The FCA’s new Consumer Duty

What’s the discussion about?

On 27 July 2022, the FCA set out its final rules and guidance for a new Consumer Duty to be introduced into the FCA’s principles for businesses. The Consumer Duty aims to increase the current level of consumer protection in the retail financial services market by setting clearer and higher standards for the culture of firms and the conduct the FCA expects of them. Firms will be required to consider the impact of the products and services they sell to consumer both at pre-sale and post-sale stages.

Central to the FCA’s proposal is the introduction of a new consumer principle requiring firms to act to deliver good outcomes for retail customers. The consumer principle is underpinned by cross-cutting rules providing greater clarity on the FCA’s expectations under the new Principle and helping firms interpret the four outcomes (see in point III below). Under the new rules, consumers should: (i) receive communications they can understand; (ii) receive products and services that meet their needs and offer fair value; and (iii) get the customer support they need, when they need it.

Why is the Consumer Duty relevant?

The FCA has signalled that it thinks the new Consumer Duty will lead to a major shift in how financial services are delivered and firms will need to adapt their governance mechanisms to ensure their regulatory compliance with the requirements set out in the Consumer Duty. Below you may see an overview of the Consumer Duty and its implication for UK financial services firms (including authorised Payment Institutions and Electronic Money Institutions).

Nikhil Rathi, the FCA’s CEO, delivered a speech on the importance of the Consumer Duty on 16 November 2022. Mr Rathi referred to the Duty as ‘the elephant in the jungle’ and highlighted, amongst others, the role of the Consumer Duty in facilitating innovation and financial inclusion. MR Rathi also expressed the view that the Consumer Duty alongside the Senior Manager’s and Certification Regime will give the FCA the framework to respond quickly to innovations and the use of Artificial Intelligence in a way that could enable new products to be trialled, with informed consent and consumer interests standing front and centre.

Which activities and products are in scope?

The Consumer Duty will apply to firms’ regulated activities and the FCA’s proposals relate to products and services sold to ‘retail clients’. The FCA has explained that this term includes all clients other than professional clients (such as large corporate entities and government bodies) and eligible counterparties. The FCA’s proposals also extend to payment institutions and electronic money institutions so that customers that are consumers or micro-enterprises will be considered “retail clients” for the purposes of the Consumer Duty. However, in relation to outsourcing, the FCA has stated that ‘unless an FCA-authorised outsource provider can determine or has a material influence over retail customers, it would not be subject to the Duty’.

Importantly, the FCA’s proposals extend to firms which are involved in the manufacture or supply of products and services to retail clients, even if said firms do not have a direct relationship with the end customer. The FCA has referred to the markets covered under the proposed rules by using the term ‘retail markets’.

Which are the three key pillars of the Consumer Duty?

I. The Consumer Principle

Through the introduction of the consumer principle and the Consumer Duty as a whole, the FCA aims to apply an enhanced level of care that would also strengthen the existing requirements in its Principles[1], in particular in Principle 6 (customers’ interests).

This principle currently reads that a firm must have due regard to the interest of its customers and treat them fairly. On implementation of the Consumer Duty, this will become an objective standard that will require firms to consider the reasonable expectations of their customer base as a whole, rather than them aiming to achieve the absolute best outcome for each individual customer (see our analysis below on the concept of “reasonableness”).

II. Overarching cross-cutting rules

A set of cross-cutting rules will develop and amplify the standards of conduct the FCA expects from firms. The new rules require firms to:

a) Avoid causing foreseeable harm to consumers

• firms will be prohibited from causing harm to customers through their conduct, products or services and required to take proactive steps to avoid causing such harm to consumers;
• firms should not seek to exploit customers’ vulnerabilities, behavioural biases or lack of knowledge; and
• firms should be fair in describing the benefits and risks of their products and services.

b) Enable customers to pursue their financial objectives

• firms must ensure that consumers are able to act in their own interests; and
• firms should use their knowledge of consumers’ behavioural characteristics to enable and support consumers in making informed decisions.

c) Act in good faith

• a new standard of conduct characterised by honesty, fair and open dealing, and consistency with the reasonable expectations of consumers will be established.

III. The Four Outcomes

The Four Outcomes represent the key elements of the firm-customer relationship: how firms design, sell and service products and services, and the key contact points along the customer journey. The Four Outcomes are the following:

1. Quality of products and services
   The FCA wants all products and services to be fit for purpose (i.e., designed to meet consumers’ needs and targeted at them). The proposed rules will apply in relation to all new products and/or services, or even to any significant adaptations to said products or services, before those are marketed or distributed to retail consumers. The rules will also apply to existing products and services before they are sold to new customers.
   Senior management will be expected to ensure that the likely outcomes customers will receive from the products and services sold are properly assessed and documented.
   
   
2. Price and value of products and services
   Following the implementation of the Consumer Duty, the assessment of whether the price of a product or service provides for a fair value must - consider at least the following factors: the nature of the product or service; any limitations that form part of a given product or service; the price consumers will pay; as well any characteristics of vulnerability amongst the targeted audience.
   Senior management will be expected to document and evidence that the firms’ products and services are delivering fair value for customers and are being regularly assessed.
   
   
3. Consumer understanding
   Firms’ communications must support consumers and enable them to make informed decisions about financial products and services. To achieve this, communications must be tailored according to the characteristics of the intended audience, the complexity of the product, the communication channel used, and the role of the firm; be communicated to retail customers in a way that is clear, fair and not misleading; and provide information to retail customers that is accurate, relevant; and on a timely basis.
   Senior management must ensure that customer communications are transparent and fully disclose all costs and fees involved. They will also be responsible for establishing an effective complaint-handling process for consumers who might not fully understand the fees’ structure or might be dissatisfied with the level of fees charged.
   
   
4. Consumer support
   Firms will be required to provide a level of support that meets consumers’ needs throughout their relationship with the firm. Firms must not disadvantage retail customers, including those in vulnerable circumstances; must ensure customers can use products as reasonably anticipated; and ensure that consumers do not face unreasonable barriers (including unreasonable costs) when pursuing their financial objectives.
   Senior management will be expected to commission regular reviews on the level of service provided to customers through complaints’ analysis and call monitoring.

What is the concept of “reasonableness” and why is it important?

The concept of reasonableness has been embedded in the Consumer Duty. The standard reflects the tortious concept of how a reasonable prudent firm would act and will apply to the interpretation of all the elements of the Consumer Duty, including the consumer principle, as discussed above. This is an objective standard of conduct that firms would need to meet and not something that they can define for themselves. The FCA has set out its expectation that firms should already be familiar with this principle due to their existing duties under common law.

… and which are the key implications for firms?

The Consumer Duty is expected to have wide-ranging implications for firms:

• the renewed focus on customers’ interests and outcomes will inevitably lead firms to consider the Consumer Duty at every stage of their processes and at every level of their organisational structure.
  Senior Managers will be responsible for ensuring the duty is met across the firm’s business areas and they could be held accountable for failures to comply with the requirements and standards of the Consumer Duty. Specific responsibility for overseeing adherence to the Consumer Duty should be documented in the Senior Managers’ Statement of Responsibilities.
• appropriate management information (MI) will be key to evidencing that the delivery of customer outcomes is being properly assessed and monitored. MI must be ‘fit for purpose’ and support senior management in evidencing that they are taking “reasonable steps” to meet the requirements of the Consumer Duty.
• the expectation will be for firms to adopt a “get it right in the first place” approach, particularly when designing products and services. The FCA also expects firms to place greater emphasis on putting customers in a position where they can make decisions to meet their needs and pursue their financial objectives.
• firms will be required to monitor, test and adapt their practices and processes on an ongoing basis to satisfy both themselves and the regulator that they are delivering the expected outcomes. The FCA will expect firms to provide information and data to it to evidence their compliance with said outcomes[2].
• Firms must deliver regular training to their staff on the Consumer Duty which will be overseen by their Senior Management.
• a firm’s governing body should review and approve the firm’s assessment of whether it is delivering good outcomes for its customers which are consistent with the Consumer Duty, at least annually.

The FCA expects the implementation of the Consumer Duty to be iterative, and it will engage with firms to determine good practice in terms of implementation and reviews of products and services.

So what happens now?

The new rules will come into force on a phased basis:

a) for new and existing products or services that are open to sale or renewal the rules come into force on 31 July 2023; whereas

b) for closed products or services the rules come into force on 31 July 2024[3].

The FCA has recognised that these deadlines, although longer than what it had initially consulted on, will still be challenging for many firms, particularly for those manufacturing and/or distributing large numbers of open products.

Against this background, the FCA has set out clearer expectations for actions firms should take during the implementation period. This includes key milestones for when the FCA expects firms to have finished planning their implementation work, reviewing their existing open products and services, and remedying any identified issues to ensure they are fully compliant with the Consumer Duty.

The key dates and expectations of firms during the implementation period

1. October 2022[4]: firms’ boards (or equivalent management body) should have agreed their implementation plans and be able to evidence these are deliverable and robust to meet the new standards. Firms should expect to be asked to share implementation plans, board papers and minutes with supervisors.
2. April 2023: Manufactures to share the information necessary for them to meet their obligations under the Consumer Duty with distributors.
3. July 2023: Manufacturers to identify any changes that might be needed to be made to their existing open products and services and implement the required remedies.
4. Ongoing obligations: (a) firms to remedy any issues causing immediate consumer harm; (b) firms to report to the FCA any harm which is likely to constitute a breach of existing requirements and/or rules; (c) obligation to engage with the FCA in circumstances where firms are considering withdrawing or restricting access to products or services in a way that impacts vulnerable consumers or the overall market supply; (d) firms to notify the FCA if they believe that they will not have finished the work necessary to be compliant with the Consumer Duty before the implementation deadlines.

Which is the position of firms currently applying for authorisation?

It should be noted that the FCA has already updated its dedicated webpage and inserted a caveat mentioning that “authorisations’ assessments of firms and individuals is forward looking (i.e. firms and individuals must demonstrate they can comply with our rules and guidance on an ongoing basis). So, any firm or individual applying for authorisation (and those applying to vary their permissions will have to demonstrate that they can meet the requirements of the Consumer Duty, as they relate to them, from now on”.

The October 2022 FCA update on the implementation of the Consumer Duty

On 5 October 2022, the FCA published an information notice to help firms implement the Consumer Duty and prepare their implementation plans by the end of October 2022.

The end of October deadline reflects that firms will need clear plans in order to implement the Duty properly and timely. Whilst the FCA did not expect from firms to have necessarily fully scoped all work required to embed the Duty by the October deadline, the FCA’s expectation had been that firms could set out how they would do so by the end of October to ensure timely implementation.

The FCA’s update imposed the following obligations to firms:

• Firms had to agree on their implementation plans by 31.10.2022
  The FCA’s expectation had been for firms’ plans to be sufficiently developed by the end of October deadline to provide both firms’ governing bodies and the FCA with the reassurance that the expectations set out in the Duty had been carefully considered and will be implemented for new and existing products by 31 July 2023.
• Firms to designate a Consumer Duty champion
  The FCA has set out its expectation that firms should designate a Consumer Duty champion at Board (or equivalent governing body) level who will be responsible to ensure the Duty is discussed at Board levels. Where possible, this champion should be an Independent Non-Executive Director (NED). For larger organisations, the FCA expects this champion to be at an appropriate Board level to ensure that the Duty is being discussed in a meaningful way.

The primary role of the Board Champion will be to support the Chair and CEO in ensuring that: (a) the Duty is being discussed in all relevant discussions; and (b) the Board is challenging the firm’s governing body/management on how it is embedding the Duty and focusing on Consumer outcomes. The designation does not affect the Board’s collective responsibility in relation to the Duty or anyhow alters the respective roles of the Board and the executive in ensuring compliance with the Consumer Duty under existing governance procedures. It must be made clear that the Board champion will note be responsible for the implementation of the Duty but rather for ensuring that the Duty is discussed at the Board.

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[1] https://www.handbook.fca.org.uk/handbook/PRIN/2/1.html

[2] References to data and monitoring are contained, amongst others, in sections 6.64 (following); 7.44 (following); 8.58 (following); and 9.42 to the Final non-Handbook Guidance for firms.

[3] Closed products have been defined as those that are no longer marketed or distributed to retail customers or open to renewal. When existing customers can continue to make payments under the existing product terms this would still be considered closed, as long as the product or service is not open to new customers.

[4] See also our analysis on the 05 October 2022 update published by the FCA and discussed in the last section of this article