I was talking to some mortgage advisers recently and found myself enlightening them on the New Consumer Duty rules, so this prompted me to share this article.
What is the Consumer Duty?
The Consumer Duty is a new over-arching consumer principle requiring financial services firms ‘to deliver good outcomes for retail clients’. It is backed by three ‘cross cutting rules’ and four ‘outcomes’.
By July 31st 2023 companies must be ready to demonstrate adherence for open products and services. They then have until 31 July 2024 to do this for closed products and services.
What is the goal for Consumer Duty?
The main goal of the Consumer Duty is to drive higher standards of care characterised by good-faith actions and empathy for the consumer. If an organisation does not live by the mantra of putting customers first, then the impact of ‘The Consumer Duty’ will be particularly challenging.
Ensuring the interests of clients are championed throughout your organisation is now more important than ever before.
The three cross cutting rules create their own challenges and opportunities:
Firms must take all reasonable steps to:
• avoid causing foreseeable harm to customers
• enable customers to pursue their financial objectives
• act in good faith towards customers.
How does Consumer Duty impact?
The Consumer Duty impact requires businesses to examine very carefully these four outcomes of the relationship they have with their customers:
1.Products and services
2.Price and value
3.Consumer understanding
4.Consumer support
For each, they will need to review against the cross –cutting rules. Let’s consider some examples for each:
Products and services
Foreseable harm – a firm grants an equity release plan without checking the client has Lasting Powers of Attorney in place. Harm would occur if they lost capacity, which would mean future draw downs would be frozen.
Pursue objectives – in the above example, a client would be unable to fulfil their financial objectives if the money they relied on was unable to be accessed.
Acting in good faith – the equity release lender should ensure they ask the client if they have LPAs and if they haven’t, then provide the access to setting them up. They would fail if they merely pointed out the need for LPAs without facilitating their completion. Its arguable then that the adviser and the product provider should have the means to make this happen and follow up the process to ensure its been completed.
Price and value
Foreseable harm – lets take the example where the charges on a mortgage product are prohibitive for over payment above a certain level and its known that a client wishes to pay off larger sums over the coming years. If they bought the product and incurred the penalties then it might cost them dearly.
Pursue objectives – in the above example, a client might be put off making early repayments meaning they would pay more interest over the longer term and their plan to be mortgage free by retirement may not happen
Acting in good faith – the mortgage lender should ensure they fully understand the client’s future intentions and provide clear, fairly priced product alternatives to enable the client to achieve their objectives. This might include worked examples to show the impact of larger over payments as a total cost of borrowing calculation.
Consumer understanding
The ability to avoid foreseeable harm not only arises from product and service design and pricing, but also the way propositions are communicated.
You might argue providers and advisers will need to go much further than ever before in their duty to ensure consumers fully understand the nature of the products they are about to purchase. Our experience here emanates form the work we did to live test consumer understanding at the point of purchase of a straight forward life product. Over a continuous 6 year period we tested understanding, rationale and perception of the type of service people were receiving. Just over 25% of all consumers failed on one of these criteria in relation to the product they were about to buy. Because our process halted the purchase until misunderstandings were clarified, we were able to avoid foreseeable harm which might have arisen from buying the wrong product, improve understanding which inevitably increased the likelihood they would achieve their objectives. You might like to read our recent article which looks deeper into this research.
Consumer support
An obvious area here is customer service and the need for it to be more proactive based on the data held by the provider. A good example was my recent experience of a mortgage application. The lender was transferring the customer at the end of their fixed rate deal onto a new deal. The customer was also looking at moving after the end of the old deal period. The lender stated that they would go onto the standard variable rate until the customer completed on the new property and they would also need to contact the lender if a better product came out compared to the new deal they were going onto. Under consumer Duty, acting in good faith, its arguable that the lender should automatically put them onto the new deal at the end of the old deal and then port this to the new property on completion. In addition, the lender should take responsibility for communicating if a better product comes out, rather than wait for the customer to keep checking. These actions would avoid the customer paying higher amounts and the reduce the cost impact of the overall deal.
