The Consumer Duty sets the standard of care that firms should provide to customers in retail financial markets.
What is the new Consumer Duty?
Following the May 20211 consultation and a second consultation in December 20212, the FCA published PS22/93 on 27 July 2022, as Guidance given by the FCA under section 139A of the Financial Services and Markets Act 2000 (FSMA). FCA policy statement PS22/9 together with Final non-Handbook Guidance for firms on the Consumer Duty in FG22/5 sets out final Rules and Guidance in respect of the new Consumer Duty, which places an increased emphasis on firms putting the needs of their customers first, by creating a requirement that they do so. Firms will also need to remember to take into account the FCA's guidance on the fair treatment of vulnerable customers (FG21/1) when considering how to comply with the new Consumer Duty.
The new Rules and Guidance come into force on a phased basis:
On 31 July 2023, the Consumer Duty will apply to all new products and services, and all existing products and services and remain on sale or open for renewal. It will then come fully into force at the on 31 July 2024 and will apply to all closed products and services.
There is now a new Principle 12 which sets out that "A firm must act to deliver good outcomes for retail customers." Where the new Principle 12 applies, Principles 6 and 7 do not apply. Principle 12 is considered to impose a higher and more exacting standard of conduct than Principles 6 and 7. Failure to comply with Principle 12 may lead to FCA enforcement action resulting in fines and associated damage to reputation. At the current time, however, there is no private right of action in respect of the new consumer duty.
Principle 12 and the Cross Cutting Rules
The Consumer Duty is structured to consist of 3 core elements:
- Principle 12
- The Cross-Cutting Rules
- The Four Outcomes
Principle 12 reflects the overarching, high standard of behaviour required of firms by the FCA. The Cross-Cutting Rules then further develop the Authority's expectations for firms in delivering good consumer outcomes, by applying the following requirements:
- Firms must act in good faith towards retail customers
- Firms must avoid foreseeable harm to retail customers
- Firms must enable and support retail customers to pursue their financial objectives
Principle 12 and the Cross-Cutting Rules are then supported by the Four Outcomes which consist of Rules and Guidance setting more detailed expectations for firm conduct in four particular areas:
- Governance of products and services
- Price and value
- Consumer understanding
- Consumer support
Who does the new Consumer Duty apply to?
The new Consumer Duty applies to all firms that "have a material influence over, or determine, retail customer outcomes" - and across the whole distribution chain, from product and service origination through to distribution and post-sale activities. It applies to the regulated activities and ancillary activities of all firms authorised under FSMA, the Payment Services Regulations 2017 and E-money Regulations 2011, in relation to products and services affecting prospective and actual retail customers. Who is to be treated as a retail customer for these purposes will depend on the specific regulated activity in question. Although the Consumer Duty will not apply in relation to customers who choose to be treated as professional clients pursuant to the COBS rules in relation to investments, it does apply to the process by which a firm determines the status of a customer. If, for example, a firm were to encourage a customer to pursue a classification as a "professional client" in order to avoid providing protection to that customer under the Consumer Duty, that would accordingly be a breach of the duty.
Where Principle 12 applies, Principles 6 and 7 do not apply, as Principle 12 imposes a higher standard of conduct on firms. However, firms should be aware that conduct that would have breached Principles 6 and/or 7 would likely constitute a breach of Principle 12. Where Principle 12 does not apply, Principles 6 and 7 will continue to apply to transactions that fall outside the scope of the duty. For example, in circumstances where services or products are exempt or unregulated, they will not be within the scope of Principle 12 and Principles 6 and 7 will continue to apply.
How will the Consumer Duty provide better Consumer Protection?
The Consumer Duty will provide heightened protection to consumers, given the potential for them to be exploited by firms and because they are do not always possess the knowledge and experience to make good decisions for themselves. When firms design products they often do not ensure that they present fair value to the consumer and they do not prioritise the needs of their customers adequately, sometimes prioritising profit ahead of favourable outcomes for their customers. The new duty therefore heralds an increased layer of protection to consumers which will signal amplified scrutiny of firm behaviour. It will also seek to prevent and minimise the likelihood of customers being exploited by firms, sometimes for reasons that they themselves would not even identify as weaknesses, such as their own inertia and loyalty to their existing provider for brand purposes. The onus therefore now, more than ever, is on firms to act in good faith towards retail customers and avoid foreseeable harm to those individuals.
Importantly, the Consumer Duty also supports existing legal requirements, such as those in the Equality Act 2010. Firms are required to take appropriate action to remedy the situation when they identify any group of retail customers that is experiencing different, less favourable outcomes compared to other customers.
What challenges may firms face in implementing the new Consumer Duty?
Firms may face a number of challenging issues as part of their implementation of the new Consumer Duty. These may for example include: identification of customers in scope and whether that includes small and medium enterprises (SMEs); products in scope and whether the target market includes retail customers; reviewing closed books for fair value; relationships with other firms in the distribution chain – obtaining necessary information and identifying where responsibility lies; and whether review of existing products will in fact lead to retrospective application of the new duty.
More generally concerning the lifecycle of the customer relationship, firms will need to ask themselves whether they are applying the same energies, resources and standards to delivering good outcomes for their customers as they are for generating revenue for the firm in those areas of the business. This is a critical examination in testing systems and motivations and paving the way for fairer and more favourable customer outcomes. Once customers have purchased a product, firms will need to question whether the ongoing information and support is as clear and unequivocal as that used to sell the product to those individuals in the first place.
It will also be crucial for firms to regularly assess and monitor customer outcomes and to then take corresponding action to address risks and harms arising, whilst putting customer needs at the heart of their culture and business.
Governance and accountability
The Consumer Duty requires firms to ensure that acting to deliver good outcomes is reflected in their strategies, governance, leadership and people policies, including incentives at all levels. Staff incentives, performance management frameworks and remuneration structures must be designed in a way that is consistent with ensuring good outcomes for customers.
A firm's board or equivalent governing body is responsible for ensuring that the Consumer Duty is properly embedded within their firm. Firms are expected to have a "Consumer Duty Champion", who should ideally be an independent non-executive director, on the board or equivalent governing body. That person should work with the Chair and CEO to make sure the Consumer Duty is raised in all relevant discussions. A report must be prepared for the board to review and approve, at least annually, assessing whether the firm is delivering good outcomes for its customers which are consistent with the Consumer Duty. The FCA will expect to be provided with the report and supporting management information on request.
To support the above, each senior manager under the Senior Managers and Certification Regime (SMCR) at a firm should be clear about what they are responsible and accountable for, and how they are ensuring that the business of the firm complies with the requirements of the Consumer Duty on an ongoing basis.
Lastly, the FCA is introducing a new individual conduct rule – individual conduct rule 6 which will require all conduct rules staff to "act to deliver good outcomes for retail customers" where the activities of the firm fall within the scope of the Consumer Duty.
Whilst some firms subject to the Consumer Duty are not subject to the SMCR, these firms will still need to ensure that their staff are properly equipped to enable the firm to act to deliver good outcomes.
Interaction between the new Consumer Duty and the new financial promotion rules for high risk investments including cryptoassets
The Consumer Duty will apply to financial promotions. The FCA clarified in its consultation paper4 and subsequent policy statement5 its expectations concerning the application of the Consumer Duty to financial promotions concerning high risk investments including cryptoassets. The FCA considers that the strengthened financial promotion rules set a minimum baseline for firms that promote high risk investments and give clear guidance on what is expected, with the aim of bringing up the overall standard of high risk investment promotions. But they also support the approach of the Consumer Duty, by encouraging firms to consider for themselves whether they should go beyond this minimum standard, considering the needs of their customers, to deliver good outcomes. Firms will need to consider how to comply with these requirements not only in relation to their own financial promotions, but also when approving financial promotions for unauthorised firms.
Timetable for implementation
This was the subject of much debate in response to the consultation – balancing the need for enhanced consumer protections as soon as possible in particular due to cost of living pressures against the need for industry to have enough time to implement the Consumer Duty fully and effectively which will involve extensive and complex work for many firms.
The final timetable for implementation is as follows:
|End of October 2022||Firms' boards (or equivalent management body) should have agreed their implementation plans and be able to evidence they have scrutinised and challenged the plans to ensure they are deliverable and robust to meet the new standards.|
|End of April 2023||Manufacturers should aim to complete all the reviews necessary to meet the four outcome rules for their existing open products and services and have shared with distributors to enable distributors to meet their obligations under the Consumer Duty.|
|End of July 2023||Manufacturers should have identified where changes need to be made to their existing open products and services to meet the Duty and have implemented these remedies.|
|End of July 2023||The Consumer Duty will apply to all new products and services, and all existing products and services that remain on sale or open for renewal.|
|End of July 2024||The Consumer Duty will come fully into force, and apply to all closed products and services.|
The Consumer Duty will ensure a process of continuous self-examination and learning for firms. Customer needs are ever evolving in the constantly developing financial services environment, and as more and more people face financial hardship with the cost of living crisis, the FCA is placing ever greater scrutiny on consumer protection, now more than ever.
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