When considering the FCA’s enforcement of Consumer Duty, it could be likened to a school teacher attempting to discipline a class. The FCA so far is attempting to retain the authority akin to a headmaster with an iron fist, rather than a flailing substitute teacher with a “kick me” sign attached to their back. Whether the FCA has managed to control its proverbial “class” of firms is yet to be seen, although it is issuing out mixed reviews at parents’ evening for some, and detentions for others.

Consumer Duty and the initial issues

The implementation of Consumer Duty in July 2023 mandated that financial services firms had to ensure good outcomes for retail customers and are expected to meet certain expectations. These include but are not limited to, ensuring products and services meet consumers’ needs, ensuring consumers are communicated and engaged with to make informed decisions, reducing exploitation of consumers, monitoring and reviewing what outcomes consumers are experiencing, and ensuring that firms’ boards or governing bodies take responsibility for Consumer Duty being ’embedded in the firm’ and for senior managers being accountable for outcomes for their customers.

When Consumer Duty was introduced, it was arguably unclear how firms were meant to ensure they were complying appropriately. When the FCA was trying to get firms to consider how they were meeting fair outcomes for customers, they were encouraged to assess a range of factors, which looked at how their products are priced, the market rates and charges for comparable products, and the costs they incurred to manufacture the products. However, to continue the tortured school analogy, it could be argued firms were required to try and pass the FCA’s exam on “is a product priced fairly?” without knowing which parts of the syllabus to prioritise or what marking scheme to look at. It was unclear what factors were to be prioritised and at what point a product was unfair, especially when they were asked to consider ‘the expected total price customers will pay’. Of course, time is a great educator and firms will now have had a period in which to mark their own homework and learn from mistakes, while developing best practice.

The FCA’s Constructive Criticism

The FCA has issued a report which highlights different parts of Consumer Duty showing what firms have been doing as ‘good practice’ and where they can improve. This at least provides some further clarity about what firms should be prioritising and what they should be avoiding.

The report is accompanied by the FCA’s Executive Director of Consumers and Competition, Sheldon Mills giving a speech on the latest progress. Mr Mills highlights that fair price and value has been the largest challenge for firms to meet. Mr Mills’ criticism of firms include that firms have relied “solely on benchmarking against the market, rather than considering a fuller range including the real value that a consumer derives compared to the price they pay”.

When digging deeper into the report, it specifically criticises that firms are not proving customers are getting a good deal, and lacking “qualitative reasoning” as to why the deal is fair. The consideration of fairness of value should consider how the product or service provides a benefit, the cost of it to be manufactured or distributed, and any limitations of that.

Examining this further, it appears the FCA is trying to clamp down on firms focussing on competitive pricing and driving profit as high as possible based on what their competitors are offering. The FCA’s encouragement to look introspectively at what costs a firm faces when offering a product comes alongside further criticisms that firms are engaging in other practices which provide unfair value for consumers. The report claims it has seen firms ‘add fees along the distribution chain’ which adds to the cost to the consumer and doesn’t represent fair value. Firms are also reportedly charging customers for services they aren’t benefitting from, which the report highlights with the example of annual reviews which customers pay for and don’t receive. The FCA intervening to highlight and criticise this shows it is critical of both a firm’s conduct dependent on the outcome for consumers and the stages before it as well. These are hard lessons – on one level firms were told years ago to be clear about the services they offered and the prices they offered them at. Think post-Retail Distribution Review offers of annual reviews, quarterly detailed reporting and the sort of client support encouraged by the regulator at the time. Is it the pupil’s fault if the master sets the wrong homework? Or changes the homework halfway through?

Are we seeing a more interventionist FCA?

The FCA in its 2023/24 business plan said it would ‘effectively enforce against activities which undermine effective competition and good consumer outcomes’.

Prior to the publication of the report, the FCA took the initiative to request insurance firms to postpone the sales of ‘Guaranteed Asset Protection’ insurance after concerns that it specifically is not providing fair value. GAP insurance is sold alongside vehicle finance, which covers the difference between the initial outlay (be it purchase price or outstanding finance) and current market value, in case the vehicle is written off before all finance has been repaid.

80% of the GAP market has agreed to the FCA’s request. The FCA says that statistics indicate only 6% of the amount customers pay in premiums for GAP insurance is paid out in claims, alongside the fact that the FCA has seen firms paying out 70% of the value of insurance premiums in commission to parties who are involved in selling GAP policies.

The debate over regulators intervening in the market is one which has plagued economists and politicians for decades, which dependent on one’s political persuasion could be good or bad. One potentially clearer benefit however is that the report itself allows the FCA to provide more clarity and context to its expectations around Consumer Duty. Instead of setting slightly broad expectations for firms to merely meet, it has provided clearer “dos and don’ts” to ensure firms are able to improve. Overall, the report and recent intervention into the insurance market indicates the FCA is doing more than just ensuring consumers aren’t dissatisfied with a service, but taking measures to fight against outcomes it sees are unfair when assessing the amount a firm gains in comparison to a consumer.

This does indicate the FCA is willing to make its own value judgments to justify its interventionism. Whether this is a good or a bad thing is arguably dependent on someone’s view as either a firm or a consumer. Firms are likely to be grateful for clearer guidance from the FCA so they know what expectations are being set for them, but whether they agree with that guidance is another matter. After all, if consumers are willing to pay the price for certain products and firms are meeting those expectations, why should the FCA intervene simply because firms are maximising their profit margin, or to finalise our schoolteacher analogies, “performing above expectations” from a money-making perspective? We are going to struggle to find a rule against that, aren’t we?