The UK Financial Conduct Authority’s (FCA) Consumer Duty establishes a higher standard for consumer protection within UK financial markets. This regulation highlights the duty of firms to deliver good outcomes for retail clients and focuses on the four key areas of Products and Services, Price and Value, Consumer Understanding and Consumer Support. Firms must ensure that the behaviours of the firm and its employees do not contribute to any poor outcomes for consumers.
What is Conduct Risk and Consumer Duty?
Conduct risk and consumer duty are two important concepts that firms must understand and adhere to in relation to their specific obligations and responsibilities to their customers.
Conduct Risk
The definition of conduct risk is a risk relating to the conduct and behaviour of a firm’s employees, stakeholders and senior management. Poor conduct can cause direct harm to consumers and ultimately lead to a wider risk to market integrity. For these reasons, conduct risk must be closely monitored internally, as any breach can undermine consumer trust and market stability.
Consumer Duty
The Consumer Duty is a set of standards outlined by the FCA that firms must comply with when providing services to their customers. Consumer Duty sets a higher benchmark and requires firms to proactively consider the needs of their customers to deliver good outcomes for retail consumers. The core principle underpinning the regulation is that firms must be open and honest and avoid causing foreseeable harm while helping consumers achieve their financial objectives.
Conduct Risk and Consumer Duty Frameworks
There is a fundamental link between Consumer Duty and conduct risk. It would be impossible for a firm to meet its Consumer Duty obligations without implementing a robust conduct risk management framework. Effectively managing conduct risk is the most important demonstration of a firm's commitment to protecting the interests of its customers and delivering good outcomes for retail consumers.
Consequences for Firms that don’t meet Consumer Duty Obligations
The FCA has established three clear standards of conduct that firms must comply with, also known as the “cross-cutting rules”. These rules require firms to act in good faith, take measures to avoid foreseeable harm, and actively support consumers to achieve their financial objectives. Failure to adhere to these cross-cutting rules can result in significant fines for misconduct, and the FCA has demonstrated a commitment to enforcing these penalties. In 2021, five major banks were fined for failing to act in the best interests of their customers by sharing information and not acting independently. These penalties highlight the severe consequences for firms, which can also include the potential for significant reputational harm caused by not acting in their customers' best interests.
How can Firms Implement a Conduct Risk Policy
An effective conduct risk policy requires commitment from the board of directors and a structured implementation plan that manages both the long-term goals and short-term priorities of the firm. Firms should consider the following key areas:
- Goal setting: Establish both long-term and short-term goals and clearly align them to the conduct risk framework while identifying high-risk areas that require immediate action.
- Governance and accountability: Create clear lines of accountability for conduct risks and assign responsibility to specific individuals while integrating these into the firm’s governance framework.
- Company culture: Identify the desired organisational culture and define acceptable behaviours while also ensuring the firm’s values actively support good customer outcomes.
- Escalation procedures: Establish confidential reporting channels and clearly defined escalation procedures for breaches of conduct risk, and communicate these throughout the organisation.
Financial services firms are responsible to their customers and must demonstrate this responsibility within their internal operations and as part of their strategic objectives. Adhering to the principles outlined by the FCA will require firms to implement conduct risk policies, focus on creating good outcomes for their clients as a priority, while also meeting their regulatory obligations and building the trust that is necessary for long-term success. Is your firm meeting the FCA’s Consumer Duty standards?
Get in touch with Novatus Global to embed Consumer Duty principles into your business and protect your firm from conduct risk.
