Are you doing your duty? The FCA’s ‘Consumer Duty’ Explained

Whether it’s investing in an ESG portfolio and then finding out it’s dominated by banks, or inadvertently buying into devilishly complex investment vehicles, the annals of financial history are littered with examples of retail investors being misled, oversold or just plain bamboozled by the investment products put in front of them.

To mitigate instances like these, the FCA recently published a paper regarding its expectations of financial companies’ duty towards their clients. As the FCA explains on its website: “Our new Duty sets higher and clearer standards of consumer protections across financial services, and requires firms to put their customers’ needs first”.

At the heart of the guidance from the FCA is the expectation that financial companies do all they can to ensure their clients are properly briefed and understand the products they are buying. The ‘back story’ is that the FCA clearly recognises that this has not always been the case, and financial products have too often been mis-sold. The duty of care to clients, so important in financial services, has sometimes been weak.

Simpler, clearer communications

Financial firms have barely six months to make the necessary amendments to their published retail commentaries and the processes around them. But what exactly does this entail? It means producing commentary that communicates in an easily intelligible and effective manner, where complex terms are explained in plain language. The language must be clear and not in any way misleading. It needs to pass the ‘granny test’ – would your grandmother understand it if you explained it to her?

In sum, the FCA requires language that can be easily understood by the average retail customer and supports their needs, and that “facilitates informed consumer decisions”.

Stay layered, stay simple, stay relevant

In practical terms, the FCA says, service and product communications should be:

• Layered (key information is clearly shown with necessary links or cross-references)
• Engaging (well laid out and easily readable)
• Relevant (the information needs to be appropriate to the customer, with consideration about what the customer needs to know and the decision he or she needs to make)
• Simple (clear language should be used, jargon and technical terms avoided where possible, and explained where not)
• Well-timed (communication should be made in a timely manner)

Above all, the FCA wants to avoid the obfuscation that has evolved from an overload of information, and ensure that firms are considering how their clients may react to any commentary or communication sent to them.

More to consider

But as the FCA emphasises, it is not just about language. The FCA has listed the “four outcomes” that need attention for financial firms to effectively promote care and protection for their retail clients:

• Communications
• Products and Services
• Customer Service
• Price and Value

The focus, the FCA says, needs to be on the overall financial well-being of the retail investor, so any products being offered should be good value and appropriate to the customer.

Consumer Duty also means ensuring that the financial firm has considered the implications for the investor. It is not enough just to dangle the carrot: financial firms have to be mindful of the effect of the consumption of the carrot, and its impact on the client’s health. This will mean knowing the client better – their financial situation and their financial goals.

Under the new guidelines, much greater consideration should be given to the risks facing clients. Again, the back story here is likely that too much focus has gone on what a product or service does for financial firms’ bottom line, and less on what it can do for the client.

Focus on the customer

The focus needs to be more customer outcomes. What can the purchaser of the financial product reasonably expect to receive or gain from purchasing it? Additionally, the FCA mentions that financial firms must be careful to not exploit or reinforce any behavioural biases that customers may have. This suggests greater objectivity and (again) a focus on likely outcomes. Advice should also be timely, allowing clients to have the information needed to make decisions.

More care over language will reap benefits

From our point of view, what could be better than producing content that is simpler and more intelligible? We have long argued that financial commentary needs to be ‘de-jargonised’ and ‘de-mystified’ so it’s great to see that the FCA agrees.

Ultimately, Consumer Duty should be treated by the sector as an opportunity. If customers feel they are gaining from products and receiving good service, then trust builds and a potentially long-lasting relationship can be constructed to the benefit of all.