What has happened?
Following the April 2019 publication of its feedback statement on a duty of care and potential alternative approaches, the Financial Conduct Authority (FCA) is consulting until 31 July 2021 on a new Consumer Duty that would set clearer and higher expectations for firms' standards of care towards consumers.
The FCA says that it encounters too many firms that are not adequately considering the needs of their customers, or prioritising good consumer outcomes as an objective of their business activities. It wants to see firms avoiding consumer harm by 'getting it right in the first place' - putting consumers at the heart of their businesses, offering products and services that are fit for purpose and which they know represent fair value.
The FCA believes that its Principles remain fit for purpose as a statement of firms' fundamental obligations, but considers that in UK retail financial services markets there is a need for something more - a clear statement of expectations that goes beyond the existing Principles and rules, and provides a framework for the ongoing development of retail markets.
Who is affected?
The proposals relate to products and services sold to retail clients. They extend to firms involved in the manufacture or supply of products and services to retail clients, even if those firms do not have a direct relationship with the end customer.
What does it mean for firms?
As we explain below, the FCA intends to implement the Consumer Duty using supporting rules and guidance. Supervisors would increasingly focus on the outcomes being experienced by consumers. Firms would be expected to monitor, test and (where necessary) adapt their policies, practices and processes on an ongoing basis so they can satisfy themselves, and demonstrate to the FCA where required, that the outcomes for their customers are in line with the FCA's expectations. They would need to consider the Consumer Duty at every stage of their processes and at every level of organisational structure.
The Consumer Duty would not specify exactly how firms should act. The FCA says that firms would have flexibility in how they act to avoid harm to consumers and put them in a position to achieve their financial objectives.
A webinar on the proposals is being held on 10 June 2021. Firms are encouraged to make their views known by responding to the consultation (see Annex 1 of the paper for a list of questions). The FCA will then set out the proposed text for any new rules or guidance in a separate consultation, expected to be published by 31 December 2021 1. Any new rules will come into force by 31 July 2022.
It is telling that the FCA is positioning these proposals as a major change. Arguably, the powers already exist in the FCA Handbook and under the Senior Managers and Certification Regime to bring businesses and individuals to account. The FCA itself recognises that there are many firms that are already delivering the right outcomes for consumers - good products and services at fair prices, supported by high standards of customer service and clear communications - and that its existing rules already create different duties of care for firms. The Consumer Duty would be designed to reinforce and complement the existing Handbook requirements.
Notably, the FCA is not branding the Consumer Duty as a 'duty of care'. Instead, it is a package of measures specifically designed to more effectively tackle the harms the FCA sees in financial services markets, and their causes.
In addition to culture and conduct, protecting vulnerable customers is a key area of focus for the FCA. It is no surprise that vulnerability features explicitly as a factor relevant to what the Consumer Duty would require from firms 2.
How we can help
Walker Morris has a large cross-departmental team of financial services experts providing advice to the full range of financial services businesses. If you have any queries or concerns about the FCA's proposals, or require any assistance with responding to the consultation, please contact Jeanette or Richard, who will be very happy to help.
What is the Consumer Duty?
The proposed Consumer Duty is a package of measures, comprising a new Consumer Principle that provides an overarching standard of conduct, supported by a set of Cross-cutting Rules and Four Outcomes designed to set clear expectations for firms' cultures and behaviours.
The FCA wants to achieve a strong proactive focus on consumer interests and outcomes. In this consultation, it seeks views on two options for the wording of the Consumer Principle: 'A firm must act to deliver good outcomes for retail clients'; and 'A firm must act in the best interests of retail clients'. It wants to set a higher standard than the existing requirement of Principle 6 for a firm to pay due regard to the interests of its customers and treat them fairly.
The Cross-cutting Rules would require the following key behaviours from firms:
- Take all reasonable steps to avoid causing foreseeable harm to customers.
- Take all reasonable steps to enable customers to pursue their financial objectives.
- Act in good faith.
The Four Outcomes (see Chapter 4 of the consultation paper for details) are:
- Communications equip consumers to make effective, timely and properly informed decisions about financial products and services.
- Products and services are specifically designed to meet the needs of consumers, and sold to those whose needs they meet.
- Customer service meets the needs of consumers, enabling them to realise the benefits of products and services and act in their interests without undue hindrance.
- The price of products and services represents fair value for consumers.
A concept of reasonableness would be embedded into all elements of the Consumer Duty. Factors influencing what is reasonable include:
- The nature of the product or service being offered or provided.
- The role of the firm in the distribution chain.
- The reasonable expectations of consumers.
- The specific characteristics of customers, including characteristics of vulnerability.
1. The second consultation will also include the FCA's further consideration of a private right of action for breaches of its Principles, the impact of the introduction of the Consumer Duty on the existing Principles, and details of how the FCA intends to supervise and embed the Consumer Duty.
2. See our earlier briefing on the FCA's recently-published guidance on the fair treatment of vulnerable customers.
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.