Voice of the Industry

Unique challenges for payments firms as Consumer Duty goes live

Tuesday 8 August 2023 11:42 CET | Editor: Oana Ifrim | Voice of the industry

Andrew Neeson, Managing Editor & Research Director at Vixio Regulatory Intelligence, offers his expert advice on the new Consumer Duty rules.


The deadline of July 31st has passed for payments and e-money firms in the UK to start complying with the Financial Conduct Authority’s (FCA) new outcomes-focused regulation, and with it comes new challenges that cannot be ignored for payment service providers now firmly in scope.

Following a financial markets review and consultation, the FCA identified what it terms as poor practices and situations where the consumer is in a `lesser position` (such as a weaker bargaining position), or where there are asymmetries of information, consumer inertia, lack of understanding or behavioural biases.

These practices and situations have led the FCA to develop the new Consumer Duty, requiring that firms apply an outcome-focused approach to ensure customer protection, rather than prescriptive rules.As such, the FCA is introducing rules relating to four desired outcomes: products and services, price and value, consumer understanding and consumer support.

How payments firms are affected

The Duty emphasises customer outcomes over a rules-based approach, applying to all firms that have “a material influence over, or determine, retail customer outcomes”, meaning that firms not directly dealing with individual consumers may be in scope if they can influence material aspects of design, such as price and value, or consumer support and communications. This, therefore, could well include merchant acquirers. 

Scope of Duty

During the consultation process, some businesses argued that it would be unfair to apply the Duty to payments firms. The FCA rejected this, however, and UK payment and e-money businesses are now squarely included in the scope.

For payments firms, this covers any business conducted with consumers, micro-enterprises, and small charities. In addition to dealings with existing retail customers, the Duty will also be applicable when a firm approves or communicates a financial promotion, when answering questions from prospective customers, and in cases where prospective customers apply for a product.

It is worth noting that the Duty can only apply to FCA-regulated firms. With buy now pay later (BNPL) not currently regulated in the UK, some BNPL firms may be outside of the FCA's purview if they do not offer any other regulated products.

The FCA wants to ensure that consumers pay fair prices for goods and services. It anticipates that businesses will determine whether a product or service offers fair value throughout the course of its lifecycle, avoids predictable harm, and does not impede the customer's usage of the goods or service.

Step change

This represents a fundamental step change in regulatory expectations and standards, requiring firms to prioritise serving their clients' needs and achieving positive results for them. For instance, businesses need to offer helpful and responsive customer support. According to the FCA, it should be as simple to switch, cancel, or complain about items as it is to purchase them.

Firms also need to explain and justify their pricing decisions, including being able to demonstrate that rates offer fair value. Determining the application of the rules has been challenging, but regulated payments firms are taking this seriously and engaging with the requirements.

Firms also need to justify and explain their pricing choices, including evidence that prices are fair.
Many payments companies also appear not to be adequately prepared for the Consumer Duty. For example, compliance consultancies have told us that they are still receiving requests for guidance from payment companies. One noted that many businesses have not even developed an implementation strategy, which was supposed to be in place by 31st October last year.

Major issues for payments firms

Some industry insiders have told us that payments organisations may find it more difficult to apply the Duty than other sectors due in part to the low level of maturity of many firms. For example, unlike products such as mortgages and pensions, it may also be more of a challenge to identify specific consumer harms related to the payments industry.

Indeed, the impending restrictions have not exactly been met with enthusiasm by some in the payments industry. The Payments Association recently expressed its concern that the Duty will increase compliance and benchmarking costs for those payment firms already offering adequate value, all the while doing nothing to improve customer centricity.

In addition, there are specific challenges related to fee structures. For example, the Payment Systems Regulator has previously criticised fee acquirer arrangements as being too complicated and opaque (especially for SME merchants), which will only gain more momentum thanks to the introduction of the Duty. White-labelled products will require careful monitoring, especially when provided by in-scope companies to card programme managers and other out-of-scope individuals.

Strong Customer Authentication (SCA), which must be appropriate for all client groups, is another issue. SCA may not be acceptable to customers with patchy mobile phone service and could be unsuitable for vulnerable customers.

Is enforcement on the horizon?

Now the compliance deadline has passed, businesses must keep putting improvement front and centre. This deadline is a stop along a longer path; as such, businesses should concentrate on integrating the Duty into every aspect of their culture and operation and view it as a chance to improve continued monitoring of client results, strengthen customer loyalty, and differentiate their customer offering.

Payments and e-money companies should anticipate FCA audits of their compliance now that the rules are being enforced. The primary purpose and strategy of a company should depend on getting this right because it centres on customers and their outcomes.

To emphasise the value and significance of the regulatory change, it is anticipated that the FCA will concentrate on the industries where consumer harm is most likely to occur and to work quickly to hold the worst violators accountable.

The industry hopes that it will be given the benefit of the doubt and that the well-intentioned nature of their involvement and ongoing efforts will be noted. But the FCA is bound to ask for documentation in the near future, so it is best to have this in place before potential enforcement is taken.

The Duty was ultimately intended to increase competitiveness, encourage consumer loyalty, foster trust, and lower the likelihood of unfavourable results, but only time will tell if it can succeed in these goals.

About Andrew Neeson

Andrew joined Vixio in September 2021 and leads the research team in payments compliance. He has spent more than 20 years in research and analysis focused on the payments industry, starting at the British consumer publication Which? Since 2007, he has held strategy roles within the payments industry at Vocalink and Mastercard and as Head of Research for Lafferty Group.


About Vixio Regulatory Intelligence

Headquartered in London and with an office in Washington DC, Vixio Regulatory Intelligence provides insights, intelligence, and data to some of the world’s biggest brands involved in the global gambling and payments industries. Vixio’s powerful intelligence solutions and its industry experts empower organisations to understand complex regulatory frameworks, helping them to confidently manage compliance risk, while analysing and pursuing new opportunities in fast-moving, volatile markets.

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Keywords: FCA, regulation, payments , Consumer Duty
Categories: Banking & Fintech
Companies: Vixio Regulatory Intelligence
Countries: United Kingdom
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