What is cross-cutting rule number two? (A firm must avoid causing foreseeable harm to 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. This blog takes a look at the second of the three Cross Cutting Rules: “A firm must avoid causing foreseeable harm to retail customers.”

For context about the role of Consumer Duty and how it's made up, please take a look at the opening section of our first blog on Consumer Duty.

The three Cross Cutting Rules are at the heart of the Consumer Duty. Let's consider the second Cross Cutting Rule.

What is Cross Cutting Rule number two?

The second Cross Cutting Rule is that a firm must avoid causing foreseeable harm to retail customers.

The actions and omissions of your firm can cause foreseeable harm to your customers. This can apply to your advisers, where there is a direct relationship, as well as their role in a distribution chain. The scope of your firm's responsibilities will be affected by its role and influence on customer outcomes.

This rule hinges on the word 'foreseeable' so it's important to consider whether a firm acting responsibly and reasonably would be able to anticipate their actions or omissions, related to a service, having a harmful result.

So, this means that firms must take steps - both proactive and reactive - to ensure that they avoid harm being caused to their customers. These steps include actions they take through their professional conduct or services where it's in their control to do this.

The scope of this rule is broad and incudes firms making sure that no part of their terms and conditions, marketing, or sale and support for their products or services cause foreseeable harm.

What are examples of firms causing foreseeable harm?

It's difficult to provide an exhaustive list, but some examples of firms causing foreseeable harm are:

Customers not being able to cancel a product or service that is no longer right for them, because the firm's processes are not clear, or are hard to navigate.
Products and services which perform poorly because they have not been adequately tested in a variety of market situations to determine how consumers might be affected.
Consumers exhibiting vulnerability traits, who cannot access a service properly because the appropriate customer support is not available to them.
Customers falling victim to scams because a firm has inadequate systems to detect or prevent scams, or test and monitor scam warning messages to customers.
Consumers discovering it is too hard to switch to a better product or different provider because the process is too complicated or not clear.

The principles of Consumer Duty are led by the idea of reasonableness, which means that firms can only assess the risk of harm if it is reasonably foreseeable at the time, based on what a firm knows or might reasonably have been expected to know. Often this will be influenced by the available information. The FCA expect all firms to gather sufficient information so that they can act to avoid causing foreseeable harm.

The FCA also maintain that your firm's duty to avoid foreseeable harm remains across the customer journey and lifecycle of the service. Firms also need to ensure that they have regular reviews to identify new harms, for example from press reporting, FCA supervisory comments and complaints management information.

How can firms avoid foreseeable harm?

Some guidelines on avoiding foreseeable harm include:

Being clear when communicating key terms, and highlighting key risks for consumers, which could include adequately explaining key risks in ways that customers can understand.
Thinking about the information that customers need beyond the point of sale, and across the product lifecycle.
Being flexible with customer support, taking account of customers who are vulnerable.
Adopting a flexible consumer support approach that takes account of the needs of customers with characteristics of vulnerability.

What does this rule NOT expect of a firm?

The FCA are clear that this rule and the overall Consumer Duty do not mean that customers can or will be protected from all harm.

Harm could occur because some outcomes and circumstances were not reasonably foreseeable, for example market and economic conditions could affect the future suitability of particular products for some customers.

Or, a customer's circumstances could alter suddenly in a way that had an effect on, for example, their insurance cover just before they needed to claim. However, where a firm might reasonably be expected to take action, they should do this.

How does risk affect the rule?

The FCA is clear - many financial products involve the understanding and acceptance of various degrees of risk.

Firms are not expected to protect their customers from risks which they reasonably believe the customer understood and accepted, such as the risk of capital loss on an investment, or that secured lending puts on a consumer's home at risk if they do not meet the repayment.

Similarly, the rule does not prevent an assertive customer from making choices or behaving in a way that the firm regards as being against their interests.

Customers sometimes make poor decisions, and firms should always try to help them understand the consequences. However, if a customer is insistent on an action that the firm considers harmful, the firm is not obliged to prevent it. But, of course, the firm should ensure that customers are fully aware of the risks of their action, and should also ensure effective documentation and evidencing of the advice that was given and any action that the customer subsequently takes.