REBA Inside Track: How does the FCA’s Consumer Duty affect employee benefits?
REBA’s Financial Wellbeing Research 2022 found that 59% of employers see employees’ poor financial literacy as a major financial wellbeing risk in their organisation. And the FCA’s Financial Lives survey 2020 found that just 35% of consumers see financial firms as honest and transparent.
That mix creates a high-risk combination where individuals lack the skills to make informed financial decisions and identify products that are right for their needs, but don’t trust the industry that should be helping them to do so.
The new Consumer Duty
The FCA’s forthcoming Consumer Duty should help. The new rules require all FCA-regulated providers to meet four key criteria when designing and selling products and services:
1. Consumer Understanding. People need to be able to make informed financial decisions, based on timely, clear information from providers.
2. Products and Services. Consumers should be buying products that are appropriate for them. The FCA wants to guard against customers being pushed into high-risk investments that are incompatible with their needs, or unsuitable debt products, for example.
3. Consumer support. Customers must receive suitable support throughout the time that they use a product, including help in solving problems quickly. Exit fees must be reasonable, and firms are expected to make it as easy to switch or cancel a product as it is to buy it.
4. Price and value. The FCA wants to ensure consumers receive fair value and that charges are reasonable for the benefits and products on offer.
A change in culture
The four pillars of the duty affect almost every interaction a customer has with an FCA-regulated organisation, from decision-making and purchase through to exit, and across distribution chains. Asset managers, for example, will need to supply information to financial advisers in a format that enables the adviser as well as the asset manager to remain compliant with the rules.
For some FCA-regulated organisations, complying with the Duty will be more-or-less business as usual, or require some additional reporting and compliance changes. For others, creating better standards of consumer protection in products and services has required significant internal culture change.
And the regulator is not letting companies off lightly. Responsibility for overseeing change rests with senior management and boards, and the FCA has warned that some companies will struggle to meet the implementation deadline of 31st July 2023 for new and existing products.
How does Consumer Duty affect employee benefits?
The good news is that, unless they are FCA-regulated themselves, employers are not subject to Consumer Duty, even if they pay for employees to access products or services through the workplace. (For those that are FCA-regulated, the Duty may have caused significant pressure to comply and in some instances required deep-rooted culture change).
But employees are consumers too, so most workplace financial benefits suppliers and partners will need to comply with the new rules for the products that they provide to employees. Here are some of the ways in which Consumer Duty will affect workplace employee benefits:
Financial guidance and advice
Unless an employer is FCA-regulated and providing advice to members of its own workforce, Consumer Duty doesn’t apply to employers offering access to financial guidance and advice through the workplace.
Independent Financial Advisers (IFA) who are appointed by an employer to support employees will still be subject to the Duty, as (in the FCA’s words) “they can determine or materially influence retail customer outcomes, even if they do not have a direct relationship with retail customers”.
Master trust pensions
Master trust pensions are regulated by The Pensions Regulator (TPR) rather than the FCA, so fall outside the boundaries of Consumer Duty. However, although the trustee board running a master trust is not subject to the Duty, any FCA-regulated suppliers appointed by trustees to work directly with members and influence customer outcomes, will be subject to the Duty. That could include communications providers, for example, or support services. Consumer Duty also forms part of joint workstreams between TPR and the FCA, and TPR says the two regulators are “aligned and support each other”.
Group Personal Pensions (GPP)
GPPs offered by insurance and financial services companies are subject to Consumer Duty, even though they are appointed by the employer rather than directly by employees. GPPs are (in the FCA’s words): “Likely to have a material impact on retail customer outcomes, covering the four pillars in the Duty – product design, fair value, consumer communications and consumer support.”
Group risk insurances
Some activities related to group policies are outside the scope of Consumer Duty, such as setting up a group policy, or adding new members to it. However, if an insurer contacts an individual member or provides a service to them, such as providing disclosure documents or giving support when a claim is submitted, those activities must comply with the Duty.
Debt and debt consolidation
As with some of the other benefits discussed above, employers themselves do not have any compliance requirements under Consumer Duty when offering access to benefits such as debt management or debt consolidation. However, the companies that provide those services will be FCA-regulated and will be subject to the Duty, as again they can have a material impact on consumer outcomes.
Salary Advance Schemes
Salary Advance Schemes are not regulated by the FCA, so are not required to adhere to Consumer Duty.
What do employers need to do?
FCA-regulated providers appointed by employers should be reviewing the range of products and services that they offer, and may be in the process of raising standards to meet the new expectations of the Duty. That might mean some employee benefits change or are replaced with new products – but those changes should be for the better. More appropriate information, better quality customer service and improved product design should help both employees and employers make the most of their benefits.
The Duty comes into force at the end of July this year for open and new products (and July next year for closed products), but providers should know by 30 April how existing products will meet the rules.
Now is a good time for employers to talk to their FCA-regulated providers about their preparedness for Consumer Duty, and whether they are making any changes to products and services that will affect employees in the short or long term.
