Firms will be well-versed in applying judgement and proportionality, as well as evidencing their doing so.
For example, firms should be aware of the need to understand consumer behavioural biases, and how they can cause consumer harm.
They should be prepared to demonstrate that they are able to identify when consumer biases might cause harm, and that they are acting to mitigate it.
Regulators are particularly concerned about potential harms from the increasing number of digital consumer journeys.
The risks inherent in these will need to be properly considered by firms as part of their compliance with the consumer duty.
Much of the FCA’s recent work on ‘positive friction’ and other nudges will be relevant. Firms should also consider how they are using data, and how they can develop their use of it to ensure fair outcomes for consumers.
Of the cross-cutting rules, avoiding foreseeable harm may be the one that firms need the most help with – our experience shows that it is the one on which firms are weakest.
Naturally, people will focus on today rather than tomorrow, never mind a point in the distant future. It is important for firms to consider what they will put in place to ensure they are demonstrating businesses practices that root out and mitigate foreseeable harms.
As well as uplifting standards across the distribution chain, the consumer duty will require firms to improve their governance and control mechanisms.
This means that firms will need to apply a consumer duty lens across all of their governance and control arrangements.
What do financial advisers need to think about?
The consumer duty differentiates between expectations on manufacturers and distributors.
Some firms will do both, and many advisers will advise on third-party products. It is important to understand where your consumer responsibilities lie and which parts of the distribution chain, and therefore consumer duty, you are obligated to meet.
Where parts of the chain or your processes are outsourced, it is also imperative to have clear visibility over those activities and to gain assurance the outsource providers are also meeting their responsibilities.
Before distributing products, the duty requires that firms consider and understand their customer target demographic.
It is important that advisers do the pre-sale work to evidence that the products they offer meet the typical needs of the customers they are intending to service.
This may include a greater level of engagement with manufacturers to ensure an appropriate level of understanding of individual products and the manufacturer's intended demographic.
