What is cross-cutting rule number one? (A firm must act in good faith towards retail customers.)

Welcome to our short series of adviser blogs explaining the purpose and impact of the upcoming Financial Conduct Authority (FCA) regulations on Consumer Duty. In this blog we explain the first of the three cross-cutting rules: “A firm must act in good faith towards retail customers.”

Before we get to that, let's provide some context about the role of Consumer Duty and how it's made up.

What is Consumer Duty?

The FCA's Consumer Duty is designed to fundamentally improve how you serve consumers. It sets higher and clearer standards of consumer protection across financial services and requires firms to put their customers' needs first.

What is the key Consumer Principle of Consumer Duty?

The Duty is centred on the key Consumer Principle that each firm must act to deliver good outcomes for its retail clients. This is the high-level standard that defines the Consumer Duty.

To substantiate this standard, the FCA has created a set of three over-arching requirements, also known as cross-cutting rules, which set conduct standards for firms' retail financial services activities. We'll deal with each of the cross-cutting rules in detail in separate blogs.

What are the three cross-cutting rules of the Consumer Duty?

As a firm you must:

Act in good faith towards your retail customers
Avoid foreseeable harm to your retail customers
Enable and support your retail customers to pursue their financial objectives

The cross-cutting rules overlap. This is intentional on the part of the FCA, which expects that you will consider the cross-cutting rules closely and seriously.

What is cross-cutting rule number one?

The first cross-cutting rule is that a firm must act in good faith towards retail customers.

Acting in good faith is a conduct standard that reflects honesty; fair and open dealing, and is consistent with your customers' reasonable expectations.

The FCA accepts that both firms and customers each have their parts to play in achieving good outcomes. But they say that when customers engage with firms there is often an imbalance in knowledge, expertise and bargaining position, against the customer.

So, consumers can only reasonably be expected to be responsible for their decisions and choices if firms have behaved honestly and openly.

The good faith rule supports the other cross-cutting rules by taking into account your firm's actions or intentions. For example, you can probably anticipate how the good faith rule overlaps with the rule to avoid causing foreseeable harm.

What is an example of when a firm is not acting in good faith under the Consumer Duty?

If your firm does not take account of the interests of their customers, in the way you design or communicate a service, then you would not be acting in good faith.

Similarly, firms which aim to take advantage of customers' lack of knowledge, or understanding, would not be acting in good faith. Examples could include exploiting the behavioural biases of customers, where some consumers are influenced by the manner in which products are presented, by perhaps overstating immediate benefits or impacts, and devaluing future effects, for example, renewal fees or termination charges.

How does Consumer Duty affect the culture of a firm?

Looking more widely at the idea of good faith, the FCA's Consumer Duty regulations require that firms consider their culture and ensure it supports their staff are acting in good faith. The rules say that your firm is not likely be acting in good faith if your remuneration structures are likely to cause customer detriment.

So,the FCA requires that firms are able to detect and manage any non-compliance with their regulatory responsibilities, which stem from your performance management or remuneration processes.

How broad is the Consumer Duty Good Faith rule?

You'll be sensing that the good faith rule is pervasive. Your firm needs to act in good faith at all points in the customer journey, as well as during the complete lifecycle of a service or product.

This also covers a firm's behaviour towards customer segments or groups, at the distribution stages, for example. It can also include how your firm engages with specific customers, through, for example customer support.

You can see that scope of the ‘good faith’ requirement is broad and includes firms needing to design services to support target customers' objectives and needs, as well as offering them fair value.

What are examples of firms not acting in good faith?

Designing service features which take advantage of customers' behavioural biases in order to create product demand.
Using artificial intelligence, algorithms or machine learning which embed or amplify behavioural bias and lead to systematically worse customer outcomes for some groups.
Adding variations which increase the difficulty of directly comparing products with those from competitors.
Designing services that fail to offer fair value, or those in which prices and charges are not presented, so that it's not easy for customers to fully understand the overall cost.

Finally, firms need to act in good faith to assist customers' understanding. You should do this by providing information that clearly communicates the benefits and risks of a service. These should not be presented in obscure web pages or sections of documents which you know customers are not likely to read. Firms should not present customers with information which is skewed, distorted or incomplete.

What if a firm recognises they have caused a customer harm?

If a firm recognises that they have caused a customer harm, through its actions or inactions, they must behave in good faith and take relevant action to resolve the situation.

Sometimes an apology will be appropriate but where redress is required, this needs to be paid promptly.