to which, and how, they are acting to deliver good outcomes both now, and in the future, across the four outcomes. This will include the need for the Senior Managers in firms to evidence these and the steps they have taken to meet the proposed requirements and cross-cutting rules.

WHAT IS THE STAGED APPROACH TO GETTING THIS RIGHT?
Firms should actively consider:

• Strategic reflection
• Socialise and get buy-in for the challenge and approach
• Undertaking a thorough gap analysis