Core standards of behaviour that always apply to your business, whatever you do.
The 12 overarching principles
There are 12 overarching principles that we expect firms to follow. If you meet these well, you’ll find it easier to comply with the more detailed requirements covered later in this guide.
The ones we expect you to pay particular attention to are:
Integrity
You must conduct your business with integrity. This means being open and honest when dealing with customers and us. For example, our rules and guidance say that you must think about the interests of your customers and must not recommend credit where you know, or should know, it isn’t suitable.
Skill, care and diligence
You must conduct your business with skill, care and diligence. This isn’t just about your firm’s internal arrangements but also applies to how you deal with customers.
Management and control
You must make reasonable efforts to organise your business responsibly, with adequate controls to manage risk suited to the size of your business. As set out in section 4, your business must have senior management that are fit and proper for their roles and clear about their responsibilities, and have processes in place to comply with our rules.
Customers, relationships of trust
You must ensure that any advice given to a customer is suitable. You must do the same where you make decisions for your customers. Our rules and guidance expect you to help consumers make informed decisions, for example, by explaining key features of credit agreements. You should not pressure customers into making quick decisions.
Clients’ assets
You must ensure that you protect clients’ assets when you are responsible for them, including segregating them from your own assets. For credit brokers, this usually means looking after your customers’ money, such as fees paid by customers to be remitted to others or money that needs to be refunded.
Relations with regulators
You must engage with us in an open and cooperative way and tell us anything that we would reasonably expect to know, for example, if you are unable to meet your debts as they fall due, there are significant changes to how you make money or the credit products you offer, or if you are no longer meeting our rules. Our rules and guidance require you to submit information that we request from your firm promptly, such as requests for data.
Consumer Duty
You must act to deliver good outcomes for retail customers. The Duty is relevant to all aspects of your business. It is made up of 3 cross-cutting obligations – to act in good faith, avoid causing foreseeable harm, and support your customers in achieving their financial objectives. These rules are supported by 4 'outcomes', with rules and guidance covering products and services, price and value, consumer understanding and consumer support. Under the Duty, credit brokers are both distributors of the product they are selling, and manufacturers of the service they are providing. A manufacturer is the firm that designs the product or service and decides who it is intended for.
These case studies are illustrations of good practice relating to the Duty and as you read other parts of this guide, you will find further case studies to help you understand our expectations. These case studies are examples and are not exhaustive.
Case study 1: How a small credit broker might conduct a fair value assessment under the Duty’s price and value outcome
Context
As ‘manufacturers’ of a credit broking service, firms must ensure that credit broking fees charged to customers offer fair value, i.e. that the cost is reasonable and proportionate to the benefits of the service. All firms must carry out a ‘value assessment’ before a product is marketed or distributed to a retail customer and must review it regularly, so that consumers are not exposed to poor value products and services.
Scenario
A small independent credit broker is trying to meet its obligations under the Duty’s price and value outcome. It advises on and recommends credit products from a large panel of lenders and charges all customers a fixed fee.
Its 'Consumer Duty annual governing body' review (also known as a ‘Board Report’), includes an assessment of fees it charges customers, the cost of credit products it arranges for customers, any commission or other fees it receives from lenders, its own costs in arranging credit, and the lender’s value assessment of the product.
Good practice example
The broker uses this information to compare its fees and the cost of its products to similar brokers. For some services, its fees are consistent with other firms. However, it identifies that some customers will not need advice, and for others, it is unable to recommend a product. The firm implements a policy to waive its fees in future in these circumstances.
The firm finds that some credit products have much higher fees and charges than other comparable products. The lender of these products was unable to provide a fair value assessment to justify the fair value of the products. It therefore removes the lender from its approved panel and ceases distributing this product.
Why this matters
Our rules do not set out how firms should conduct fair value assessments. We expect them to take a reasonable and proportionate approach, that considers the size and complexity of their business. We do not specifically require firms to undertake a cost analysis, but if they do have that information, it may be useful to consider.
To monitor whether their services provide fair value, all firms should use fundamental information, like upheld complaints about the value or effectiveness of their service.
Although a credit broking firm like this might not charge fees, we still expect them to assess whether the product provides ‘fair value’. For example, they could consider whether any remuneration they receive is likely to compromise the impartiality or effectiveness of any advice or recommendation they provide.
As the fair value assessment relates to the service provided by the firm, there is no expectation for them to collect information from the customer after the point of advice/sale, if they don’t have an ongoing relationship with the customer.
Where a firm offers, sells, recommends, advises on, arranges, deals, proposes or provides a loan product, it will be a ‘distributor’. It must obtain sufficient information to understand the outcome of the lender’s value assessment and must not distribute the product unless its arrangements are consistent with providing fair value to customers.
Case study 2: How a small credit broker can clearly define target markets, and make sure that the products it recommends are suitable for its customers
Context
When dealing with financial products, such as credit, many consumers may not have the knowledge or expertise that the firm does, so it’s important that the firm understands its target markets.
Scenario
A small high street jeweller sometimes offers credit as a payment option and on doing so, sometimes explains to customers aspects of credit products and shares product information that has been created by the lender.
The jeweller offers customers two products: one that is interest-free, which it pays the lender a subsidy to provide, and another that charges interest. To meet expectations as the ‘manufacturer’ of its own broking service, the firm decides what data it can collect from customers to ensure it meets its responsibilities for the design of its broking service. The jeweller considers the needs, characteristics and objectives of the customers it serves.
Good practice example
The broker collects basic information from a loan application, such as the amount of credit requested, and the applicant’s income and profession. It also gathers information from the lender about the intended target markets for its products and asks it to share where it has declined a loan application and any cancellations or withdrawals that take place within 30 days of the agreement being made. This is so that it can look for signs that the products are not being distributed consistently with its designed target markets – but eventually finds that there are very few instances of this and no obvious trends in the information that the lender shared.
The firm was able to satisfy itself that its credit broking service is suitably designed to meet the needs of its target market, achieves good customer outcomes, and is consistent with the lender’s design of the products.
Why this matters
If firms find issues that are affecting a group of customers, it could be a sign that they haven’t correctly defined that target market. As credit broking firms are distributors of lending products, it’s important that they have sufficient information from lenders and understand the product(s). This will make sure that their distribution arrangements are appropriate to the customers’ needs, characteristics and objectives.
Case study 3: Supporting customers in vulnerable circumstances
Context
Customers in vulnerable circumstances may have additional needs or be at greater risk of harm if things go wrong.
Scenario
The impact of the cost of living crisis has meant that more people are finding themselves in vulnerable circumstances. An online personal loan broker is considering how it can better meet the needs of such customers.
Good practice example
The firm already collects information from customers about the reason they are seeking credit and finds that a significant number are trying to cover basic expenditure, such as food or energy. Others are applying for credit to consolidate existing debts and make repayments more affordable.
Although these customers are in the firm’s target market, it has identified a risk of foreseeable harm and puts in place measures to mitigate this.
It introduces a policy that signposts these customers to the Money and Pension Services’ Money Helper and Free Debt Advice Finder pages, where they can find guidance on asking for support from creditors when struggling to make repayments, on budgeting and on accessing unclaimed benefits – as well as how to access free debt advice.
The firm also works with a debt advice charity to refresh its policies for handling customers in vulnerable circumstances to include real-life scenarios. These help staff identify some common indicators of emerging financial difficulties. It then trains all its staff. From then on, every time a call agent identifies key indicators, for example that a customer is applying for a high-cost loan to cover energy bills, the agent will make them aware of these resources before proceeding with their credit application.
Why this matters
Customers’ personal circumstances can make them susceptible to harm. By understanding customers’ needs, firms can act to deliver good outcomes for them and avoid causing foreseeable harm through offering flexible services that meet these needs.
Case study 4: How small credit brokers can complete their annual Consumer Duty governing body report
Context
Firms that have a relationship with retail customers must produce a governing body report at least annually. This is also known as a Board Report and should reflect the firm’s size and complexity. It should outline how the firm is monitoring the requirements of the Duty and document what it’s doing to make sure customers’ outcomes are good.
Scenario
A small car dealership makes applications for credit for customers wishing to obtain a vehicle on finance. It offers various types of finance provided by one lender, including PCP, hire purchase and consumer hire options.
The firm is preparing its annual Consumer Duty governing body report. But because it’s small, it doesn’t have much dedicated compliance and audit resource and its customer records are limited. The firm is identifying the data and inputs needed to help produce the report.
Good practice example
The firm reviews the limited information that it collects about customers (such as their age and profession), the vehicle (mileage, age, retail value and type) and the details of the finance. The firm also collects information about complaints, Trustpilot reviews as well as some information from the lender on voluntary terminations and informal extensions. This helps it understand different customer outcomes and how different products perform.
When analysing this for its Board Report, the firm finds some common misunderstandings about important aspects of the agreements, such as which type is best for a customer intending to keep the vehicle at the end of the term, and the existence of excess mileage charges. Based on this, the firm decides to implement a survey for customers to complete at the point of sale and six months later, to help it understand customers’ experiences over time.
Why this matters
Delivering good outcomes for customers should be at the centre of firms’ strategy and business objectives. Because smaller firms have simpler governance structures, we don’t expect the same level of formality in compiling the report from them compared to larger firms. All firms, however, should be able to monitor customer outcomes and take appropriate action.
Smaller firms may benefit from having a knowledgeable ‘critical friend’ to provide impartial feedback on their approach to the Duty if they don’t have dedicated compliance and audit functions. Firms can use qualitative feedback, such as observations from frontline staff, customer surveys or interviews to inform their governing body report.
