FCA Consumer Duty Announcement Adds Focus To Culture

The regulator is aiming for higher standards that will “require more judgement and less box-ticking”

The Financial Conduct Authority (FCA) has published plans for a new Consumer Duty, which would set a higher level of consumer protection in retail financial markets, including dealer finance. The FCA proposals reflect a concern that too many firms are failing to consider their customers’ needs adequately or prioritise good consumer outcomes as an objective for their business activities.

The regulator expects customer needs to be at the heart of every firm, indicated by products and services that are fit for purpose and represent fair value and a culture focused on the overall customer experience and journey.

It is not new messages and should already be evidenced strongly within general insurance activity following the implementation of the Insurance Distribution Directive in 2018. Now, it has been given a fresh impetus.

Why this matters now

Following their initial Consumer Duty announcement mid-May, FCA executives hosted a webinar on 10 June about their proposal. Some of the messages were stark. The FCA highlighted that it has seen too many business models that depend on consumers making poor choices with firms accused of ‘Information asymmetry,’ wherein firms may not be entirely transparent to the detriment of the consumer.

The FCA intends to address their concerns with higher standards that will “require more judgement and less boxticking.”

There is a pace and intent to the FCA’s approach right now and dealer finance must be alive to this trajectory. In addition to their Consumer Duty proposals, Buy Now Pay Later, retail credit and guarantor loans have been scrutinised recently.

The next ‘test’ for dealer finance starts in September when the regulator starts its supervisory work on motor finance, assessing the impact of their new rules and adherence with them.

Getting ready for the FCA’s supervisory work

The regulator’s planned supervisory work in September will cover:

• Looking closely at any attempt by a motor finance firm to introduce commission models that could lead to the same harm that they sought to ban.
• Monitoring how well firms are complying with the ban on discretionary commission models by carrying out supervisory work across a sample of firms. This will include looking at commission models firms are using as an alternative to discretionary commission arrangements and the ranges of interest rates and commission earnings.
• Undertaking point-of-sale mystery shop exercise measuring lenders’ control over dealer networks to assess whether firms have taken appropriate steps to ensure dealers/brokers comply with relevant regulatory requirements.

The rules being assessed are reasonably prescriptive, but it is crucial to emphasise the importance of the type of customer-led culture the FCA hopes to see. Success here will lie in aligning culture, conduct, and competence, working collaboratively with F&I providers to connect the entire distribution chain and customer journey.

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