Asset Finance: Consumer Duty Countdown

The announcement by the FCA in late July last year of its final decisions on implementing the new Consumer Duty has led to a range of responses within the leasing and consumer credit industries.

The aim of the FCA is said to be to fundamentally improve how regulated firms serve consumers, by setting higher and clearer standards of consumer protection across financial services and explicitly requiring regulated firms to put their customers’ needs first.

The Duty is made up of an overarching principle and new rules regulated firms will have to follow. It will mean that consumers should receive communications they can understand, products and services that meet their needs and offer fair value, and they get the customer support they need, when they need it.

The FCA explained its aspirations as follows:

“Clarity on our expectations and firms focusing on what their customers need should lead to more flexibility for firms to compete and innovate in the interests of consumers.  

The Duty forms part of the FCA’s transformation to becoming a more assertive and data-led regulator. With firms assessing how they’re meeting their customers’ needs, the FCA will be able to quickly identify practices that don’t deliver the right outcomes for consumers and take action before practices become entrenched as market norms… 

The Consumer Duty will lead to a major shift in financial services and will promote competition and growth based on high standards. As the Duty raises the bar for the firms we regulate, it will prevent some harm from happening and will make it easier for us to act quickly and assertively when we spot new problems.”

In response to industry concerns about the speed of implementation, the FCA has now dictated a two‑phase implementation period:

• From the end of July 2023, the consumer duty will apply to all new products and services, and all existing products and services that remain on sale or open for renewal.
• From the end of July 2024, the consumer duty will come fully into force and apply to all closed products and services.

The FCA stresses the importance of regulated firms making full and effective use of the longer implementation period to make the necessary changes to policies, process, governance and culture.

No application to business customers

For asset financiers involved primarily in the business market, the unwelcome news is that the revised made rules appear to in effect extend beyond the usual definition of a “retail customer” as “an individual who is acting for purposes which are outside his trade, business or profession,” so that regulation will also now extend to any customer in a regulated activity, in other words encompassing sole trader and partnerships of 2 or 3 who are business customers.

However, the FCA’s jurisdiction essentially remains limited to those firms which it regulates, so the Consumer Duty will not apply to unregulated business. It will not, for example, apply to credit products outside the FCA’s remit, such as unregulated business lending. However, it will apply to unregulated activities that are ancillary to regulated activities. For example, the design of a product or service, and ongoing customer support services, are not themselves regulated activities. They are, however, necessary activities linked to regulated activities.

There is an interesting and positive perspective on the new Consumer Duty in a recent blog by Julian Rose, a much respected expert and commentator on the asset finance industry:

“For many, implementation of the FCA’s Consumer Duty rules may be a concern. It really shouldn’t be:  This is an example of smart new regulation and we should welcome it…

But behind all of this, the regulation is simple and good. The FCA is saying, in effect, put aside for a moment everything else in the thousands of pages of Handbook rules, and just be certain that your customers get a fair deal. Fairness is, of course, a matter of judgement, but the guidance gives plenty of useful indicators of what to look for.

…the FCA is clear that what is expected of firms should be interpreted ‘in light of what is reasonable’ given the nature of the product, the characteristics of customers, and the firm’s role in the distribution chain.  These factors point to asset finance being low risk, suggesting a lighter-touch implementation. So if Consumer Duty is becoming a very large project, I suggest take a step back and ask whether that’s necessary and what the FCA intends”. 

You can read Julian’s blog in its entirety using this link

Contact Bermans Asset Finance team