In July 2022, the Financial Conduct Authority (FCA) published its final policy, rules and guidance on the new Consumer Duty (“the Duty”). Subject to some exclusions, the Duty applies to products and services offered to retail customers and has the aim of setting higher and clearer standards for firms providing such products and services, resulting in better protection of retail customers and the promotion of competition amongst firms and service providers.
In essence, this new Duty requires that firms put consumers at the heart of their business and focus on delivering good outcomes for customers. It puts a stronger focus on customers' interests and outcomes, going beyond a narrow "tick-box" focus on compliance with the FCA rules. A firm will need to consider the Duty at every stage of its processes and at every level of its organisational structure.
The FCA believes that the Duty will give firms more certainty about the standards it expects of them and the standards that consumers can expect of firms. The Duty is designed to reinforce and complement the FCA's existing handbook requirements (for example, the current Principles for Businesses and the conduct of business rules). Firms should ensure that the needs of vulnerable customers continue to be addressed effectively and that vulnerable customers achieve outcomes that are as good as those of other consumers .
Firms do not have a responsibility to protect customers from all foreseeable harm. Many financial products involve the risk of adverse outcomes for consumers (for example, investments may carry a risk of capital loss) – firms are not required to protect consumers from risks that are understood and accepted.
The FCA makes it clear that the Duty will not apply retrospectively to past business – it will apply on a forward‑looking basis to existing products and services, including closed book products and services .
What is the Duty?
The Duty comprises of a (i) new Consumer Principle, (ii) the cross-cutting rules and (iii) the four outcomes that the FCA expects firms to adhere to on a continuing basis:
- Consumer Principle: The FCA has introduced a new Principle 12. Principles 6 and 7 do not apply where Principle 12 applies but will continue to apply to conduct outside the scope of the Duty (for example, certain SMEs and wholesale business). Principle 12 requires firms to “act to deliver good outcomes for retail customers” and sets a higher standard than Principle 6 (to pay due regard to customers and treat them fairly) and Principle 7 (to communicate with customers in a clear and fair way which is not misleading). Firms are required to consistently evaluate the compatibility of their products and services against customers' needs and the outcomes that customers want from those products and services irrespective of whether or not the customers are direct clients of the firm.
- The cross-cutting rules: These rules set out
parameters for firms to apply in order to deliver good outcomes for
retail customers and those parameters are:
- Firms must act in good faith to assist customers to achieve good outcomes (including keeping customers' interests in mind while designing products and services, and not under emphasising the impact of future costs or charges (e.g. termination or renewal fees)).
- Firms must avoid causing foreseeable harm to customers through their conduct, products or services and must take proactive steps to avoid it (where it is within the firm's control to do so). Examples include lack of clarity of firms' policies leading to customers experiencing loss or harm, lack of adequate testing of the product or service in different markets to ensure its impact on customers and lack of clarity on costs resulting in customers paying more than they intend to or could afford.
- Firms must enable and support retail customers to pursue their financial objectives throughout the customer journey. This rule requires firms to take proactive measures to equip customers with enough information to enable them to make informed choices.
- The four outcomes: The FCA has implemented
four driving factors for firms to focus on in order to comply with
the above rules and Principle 12. The factors that firms need to
- Products and services – Are the products and services designed in a way that would meet customers' needs and ensure they are fit for the purposes arising out of such needs? The FCA wants all products and services that are sold to consumers to be fit for purpose. It wants them to be designed to meet consumers' needs and be targeted at the consumers whose needs they are designed to meet.
- Price and value – Are the products and services fairly priced so that that customers get fair value for money from opting for those products and services? The FCA wants to ensure that products and services represent fair value, as well meeting consumers' needs and objectives.
- Consumer understanding – Are firms' communications about their products and services clear and not misleading in explaining, for example, their features and risks involved? The FCA wants firms' communications to consistently support consumers by enabling them to make informed decisions about financial products and services. It wants consumers to be given the information they need, at the right time, and presented in a way they can understand.
- Consumer support – Does the firm have systems in place to provide adequate support to customers? The FCA wants firms to provide a level of support that meets consumers' needs throughout their relationship with the firm. This means firms' customer service should enable consumers to realise the benefits of the products and services they buy and ensure that they are not hindered from acting in their own interests.
A concept of reasonableness applies to the interpretation of all aspects of the Duty, including the Consumer Principle (Principle 12). The aim of this is to clarify the objective standard of conduct that could reasonably be expected of a prudent firm:
- carrying on the same activity in relation to the same product or service; and
- with the necessary understanding of the needs and characteristics of its customers based on the needs and characteristics of an average customer.
The FCA has set out the following timescales to achieve compliance with the Duty:
- 31 October 2022 – boards / management bodies should have agreed their firm's plans for implementing the Duty in compliance with the deadlines specified below. Firms should expect to be asked to share implementation plans, board papers and minutes with supervisors and be challenged on their contents .
- 30 April 2023 – manufacturer firms (firms who create, develop, design, issue, manage, operate, carry out or underwrite relevant products and services) should complete their assessments of their existing open products and services and share with distributors the information and action points necessary for distributors to meet their obligations under the Duty.
- 31 July 2023 – all remedial actions must have been implemented so that open products and services comply with the Duty.
- 31 July 2024 – firms must have implemented all steps necessary to ensure that closed products and services comply with the Duty. Deadline for boards / management bodies of firms that have had to comply with the Duty since 31 July 2023 to produce the firm's first annual report on complying with the Duty.
There are currently no regular reporting obligations in respect of the Duty. However, a key part of the Duty is that firms assess, test, understand and are able to evidence the outcomes their customers are receiving, so regular review and analysis will be required.
The FCA requires firms to notify it of any serious breaches of their obligations under the FCA's Principles or if they are unable to meet the above deadlines, or if firms decide to withdraw or restrict access to products and services as part of their plan to implement the Duty.
Firms will be required to notify the FCA if they become aware that another firm in the distribution chain is not complying with the Duty. Firms will also be required to notify other firms in the distribution chain if they think that the other firm has caused, or contributed to, harm to retail customers.
Action to be taken now
Firms' compliance plans should already be in progress. Some key action points to consider include:
- review of products and services to determine the applicability of the Duty requirement and, where applicable, compliance with the Duty requirement
- management briefings
- staff awareness training
- resourcing requirements
- preparation of implementation plans
- reviews and updates of product literature and
- ongoing compliance monitoring
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.