The Consumer Duty is here, but will it work?

Here’s 3 tests we have of the new approach to regulation

At Citizens Advice we spend every day thinking about how consumer markets can work well for consumers. We see what happens when they don’t. Poor value can squeeze budgets already at breaking point, cutting some people out of essential services. Poor sales practices can leave people exposed to risks they don’t understand and can’t afford to bear.

More than anything, we know that consumers are people, often with stressful lives, limited time and competing demands. We’re usually sceptical of policy solutions which aim to make people into more effective shoppers rather than ensuring that firms design products and services which deliver on what consumers expect. This is why we welcome the Financial Conduct Authority (FCA) introducing a new Consumer Duty which looks to put the consumer at the heart of business decisions.

A new Consumer Duty

Today, after several years, many consultations and a few name changes, the FCA’s Consumer Duty finally comes into force. So much work has gone into getting to this point — from consumer advocates, the regulator and industry itself, that it’s tempting to celebrate arriving at this point as a success. And let’s be in no doubt, it is. But if we are climbing Everest, then we’ve made it to Base Camp, not the peak, and success really lies in the journey ahead.

The promise of the Consumer Duty is a wholesale shift in the culture of financial services firms, placing good outcomes for consumers alongside the bottom line. It also marks a shift in how the FCA will approach regulation, focusing on whether firms have taken reasonable steps to protect consumers from foreseeable harm, rather than checking against a tick-list of rules.

With such a huge shift, it’s impossible to say at the outset whether it will work — measuring the harm which the Consumer Duty has prevented is especially hard. But there are 3 areas where the Consumer Duty, if it’s working as expected, should make a huge difference to consumers. We will be measuring the success of the Consumer Duty by looking at progress in these areas.

1. Tackling the Ethnicity Penalty

For the last 2 years our research has found that people of colour are paying on average £250 more for their car insurance than white people. It’s not clear what’s driving the difference in outcomes and insurers are in the best position to dig into their pricing models to find out why this is happening. But to date we’ve not seen any action from insurers to explain what’s happening.

The Consumer Duty should change this. The new rules make it clear that firms must monitor to see if different groups get different outcomes- with specific reference to differences between protected characteristics. Where differences are found, firms have to explain why that’s happening and act appropriately. The Consumer Duty is the perfect tool for the job of tackling the ethnicity penalty. If no progress is made on this, it would show that the tool isn’t being used right by firms or the regulator.

2. Creating better online consumer journeys

Financial services is full of choices which consumers need to make and which have important consequences. The way that businesses present those choices influences how they are made. Things like pre-selecting certain options, how information is presented or making it harder to cancel a service than it is to sign up all make a difference. Last year we looked at slippy design practices around Buy Now Pay Later credit and found 1 in 5 users regretted having used the product and 31% signed up while not fully understanding at least one key element of the product. More recently, looking at eCommerce in general we found 1 in 6 people have felt pushed into making purchases they didn’t want, didn’t need or came to regret due to the features in the design of the sales process.

As we’ve previously argued, these questions of online design are particularly well suited to an outcomes based framework. What design is best for consumers will depend on the specific context. So it’s right to give firms, and the user experience designers who work for them, the flexibility to work out how to best achieve good outcomes. Currently, we tend to see online design being optimised to keep people on the website and to drive sales. The Consumer Duty should mean firms are also looking to use these design techniques to help their customers make decisions which they don’t regret.

The FCA has this on its radar. The Consumer Duty has explicit references to ‘sludge practices’ — barriers that make it harder for a customer to make the choice they want — as an example of poor design which firms should avoid. Recent research by the FCA into ‘gamification’ in trading apps shows the regulator is thinking about novel techniques. This is why we have high expectations on the Consumer Duty to drive better outcomes through a focus on online design. We see this as a critical cross-cutting area for the FCA to prioritise, and to use the Consumer Duty as a tool for delving into how such design decisions are made.

3. Effective communication of forbearance support

The Consumer Duty comes into force during a cost-of-living crisis. Rising interest rates are putting further pressure on households, making it harder for them to meet their credit payments. We’ve found that 40% of households whose mortgage payments have increased in the last 3 months have found it difficult to make repayments. Many in this situation are taking steps like borrowing or going without essentials in order to not miss payments. The support offered by lenders to people in or at risk of financial difficulties is an essential protection for borrowers.But 61% of households that have seen these rises say they’ve had no contact with their lender about getting support. We also know from our advisors that many of the people they see don’t reach out to lenders to ask for help.

The outcomes-based focus which the Consumer Duty brings is helpful here. A good outcome is someone receiving support before a predictable rise in payments leads to financial difficulty. If the Consumer Duty is working as it should, firms should be constantly testing different approaches to achieve this, monitoring what is working and adjusting their approach to be as effective as possible. We would expect different approaches to be tested side by side- what is the best subject line for an email to get people to read it and reach out? Does a phone call lead to higher uptake of support than an email? And what combination of steps succeeds best in getting people onto the support they need?

This is a current, specific and tangible problem concerning outcomes and an immediate test of the Consumer Duty. It’s not just a test for firms but also for the regulator to show that it can use this new approach as a proactive tool to push lenders to innovate, test and iterate at pace. We’ve said previously that lenders could be doing more to ensure people access the support available. And when 2 in 5 with rising mortgage costs find them difficult to manage, it’s proportionate to expect lenders to pick up the phone ahead of time to make sure that people are not going with support. The FCA should set this expectation, letting firms take different approaches only if they can show that this will deliver better outcomes. The regulator needs to set the bar high and then challenge firms to do better.

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It’s fitting to judge outcomes-based regulation on whether it improves outcomes. These are 3 areas where we will be looking to see if the Consumer Duty is delivering on its ambitions. If it does, then this will make a real difference to people who come to us for help every day. If not, it will be a missed opportunity.