FCA: What is the new consumer duty and what does it mean for financial firms’ customers?

New rules from the financial watchdog puts pressure on banks to pass on interest rate rises to savers

A new consumer duty has come into force on Monday, setting a higher bar for financial firms and giving customers more certainty that the product they are taking out does exactly “what it says on the tin”. Overseen by the Financial Conduct Authority (FCA), it sets higher and clearer standards of consumer protection across financial services, requiring firms to put customers’ needs at the heart of what they do. The impacts of the new duty will be far-reaching, weaving through the design of financial products through to the way firms treat their customers.

"The rules are designed so banks, building societies, insurers - financial firms across the board - put the customer right at the heart of what they do. Too often, in the FCA's view, that is not happening," ITV News' Business Editor Joel Hills explains.

It is hoped the duty will usher in fairer and more transparent pricing, better customer service, and lead to fewer complaints.

The duty could also potentially help prevent people from being sold unnecessary “add-ons” to financial products, stopping them from wasting money. Firms should also be able to explain and justify their pricing decisions.

It comes as households and businesses are seeing their disposable incomes squeezed due to high interest rates and high inflation, making debt far more expensive to repay.

The Bank of England base rate currently stands at 5% and it is expected to potentially rise again on Thursday. Credit: AP

Under the duty, the FCA expects firms to have a strategy to keep savers informed of available rates across their products and how they may benefit from switching to an alternative.

"[The FCA] warned banks they were too slow to pass on the benefits of higher interest rate rises in the form of better savings rates to their customers," Hills said.

Savings providers can let their customers know of the best rates available for them, even where they have opted out of direct marketing.

A 14-point action plan released today by the FCA will require firms offering the lowest rates to provide “fair value” assessments under the consumer duty by August 31, 2023.

It will take “robust action” by the end of 2023 against those who cannot demonstrate fair value.

The FCA also indicated it is worried about the number of households that are borrowing to pay for the bare essentials month-to-month - too often, they are given loans that are unaffordable, Hills explains.

"Many of the people who are worried about their financial health are renters, or are young people, or single-parent families, there's connections with ethnicity and worrying about your financial health. So it's really important that we see financial services in the round," FCA Executive Director Sheldon Mills told ITV News.

Customer service should be clear and responsive, under the new rules Credit: Unsplash

Firms will have to provide helpful and responsive customer service under the duty and be timely and straightforward in how they communicate.

Processes for complaining, switching and cancelling products should also be straightforward.

Nisha Arora, director of cross-cutting policy and strategy at the FCA said: “What we want (firms) to do is make it as easy to switch, complain, move product or service, as it was to come in, and not have to go through all those hoops and hurdles to make things happen.”

Vulnerable customers are also at the heart of the duty. This could mean, for example, firms needing to make sure there is effective access for those who do not go online regularly.

Over time, it is hoped the duty will improve trust and confidence in financial services.

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Rocio Concha, Which? director of policy and advocacy, said: “Whether you have a bank account, insurance policy, mortgage, credit card or want to take out a loan, the consumer duty is clear that firms should ensure that the product and service meets customers’ needs, offers fair value and that customers have enough information to make an informed choice and are supported throughout. “The duty should have wide-ranging consequences. In practice, it should mean that the terms and conditions of insurance policies are easy to understand, that banks alert customers of better savings rates, and that lenders proactively help any mortgage customers in financial difficulty with tailored support. “Which? expects the regulator to take tough enforcement action should firms fall below the required standards.”