Implementation of the Consumer Duty for Brokers and Intermediaries in the Consumer Finance Sector

The introduction of the Consumer Duty is the biggest regulatory shift in financial services in recent years, with a very tight timescale for implementation set out in the FCA's policy statement of 28 July 2022 (PS 22/9).

We have scrutinised each of the FCA's consultations leading up to its final rules and engaged with clients on the key issues, advising them on their implementation plans and how to put plans in place. Drawing on this experience, we have set out in this article guidance on implementing the Consumer Duty for brokers and intermediaries in the consumer finance sector, including firms carrying on debt adjusting, debt counselling, debt collection and/or debt administration (“debt firms”).Firms should note that the FCA has been clear that there is no 'one size fits all' approach and that implementation plans should be tailored to each firm. Therefore, we recommend firms receive advice on their specific implementation plans and needs.

What is the consumer duty?

Understanding the structure of the Consumer Duty is crucial to then being able to implement it properly. The Consumer Duty has the following structure:

The Principle

The Consumer Duty amends the FCA's existing Principles for Business (PRIN) introducing a new Principle 12, the Consumer Principle, which is intended to set higher standards for firms than the existing Principles. This is shown at the top of the triangle. In particular, when Principal 12 applies, the existing Principle 6 (treating customers fairly) and Principle 7 (clear, fair and not misleading communications) are disapplied. Principle 12 is outcome-focused - so your implementation plan should be as well. The new Consumer Duty requires a more proactive approach.The FCA has provided some comfort that the Consumer Duty is not a duty of care, is not a fiduciary duty and does not require firms to provide advice where they would not otherwise do so.

The cross-cutting rules

Underpinning the new principle are three cross-cutting rules.

• Acting in good faith

The FCA has provided examples where a firm would not be acting in good faith. Brokers will particularly want to consider that their communication with customers takes into account the retail customers' interests and that the product is suitable for the target customer (e.g. in the context of mortgage lending, bridging finance may not be suitable for retail customers that need longer-term finance), ensure they are not exploiting retail customers' behavioural biases (e.g. some retail customers may have a bias towards taking out credit when it is more prominently displayed than other options) and ensure their processes also provide good outcomes for vulnerable customers.

Debt firms will particularly need to take into account behavioural biases and vulnerable customers, which will be particularly important when dealing with customers in financial difficulty.

• Avoid causing foreseeable harm

A firm must avoid causing foreseeable harm to retail customers, whether by act or omission, and whether in a firm's direct relationship with the retail customer or through its role in the distribution chain even where another firm in that chain also contributes to the harm.

This cross-cutting rule was amended from “avoiding foreseeable harm” to “avoid causing foreseeable harm” to underline that firms are not required prevent harm where a properly informed retail customer has made the decision to proceed. One of the FCA's regulatory principles is that customers are responsible for their own decisions.

Whether harm is foreseeable will depend on whether a prudent firm acting reasonably would be able to predict or expect the ultimately harmful result of the firm's act or omission. The Consumer Duty is “underpinned by the concept of reasonableness” so firms are only responsible for addressing the risk of harm that is reasonably foreseeable at the time (e.g. brokers may not be able to reasonably foresee the borrower falling into payment difficulties due to external factors post-sale). Where harm was not foreseeable at the outset of an arrangement but becomes apparent later, firms must take steps to take appropriate action at that stage to mitigate the risk of harm, whether actual or foreseeable (e.g. if a debt firm providing an ongoing service to a customer identifies a change in the customer's circumstances that means the previous advice may no longer be appropriate, the firm should update its advice to the customer, and where appropriate adapt their debt management plan).

• Enable and support retail customers to achieve their financial objectives

For brokers, the implementation of this cross-cutting rule will depend on the type of finance being offered and whether they provide an advised or non-advised service. Where consumer finance brokers provide a non-advised service, they can assume (unless they know or could reasonably be expected to know otherwise) that the financial objectives of retail customers are to purchase, use and enjoy the full benefits of the product in question.

The four outcomes

As set out above, the Consumer Duty focuses on outcomes. The four outcomes should therefore be central to firms' implementation at every stage.

Implementation timeline

Firms should focus on the implementation timeline to ensure implementation is feasible within the regulatory timescales.

Implementation for brokers and other parties in the customer journey

The Consumer Duty extends not only to the lenders that provide the finance products, but to “all firms in the distribution chain that can influence material aspects of the design, target market or performance of a retail financial services product or service, even where they did not have a direct relationship with the retail customer.” As with lenders, implementation should focus on the four outcomes identified above:

• Products and services

As distributors, brokers (which will include retailers that act as intermediaries to offer regulated credit products to their customers) will need to work with lenders to provide information about customers they already distribute to and provide other information to lenders that assists the lenders identify the target customer and its characteristics. Brokers should also map the customer journey from start to finish thinking about what outcomes there could be for customers and when they can occur during the customer journey. When mapping the customer journey, brokers should identify all other parties in its distribution chain.

Other parties in the distribution chain will also need to consider their role in the customer journey and outcomes. For example, debt firms will need to obtain information from the other parties in the distribution chain to ascertain what information the client has been provided with, which may impact on what steps the debt firm needs to take to ensure the debt process provides good outcomes.

• Price and value

The consumer finance sector has been the subject of numerous interventions by the FCA for specific products and the FCA has already highlighted a number of unfair business practices. We expect brokers to come under pressure in respect of the fees that they charge, and brokers should focus on demonstrating how these fees provide good value and are part of a good outcome for retail customers. Excessive broker fees were highlighted in the FCA 'Dear CEO' letter to mortgage intermediaries of 29 October 2020, so are likely to be an area of scrutiny.

For debt firms, even if the service has no financial cost, firms should still consider if their customers are incurring non-financial costs, and whether those costs are reasonable in relation to the benefits of the product. Where a product or service does not have any financial or non-financial cost to the consumer (e.g. debt advice funded through other sources), firms are not expected to do a value assessment.

• Consumer understanding

We have identified consumer understanding as the most important outcome for brokers. Providing the right information at the right time will be key. Brokers should review their communications across the whole sales process to ensure they are equipping consumers to make properly informed decisions at the right time and are not exploiting information asymmetries and behavioural biases.

Debt firms will also need to consider consumer understanding, particularly taking into account vulnerable customers who are in financial difficulty.

At Freeths, our Terms of Business have been given the Crystal Mark by the Plain English campaign, which is part of our work to test the clarity of our communications. Obtaining the Crystal Mark by the Plain English campaign could be a useful starting point to test communications. However, testing should be carried out on actual customer understanding. The FCA guidance states this should be to the same standard as any testing carried out on the impact of communications on sales (for example, if a broker tests whether their communications lead to an increase in customers contacting them, a similar level of testing should be carried out to check whether their communications also lead to good outcomes and understanding).

• Consumer support

All intermediaries should identify all channels of communication and support that customers might access and consider how each of these channels will meet the new standards. For instance, it may be proportionate for brokers, where sales are entirely online, to offer only online and telephone support to consumers. However, if the sales process does or can take place face-to-face, then it may be inappropriate to exclude face-to-face communication as an option for future communications.

Brokers should also identify any 'friction points' that could benefit the firm to the detriment of the consumer (e.g. a long telephone hold time or other actions that discourage a customer from making a complaint) but also consider where friction may need to be built into the process to benefit the consumer.

Debt firms should particularly consider vulnerable customers in financial difficulty when giving customer support to assist the customer to make good decisions in respect of outstanding debts without facing undue pressure.

• Testing and training

All firms will need to have a good knowledge of the whole customer journey so they can assess whether they are providing good outcomes in the context of the whole customer experience. This will require firms to understand the role of and to collaborate with other firms and third parties that have an impact on the customer journey. The first thing to do is to review what sources of data are available in order to monitor and test consumer outcomes and whether a firm is complying with the Consumer Duty. Once these sources of data have been collected, firms can decide how they will monitor management information. As information is likely required from the other parties in the distribution chain, data sharing arrangements should be reviewed and updated.

We expect brokers and debt firms may have carried out testing and monitoring when the FCA introduced its guidance on the treatment of vulnerable customers, which will have focussed on the treatment of vulnerable customers at key points in the customer journey. Firms should consider what other key regulatory issues they could test against and leverage any testing they have already carried out.

Depending on the role, we would not necessarily expect all other firms to carry out end-to-end outcome testing of the whole customer journey, but we would expect end-to-end testing of the customer journey whilst the firm is involved (e.g. for brokers, end-to-end testing of the whole sales process). The results of all testing and monitoring should be collected, and root cause analysis carried out to identify and mitigate any gaps in the customer journey.

All firms should set out in detail staff training on the Consumer Duty to ensure it is fully understood across the business and to ensure consumers and the delivery of good outcomes for consumers are at the heart of everything employees do.

Considering the cost-of-living crisis when implementing the duty

The FCA sent a 'Dear CEO' letter on 16 June 2022 to over 3,500 firms, including lenders, brokers and, interestingly, BNPL providers (interesting as, currently, these firms are not regulated by the FCA). Overlapping with the Consumer Duty, the focus of this letter was on fees and charges (i.e. price and value), communications and customer support. The cost-of-living crisis has intensified the focus on consumer outcomes, as more consumers may be in financial difficulty (becoming vulnerable customers) and it may be more difficult to achieve good outcomes for consumers. The FCA expects more demand for credit, but with borrowers potentially being in a weaker position in respect of affordability. Brokers therefore need to be robust at the point of providing credit, in particular in respect of affordability assessments. Debt firms need to be cognisant that the number of borrowers facing financial difficulty is likely to increase and will need to take into account potential future circumstances of the borrower as well as those that persist at the time of repayment.

Immediate steps for brokers and intermediaries

Firms should already be well under way with their implementation plans, which should be completed and ready for sharing with the FCA by 31 October 2022. The FCA has stated that it expects firms to make use of the whole implementation period and to be able to demonstrate the progress of this when asked. We recommend you take the following steps immediately, if you have not already done so:

• Undertake training to ensure all senior management are aware of the significance of the new Consumer Duty and their role and obligations in terms of ensuring compliance with the new standards.
• Engage early with other firms in your distribution chain.
• Complete your implementation plan.
• Ensure your implementation plan is supported by evidence (such as board papers and minutes) to show you have scrutinised and challenged the plan to ensure it is deliverable and sufficiently robust to meet the new standards.
• Take ownership of the implementation plan at a board level, ensuring each step is implemented on time and the plan is continually updated.
• Start thinking about the annual assessment of compliance with the Consumer Duty early.

How can our financial services team help?

Our team would be very happy to advise on and assist you with your next steps. Our Financial Services Regulation team can assist you with all aspects of preparing your implementation plan and putting this into practice in your business. We regularly advise on complying with regulatory obligations and implementing and adapting to regulatory change. Our Financial Services Regulation team has extensive experience in the consumer finance sector (some of our experience can be viewed here) and has experience assisting firms to prepare for the Consumer Duty. Our expert team is able to assist you with considering how the Consumer Duty regime will impact your firm and what changes and reviews will be needed so as to ensure that you can be confident in your ability to evidence immediate compliance once the new rules take effect. For further information, do not hesitate to contact Adam Edwards for a confidential, no-obligation discussion to review what support we can give you.