Consumer duty: the biggest shake-up of financial services in two decades comes into force today 

One of the biggest changes in financial regulation for over two decades comes into force today. New rules – known as the Consumer Duty – mean that all financial services firms now need to work to deliver good outcomes for their retail customers. Not only that, but they need to prove they are doing so – and attest at board level that they are meeting these new requirements at least once a year. 

Importantly, retail customers are not just the likes of you and me – the Consumer Duty also applies to small and medium sized business customers. 

Underpinning the overarching Consumer Principle – that firms need to work to deliver good customer outcomes – there’s lots more detail – including a requirement that firms work to prevent foreseeable harm and act in good faith. They also need to prove that their communications are understood by their customers, and prove that their products offer fair value.

For many firms, these new requirements will necessitate an internal cultural revolution. For the last few decades, many financial services firms have built their business models around taking advantage of customer inertia or ignorance. Shareholder interests have ended up in direct competition with good customer outcomes – with firms often choosing to prioritise the pursuit of short-term gain, over the longer-term game of building customer loyalty.

Better advice and information about complex financial products

This tension has been all the more acute over the last couple of decades as the internet has left more people buying complex financial products directly – and without advice. As a result, it’s all the more common for customers to not understand the limitations and irregularities of what they’re buying – usually to the benefit of shareholders.

The credit card market is one of the best examples here. There are so many oddities to these products – and much of the profit is made from consumers using them incorrectly or over-extending themselves. Zero percent balance transfer credit cards, for example, generate much of their profit from customers not paying off their balance by the end of the offer period, and then lapsing into high interest rates of 20-25%+. This is a market where the wealthier, savvier switchers are subsidised by the poorer, less financially capable. It’s hard to see how firms will prove they are working to deliver good outcomes for all their customers in markets like this.

In some cases, unfair charges or differential pricing practices will simply have to be scrapped to meet the requirements of Consumer Duty. In most cases, however, it’s likely that what we will see is much more transparency. Firms will have to work harder to explain the things that they know consumers don’t understand. 

What does this mean for you?

As a customer, the Consumer Duty should make it easier to hold companies to account for poor practice. If you feel a charge is unfair, or you end up paying over the odds for a service – make sure you reference the Consumer Duty in your complaint. Did the company do everything it could to help you understand how its products worked? Were the terms and conditions written in a language you could understand? Did it communicate with you in the right way, and at the right time?

The Consumer Duty also requires firms to prove they have the right level of support for customers. So if you’re left waiting on the phone for hours, or you’re unable to close an account or transact through your app – these could all be reasonable grounds for complaint. Of course firms won’t always be perfect, and the Consumer Duty doesn’t require them to be. But if they are struggling with call centre volumes, the Duty might expect them to have strategies in place to triage calls so they can deal with the most important ones first – and to communicate with their customers about the delays while they address the issue.

If firms brush off your complaints, make sure you escalate them to the Financial Ombudsman Service, who will also be taking Consumer Duty into consideration when they make their decisions on whether firms have acted ‘fairly and reasonably’.

No private right of action

For now, there is no private right of action for consumers. That’s to say that you can’t use the Consumer Duty to prosecute individual cases against firms in the courts. However, the FCA has not ruled out introducing this power for consumers in the future.

Nevertheless, the Consumer Duty does raise the bar significantly in terms of what we can expect from financial services firms – and gives the regulator a ratchet to drive up standards. It shifts the burden of responsibility onto firms to ensure they’re supporting their customers, rather than taking advantage of their biases, inertia or ignorance. It should be the catalyst for significant change. Let’s hope it is.

James Daley is a consumer campaigner, financial journalist and founder of Fairer Finance. Fairer Finance provides research and ratings to help people choose better financial products and services. It also campaigns for a fairer financial services market. James won the Blogger of the Year at this year’s Headline Money Awards.