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Senior officials at the UK financial watchdog have defended the controversial new policy as a way to improve competition and support cost of living pressures during an implementation webinar.

Although Consumer Duty implementation will be challenging, it is necessary considering the cost of living crisis and customer vulnerabilities, officials from the UK’s Financial Conduct Authority (FCA) said during a webinar, taking place a day after market players needed to have put their implementation plans in place.

The webinar, organised by the regulator, focused specifically on banks, payment and electronic money (e-money) firms, and how they will need to comply with the new rules, which has an aim of ensuring that customers are always put first.

The Consumer Duty is key to ensuring that everyone who relies on payments and e-money products and services gets the outcomes that are intended, said Paul Roe, head of department for market interventions at the FCA.

We recognise that the payments and e-money sector is diverse, he said. “There are maybe at least 13 different business models, there isn’t a one size fits all approach to how you run your businesses.”

Firms need to embed the Consumer Duty with particular reference to products and services offered, he said, also referencing distribution channels and target customer base.

Meanwhile, Roe confirmed that the FCA will be issuing a "Dear CEO" letter specifically targeting payments and e-money firms in “the next few months”.

For its part, representatives from the payments and e-money industry have been less than pleased with their inclusion in the FCA’s Consumer Duty.

Previously, the Payments Association told VIXIO that it is “very concerned” and believes these new rules could end up preventing consumers from getting good products due to the added cost of compliance burden.

Effective examples

In his presentation, Roe justified inclusion with examples.

“Payments and e-money firms may well be safeguarding customer monies and have a particular duty to their customers in that regard,” he said.

There is not a tension between doing the right thing for customers, having a reputation for doing the right thing for customers and having a strong, reliable, competitive business, he said.

“It is particularly important in this sector as it is a fast growing and innovative sector. We welcome innovation but there is a risk of harm to consumers when products are poorly designed and delivered in a sub-optimal manner.”

Effective implementation of the Consumer Duty will help get that right, he said, noting that current circumstances make it important to do everything to enable customers to get effective financial outcomes.

“In this regard, we want you to be thinking proactively about how you can help customers who are struggling at the moment,” said Roe. “How can you increase capacity to engage with worried customers to enable them to take informed, effective actions that best look after their own financial interests?”

The clear expectation is that firms will ensure products and services are designed to meet the needs of consumers in their target market and that, on an ongoing basis, they are performing as expected, he said.

“We expect you to assess whether your products or services have features that may be potentially harmful to customers who develop characteristics of vulnerability, and if they do have such features, to consider what mitigating actions you can put in place?”

To monitor these issues, the FCA expects firms to use data and management information to ensure products and services meet the needs of customers, Roe said. “This includes regularly reviewing the data and taking any necessary mitigating actions on the back of it.”

Roe’s colleague, Ed Smith, used the hypothetical example of an e-money firm charging an inactivity fee for an account that has not been used for two years.

“The first question that the firm needs to ask itself is, does the product meet the needs of this customer? Is the customer incurring this fee for any reasons of friction in the customer journey, such as trying to switch or close the product? Does it understand the product? Does it understand the activity charge that it's incurring? Or is it simply the case that their customer is inert and has forgotten the account?”

Roe, meanwhile, gave an example of good practice for e-money firms. “We’ve seen an e-money firm offering a product to a specific group of customers but over time realising it was being sold to consumers outside of that market. Upon realising this, the firm did the right thing and re-assessed the product, and whether it was indeed appropriate for this broader cohort of customers.”

A pressing need

The FCA panellists were keen to stress that customer vulnerability is a key driver for the Consumer Duty.

“The current cost of living pressures underline how important it is for firms to understand the needs of their customers and support them to make effective decisions,” said Richard Wilson, the FCA’s consumer duty lead.

Yet, even before the current pressures, it is generally known that consumers were being asked to make an increasing number of complex and important decisions in a faster and increasingly complex environment, he argued.

“That makes it more important that they can make those decisions effectively and that competition is working well, with firms competing vigorously and to a high standard of customer care, and in consumers interest,” he said.

The Consumer Duty timeline currently dictates that manufacturers will need to complete their review process to meet the outcomes rules by April 30 next year.

Meanwhile, rules apply for open products and services from July 31, 2023 and for closed services by July 31, 2024.