New rules, taking effect in just over two months, aim to ensure that people are treated better by the companies from which they get their mortgages, current accounts, insurance and other financial products.
Banks, building societies, insurers, investment firms, and many other businesses have been warned they must be ready for one of the biggest-ever shake-ups of consumer finance in the UK.
The new regime, from the Financial Conduct Authority (FCA), will see the introduction on 31 July of the so-called “consumer duty,” which sets higher, clearer standards of protection, and explicitly requires companies to “put customers’ needs first”.
This could mean being told about better interest rates on a mortgage available to you if you are coming to the end of a fixed deal, or halting unreasonable exit fees, which stop people from leaving a financial product to go to a better one.
The drive is aimed at producing what the FCA calls “good outcomes” for consumers: reduced call-waiting times, an end to rip-off charges and fees through clearer promotions, and making it easier to cancel or switch investments.
And last week, Sheldon Mills of the FCA warned firms which ignore the new rules that they faced swift action where there was risk of harm to consumers. “In some cases firms can expect us to take robust action, such as interventions or investigations, along with possible disciplinary sanctions,” he said.
Tim Hogg, at consultants Oxera, says the new rules are among the biggest reforms of financial regulation in the last 15 years. “I hope, when it comes to buying new products, it’s less of a head-scratcher for people in terms of what is the right one for them.”
Pressure on consumers
The FCA says it wants consumers’ needs to be put first and for there to be a higher level of consumer protection in the retail financial markets.
This is at a time when people are under financial strain because of the cost of living crisis, and are being forced to make complex decisions when taking out mortgages, loans and other products. Some financial firms present information which is confusing, or difficult to understand, making life more difficult, which can result in people buying products that are not right for them or do not offer good value, says the regulator.
Under the consumer duty, it will be up to firms to stop practices that are not in the best interest of their clients. The changes will affect the 52 million who use financial services in the UK.
How it will work
It is unlikely consumers will see a complete change in how they deal with their mortgage provider or insurance company come 1 August. Rather, this will happen over time, says Andrew Strange at accountants PwC. There will not be a list of what can and cannot be done for the thousands of processes involved. But consumers will be able to complain if they feel they are not being well served.
Some examples of how this might happen include:
A consumer may have a financial product which has a large exit fee if they want to switch to one with better rates. Or it could be that a customer would have to physically go into a branch to cancel.
These would both breach the new rules, says the FCA.
Where there is a life insurance policy that pays out if a customer develops a medical condition, and subsequently has a life expectancy of less than 12 months. They may find it difficult to navigate the claims process when they are clearly vulnerable, or there could be complications in getting a payout.
The FCA has told firms they would need to ensure they tell people about any limits with the policy and avoid “foreseeable harm”.
So-called packaged bank accounts may have additional features such as travel insurance attached, but the customer may be unlikely to use them.
Or bank accounts which are sold with the daily cost of the overdraft advertised, rather than the “significant cumulative cost”. Both would fall foul of the new rules.
Hogg says the duty will ensure people are getting the right product at a fair price. “Another way of thinking about it would be: if you were to sit down with a consumer after they bought a product, and talk them through exactly what happened and read out the T&Cs, would they ever say ‘I regret that’? It is trying to embed that regret test in how the industry operates.”
If someone, after coming off a good fixed-rate mortgage deal, was put on to a variable rate but did not switch to a better deal. “I hope what will happen is that providers take more action to identify people who are suffering from inertia and not switching on to the cheapest rate for them,” says Hogg.
Strange says that in the case of a person suffering a death in the family and needing money from their bank account, the bank may be expected to waive exit fees.
If you have a problem
If consumers have trouble with how a financial services firm is dealing with them, they must first complain to the firm, which has a duty to look into that complaint. And then, if the consumer is not happy with the response they receive, they can go to the Financial Ombudsman Service.
It says it “welcomes the consumer duty, as this will raise standards so that consumers are better protected and can make good financial decisions. “We will continue to work closely with the FCA to ensure a consistent and complementary approach to the application of the new rules, while respecting the different statutory roles we deliver”.