Firms need clarity on how new consumer duty will interact with expectations on D&I

While the Financial Conduct Authority’s (FCA’s) latest consultation paper and response to its proposed new consumer duty intersects with its joint discussion paper with the Bank of England and Prudential Regulation Authority on diversity and inclusion (D&I) in the financial sector , some questions arise as to what firms must do in practice. 

The uncertainty arising

In its latest consumer duty paper, the FCA mainly addresses matters from its D&I paper through the lens of consumers in vulnerable circumstances. Indeed, an entire chapter is devoted to this topic. However, some firms have highlighted that it was not evident how the new consumer duty provided additional protection to those consumers in vulnerable circumstances.

These comments from firms are understandable where the relevant chapter in this latest paper appears to elide and conflate protected characteristics and features of vulnerability. Evidently, a person can have protected characteristics and also be vulnerable. However, it does not follow that a person is always vulnerable as defined by the regulators because they have protected characteristics.

The FCA’s latest consumer duty paper focuses on the potential harm and disadvantage suffered by those with protected characteristics where firms do not give them sufficient consideration. For example, the paper quotes directly from the FCA’s financial lives survey stating that “black, Asian and minority ethnic adults are disproportionately represented among the growing number of consumers in vulnerable circumstances and so at greater risk of financial harm”. However, the regulator has missed an opportunity to provide further comment on how the industry working collaboratively could proactively drive positive change and to address the practical ramifications of the interaction between its latest paper and the D&I paper.

Discussions about diversity and inclusion are often framed in the negative. This paper presents another opportunity to consider how the new consumer duty can be used as a tool for the regulator and firms to make a positive impact on the industry and as a result on society by serving the diverse needs of consumers, particularly those who have been underserved or not served at all in the past.

The latest consumer duty consultation paper features a clear overlap with the themes arising from the D&I paper in other contexts too. For example, where the paper considers product and services outcome the FCA states that the new consumer duty will require firms to consider the needs, characteristics and objectives of customers in their target market. Arguably, protected characteristics as defined by the Equality Act 2010 are matters that should be considered by firms when seeking to ensure that products and services are fit for purposes in accordance with the new consumer duty.

Another example is the requirement for firms to provide ‘good outcomes’ for consumers in keeping with the new consumer duty. A firm will need to have a good understanding of its consumers, including from the perspective of D&I, to provide those good outcomes. 

An opportunity to seek clarity

The bandwidth firms have to address further regulatory change is being stretched by significant other regulatory reforms. As is evident from the FCA’s latest consumer duty paper, firms have highlighted the “significant regulatory reforms” that they are working on, including new rules on the treatment of vulnerable customers and compliance with the Senior Managers and Certification Regime, as well as “dealing with the ongoing impact of the pandemic and the UK’s withdrawal from the EU”. It is in this context that industry would benefit from further practical and granular guidance about the interaction between the new consumer duty and regulators’ expectations on D&I.

Firms have until 15 February 2022 to respond to the FCA’s latest consumer duty consultation. We would recommend that firms take the opportunity to seek the clarity they require to make any necessary changes to their practices. The FCA expects to publish responses to this consultation and any new rules by 31 July 2022. The FCA has also said that it expects firms will have until 30 April 2023 to implement the new consumer duty.