The Financial Conduct Authority (FCA) has introduced Consumer Duty; something that is highlighted in Principle 12. This piece of regulation—which was announced in 2022 but only came into effect more recently—aims to transform financial product distribution by ensuring fair value and positive consumer outcomes.
Principle 12 impacts not just FCA-authorised firms though—it extends its reach further.
The Introduction of Principle 12: A Core Part Of The FCA Consumer Duty
Principle 12 is viewed as a core part of the FCA Consumer Duty. It essentially requires firms to act in a way that delivers good outcomes for retail clients. And, ever since the pandemic, in particular, the retail client base has been exploding in terms of size and appetite.
This principle emphasises consumer protection, making firms consider their customers' needs at every distribution stage. Firms now have a responsibility to prove their products are suitable and beneficial to customers.
This promotes transparency and accountability, encouraging firms to put consumer interests at the forefront of their operations. The FCA's goal is, basically, to create a more consumer-focused financial market where firms prioritise the welfare of their clients. By doing so, the UK can continue attracting capital and clients in the hopes of continuing its strong financial sector reputation and leading to better overall market stability—particularly during times of rapid social, environmental, and technological change.
Redefining Distribution Practices
The impact that Principle 12 has had on how financial products are distributed cannot be overstated. Firms must now unequivocally align their distribution strategies with consumer interests. Generally, it’s led to stricter oversight of fund managers, intermediaries and third-party distributors.
First and foremost, firms must show how their actions lead to positive consumer outcomes. Enhanced due diligence and stricter compliance checks are now standard practice as a result. This ensures that every step of the distribution process benefits the consumer.
It’s important to assess products and services to ensure they meet the needs of their target market. By this, we mean conducting regular surveys (some may even use focus groups) with existing customers to gather feedback on the performance and suitability of their products. It may also mean using data analytics to monitor how different customer segments interact with products, and identifying areas where adjustments are needed.
Ultimately, regular reviews and updates are needed to maintain the suitability and value offerings. The emphasis on consumer outcomes requires firms to be more proactive in identifying issues.
By adopting a more consumer-centric approach, firms not only become more compliant, they can build stronger relationships with their clients and garner loyalty.
Increased Focus on Value
As we’ve established, the Consumer Duty's focus on value means firms must offer products that actually benefit consumers.
This means there is a greater focus on value, as well as transparent pricing and clear communication of features.
Firms are accountable for making sure their products are suitable at the point of sale and continue to serve the consumer's best interests over time. The focus on value extends to fees, charges, and overall product performance. Firms must avoid hidden costs and ensure their pricing structures are fair and justifiable. For instance, firms should implement periodic audits to review and adjust their pricing models based on consumer feedback and market trends.
The emphasis on value means firms must of course provide high-quality services that meet consumer expectations. This includes offering support and guidance to help consumers navigate their financial choices and ensure they’re continuously satisfied. One option is to establish dedicated customer service teams trained to handle complex inquiries and provide personalised advice.
Beyond customer service, it’s also about communicating the value that you are offering, effectively. Newsletters and social media are two ways to express this, and with email marketing, you have the benefit of personalisation - making sure you’re speaking to the value they specifically are getting.
By focusing on value, firms can build trust and foster long-term relationships with their clients.
Impact Beyond FCA-authorised Firms
Principle 12 affects more than just FCA-authorised firms. It impacts all entities in the distribution chain, including those distributing from overseas or providing ancillary services. In short, as a link in the distribution chain, non-FCA-authorised firms must be aware and reactive to the standards set by the Consumer Duty.
This leads us to a broader shift towards consumer-centric practices across the financial sector—a cultural one that is derived from customer expectations and global standards.
The expanded scope ensures comprehensive consumer protection and fair treatment throughout the industry, otherwise, customers may not quickly differentiate FCA-authorised firms from those who aren’t. By holding all entities to the same standards, either those under their direct supervision or via the supervision of authorised entities you collaborate with, the FCA aims to create a level playing field where consumers can trust all products and services they use, knowing they are getting fair, justified value.
The Impact of Consumer Duty On The Financial Promotions Regime
The financial promotions regime is also affected by the new Consumer Duty. Firms must ensure their promotional materials are “clear, fair, and not misleading”.
This means providing accurate information and avoiding exaggerations that could mislead consumers—you need to be able to back up everything. But, even that isn’t enough, as you need to not mislead either, which can happen even with true claims due to a lack of disclaimers.
Firms must take extra care to present their products and services honestly, providing clear explanations of the benefits and risks involved. By doing so, they can help consumers make informed decisions and avoid potential pitfalls, acting somewhat as an educator (though the extent to which you position yourself as an educator depends on your marketing strategy).
The focus on transparent promotions is designed, again, to reinstil trust in the financial markets; an industry that is often accused of unscrupulous activity.
Conclusion
The FCA Consumer Duty, especially Principle 12, has changed financial product distribution by prioritising consumer value and outcomes. Its impact goes beyond FCA-authorised firms to help create a culture of consumer-centricity across the entire sector. The enhanced focus on fair value is a key piece of regulation that can help firms focus on what really matters—good customer outcomes.
