The Financial Conduct Authority has published the final guidance its new Consumer Duty rules, which the regulator said will lead to a "major shift in financial services".
The new rules, which come into effect on 31 July 2023 for new and existing products and services currently on sale, will improve how firms serve consumers by requiring them to act to deliver better outcomes, the watchdog said.
Consumer Duty includes a new Consumer Principle that requires firms "to act to deliver good outcomes for retail customers" and rules providing greater clarity on the regulator's expectations under the new principle.
The regulator has also provided rules and guidance setting more detailed expectations for firm conduct in four areas that represent key elements of the firm-consumer relationship: the governance of products and services; price and value; consumer understanding; and consumer support.
It will require businesses to act in good faith, avoid causing foreseeable harm and enable and support retail customers to pursue their financial objectives.
The FCA said: "Firms have to consider the needs, characteristics and objectives of their customers, including those in vulnerable circumstances, and how they behave, at every stage and in each interaction. They will also need to understand and evidence whether those outcomes are being met to deliver good customer outcomes."
Consumer Duty will include requirements for firms to end rip-off charges and fees and to make it as easy to switch or cancel products as it was to take them out in the first place.
Financial services firms also need to provide helpful and accessible customer support instead of "making people wait so long for an answer that they give up".
They will need to provide timely and clear information that people can understand about products and services "so consumers can make good financial decisions, rather than burying key information in lengthy terms and conditions that few have the time to read", and ensure they provide products and services that are right for their customers.
The duty forms part of what the FCA describes as its transformation to becoming "a more assertive and data-led regulator".
It said: "With firms assessing how they are meeting their customers' needs, we will be able to quickly identify practices that do not deliver the right outcomes for consumers and take action before practices become entrenched as market norms."
The watchdog expects firms to ensure the interests of their customers are central to their culture and purpose and are embedded throughout the organisation. They must monitor and regularly review the outcomes that their customers are experiencing in practice and take action to address any risks to good customer outcomes.
Furthermore, companies need to ensure that their board or equivalent governing body takes full responsibility for ensuring that the duty is properly embedded within the firm, and senior managers are accountable for the outcomes their customers are experiencing, in line with their accountability under the Senior Managers and Certification Regime.
Sheldon Mills, executive director of consumers and competition at the FCA, said: "The current economic climate means it is more important than ever that consumers are able to make good financial decisions. The financial services industry needs to give people the support and information they need and put their customers first.
"The Consumer Duty 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."
Advice industry commentators have described the new Consumer Duty reforms as a "cultural shift", but have warned it will be a "huge undertaking" for firms to demonstrate they are compliant with the new rules.
According to David Tiller, commercial and propositions director at Quilter, the new Consumer Duty is a watershed moment for financial services in the UK. "It represents a cultural shift in regulation from treating customers fairly to positioning customers to achieve good outcomes - and proving it. This is an entirely reasonable ambition and, as such, I believe that we should get behind Consumer Duty and use it as the springboard to build deeper relationships with the public we serve."
Tiller said advisers will have to become experts at explaining the value to the customer of things that help make their businesses more efficient, including tools and technologies that are not covered under their advice fee.
"Whether through the advice fee, the platform fee or the investment fees, it is all part of the advice given and the simple truth is that the customer ends up paying for everything anyway.
"With the Consumer Duty, advisers will be expected to be able to clearly articulate the customer value across the value chain. For advisers, being forced to use a cheaper, less efficient provider could mean an increased cost in delivering their advice, with customer savings more than offset by the additional costs incurred. This is a trade-off that people understand. While it may be cheaper to take a bus to the Mediterranean for your summer holiday, most people choose to fly as they understand the additional cost offers speed and convenience."
Tom McPhail, director of public affairs at the lang cat, said: "Regardless of the shape or size of firm, the Consumer Duty represents a huge undertaking to make sure firms can evidence their customers and clients are at the heart of their business. This cuts across products, service, communications, customer support and more. There are several important strands firms need to bring together.
"One of these is ‘proportionality'. This means small advice firms will not have the same compliance requirements as big providers. But it also means the resources a firm devotes to bringing in new customers should be broadly mirrored in looking after that customer once they are in, and how easy it is for them to transfer out.
"Another key theme is around data collection, as firms will have to evidence how they are complying with the Consumer Duty through their annual board or management reports."
McPhail added: "There is some work here to understand how advisers and planners will collate the data that is necessary to show they are Consumer Duty compliant, as well as a wider question for the industry about how to identify ‘foreseeable harm'."