What is Consumer Duty?

You may not have heard of the new Consumer Duty rules, but they’re set to improve the car-buying experience for customers using finance; our guide explains all

Car buyers in the UK are protected by several pieces of legislation, including the Consumer Rights Act and the Consumer Protection from Unfair Trading Regulations,

A new financial regulation – known as Consumer Duty – aims to bring about even more reassurance for people buying a car in finance, and it’s worth knowing about these rules.

What is Consumer Duty?

Consumer Duty legislation is being introduced by the UK’s financial watchdog, the Financial Conduct Authority (FCA), and it applies to all firms regulated by that organisation. This includes insurance companies and banks, as well as car dealers that offer finance packages to fund the purchase of cars. Indeed, carwow itself is regulated by the FCA.

In short, Consumer Duty requires firms offering financial services to put the customers at the heart of their business, doing their best to ensure they experience good outcomes.

It’s worth highlighting that this legislation doesn’t come into force until the end of July 2023 (so effectively 1 August 2023) and is not retroactive, so the rules cannot be applied if a dealer did not meet the requirements of Consumer Duty prior to that date.

Also note that Consumer Duty rules only apply to people taking out financial packages such as a Personal Contract Purchase arrangement, a Hire Purchase agreement or a leasing deal when getting a new or used car; if you buy a car outright they will not apply.

Consumer Duty: the overarching principle

The FCA currently has 11 principles that regulated firms must abide by. These include that companies must conduct business with integrity; that they must treat customers fairly; and that they must deal with regulators (IE the FCA) in an open and cooperative way.

Consumer Duty adds a new, 12th principle to this list, which states that companies registered with the FCA must “act to deliver good outcomes for retail customers.”

For example, if you wanted the option to buy your car at the end of a financial agreement, being recommended and taking out a lease deal (these do not offer the option of buying the car) would arguably not be a good outcome, whereas taking out a PCP deal (which does allow you to buy the car) would be more likely to result in a good outcome.

The FCA hopes the new Consumer Duty principle will bring about a “shift in culture and behaviour” within firms, making staff ask themselves if they are treating customers the way they would like to be treated themselves, and if consumers are getting the outcomes that they can reasonably expect when taking out financial products and services.

Consumer Duty: the three rules

The FCA advises that consumers using financial services are likely to experience good outcomes if firms follow three rules. These are called ‘cross-cutting rules’ because they are designed to apply across all industries covered by the FCA (IE from independent financial advisors to car brokers).

The three Consumer Duty rules require companies to:

1. Act in good faith towards customers
2. Avoid causing foreseeable harm to customers
3. Allow and support customers to ‘pursue their financial objectives’

Because the FCA regulates several different kinds of company, some rules will apply more to one type of firm than another. The third rule, for example, may be less relevant for car dealers, and more relevant for investment firms, where customers’ broader financial aims and strategies would need to be supported by specific investment products.

The first two rules apply more directly to vehicle-finance companies, though. As an example, a customer might experience ‘harm’ as a result of the Consumer Duty principle not being applied if they were not made aware that the PCP deal they had signed up to included an annual limit of 5,000 miles.

If the consumer had driven 10,000 miles each year they would have a significant excess-mileage bill to pay at the end of the contract. This would arguably have been a ‘foreseeable harm’, as if the dealer had put the customer first in their mind, they would have determined their needs, and worked out that an annual 5,000-mile cap would not be suitable for someone who drives 10,000 miles a year.

Consumer Duty: the four outcomes

Consumer Duty starts with the overriding principle that people should experience good outcomes when dealing with an FCA-regulated company; it then moves to the three rules above, which explain broadly how companies can achieve that principle.

The three rules are supported by and linked to four outcomes. The FCA’s guidelines runs to several pages for each of these outcomes, so the following is by no means an exhaustive list of every implication.

Products and services
Does a company have the systems and controls in place to enable the financial products they provide to be designed, approved and marketed in the correct way, and to the correct customers?

Price and value
Pricing structures should be understandable. Financial services should not exploit customers’ lack of knowledge of what represents good value; fees and charges should be reasonable. (EG a £500 fee for a customer changing address would not be a fair price.)

Consumer understanding
Firms should help customers make informed decisions about goods and services by making sure they understand the features and risks implicit in any particular finance product (EG knowing that if you fail to keep up repayments on a PCP deal the car can be repossessed). Firms should also ensure they understand any specific needs a customer may have. It may be, for example, that customers without internet access need to receive communications via post or telephone.

Consumer support
​​Firms should ensure customers can use their financial products as intended; firms should take into account customer vulnerability (EG chronic illness, bereavement). Firms should adapt practices, products or policies if they determine consumers are not experiencing good outcomes.

Consumer Duty: what changes can you expect?

As these rules have yet to come into force, it is difficult to know precisely how firms will ensure they are adhered to. It may be that you are asked to watch an information film or complete a questionnaire about the financial product you are buying; there may be more forms to read and fill out before entering into a finance agreement, while dealers may want to know more about your financial circumstances and lifestyle so they can ensure you are getting the right deal.

Consumer Duty: what companies need to do

Firms that are regulated by the FCA are required to have drawn up plans by October 2022 that demonstrate how they will meet Consumer Duty requirements. Then at the end of July 2023 the rules come into effect.

While the FCA recognises the implementation of Consumer Duty rules will be proportionate (IE a sole trader would have different requirements to a Blue Chip multinational), there is an expectation that firms will implement systems and controls to meet the new rules, as well as a road map for compliance.

Staff should be trained in the responsibilities implicit in Consumer Duty, while larger firms should have a board-level lead, and the Duty should be a regular item at board meetings.

What to do if you think Consumer Duty rules have been broken

Your first port of call with complaints should be the company with which you have issue. It is quite possible that it will be able to resolve matters to a satisfactory level.

If this does not happen, and assuming any such issue arises, after Consumer Duty has come into force in August 2023 (remember: the rules are not retroactive), check with the Financial Conduct Authority to see if the firm is authorised by the FCA, before filing a complaint with the Financial Ombudsman Service, which is the dispute-resolution service for FCA-registered companies.

Consumer Duty: things to bear in mind

It should be stressed that Consumer Duty rules are not designed to prevent poor outcomes from occurring – they are instead designed to reduce the chances of them manifesting.

For example, if a customer loses his or her job and their car is repossessed after they fall behind on monthly repayments (this is rare, but possible), and the customer had the product fully explained to them and was comfortable with the terms and conditions, it is unlikely that a company would be judged to have broken Consumer Duty rules.

It is also worth highlighting that the rules are more about bringing cultural change within FCA-register companies, rather than acting as broad, prescriptive rules. It is likely that industry-wide agreements, and potentially legal cases will, as time goes on, determine what is and isn’t considered a breach of the rules.

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