The New "Consumer Duty" For UK Financial Services Firms

The FCA has proposed a new "consumer duty" that will apply to most firms it supervises where products and services are offered to ‘retail customers’. In effect, the FCA says the duty will amount to a higher statutory standard of care for consumers than results from the FCA's current set of Principles for Business and conduct rules. It is intended to stop short of being an actual statutory or general law "duty of care", even though the standard is said to reflect the common law concept of how 'a reasonable prudent firm would act'; and it will not create a fiduciary duty or advisory obligation where one does not already exist. I guess 'cakeism' is not confined to Downing Street! Final rules are due by 1 August 2022 and firms should have until 30 April 2023 to fully implement the changes needed to comply (but will need to be able to demonstrate their progress toward implementation when asked). The scale of change should be 'seismic' - like simultaneously preparing for 'Treating Customers Fairly' and the Senior Managers and Certification Regime while trying to run a business (or changing all four wheels on a race car, mid-corner). But whether it will actually deliver better outcomes for consumers remains to be seen... Please let me know if you would like any help.

Scope of the Consumer Duty

As explained further below, the consumer duty will be delivered in a framework of three elements: a new 'consumer principle'; some 'cross-cutting rules'; and 'four outcomes'. 

A concept of "reasonableness" will apply to all three elements. This is intended to create an 'objective standard of conduct' that could reasonably be expected of a prudent firm which carries 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). Factors that can influence what is reasonable include:

• the nature of the product or service being offered or provided;
• the nature of the firm’s role and relationship with customers; 
• the potential of the product or service to harm consumers (higher risk means additional care); 
• the complexity of the product or service (again, more complex products and services involve extra care); 
• the role of the firm in the distribution chain; 
• the reasonable expectations of consumers, based on the nature and quality of the product or service as presented and previous interaction with consumers;
• the specific characteristics of consumers, recognising and responding to their diverse needs, including vulnerability or protected characteristics.
  

The scope of the 'duty' will be the same as the current 'conduct of business' rule books or other applicable regulation (e.g. for payment services); and exemptions from financial promotions rules, for example. Firms in a chain will need to agree where their responsibilities meet.

The Consumer Duty applies to products and services offered to ‘retail customers’, as defined within the scope of the FCA Handbook in each sector. For example: 

• consumer credit: the Consumer Duty applies to all regulated credit-related activities;
  
• deposit-taking: the duty applies to consumers, micro-enterprises and charities with a turnover of less than £1m (in line with the banking customer test);
  
• insurance: the duty follows the position in the Insurance Conduct of Business Sourcebook (ICOBS), so does not apply to reinsurance or contracts of large risk sold to commercial customers;
  
• investments: the duty applies to business conducted with retail clients as defined in the Conduct of Business Sourcebook (COBS);
  
• mortgages: the duty follows the position in the Mortgage Conduct Business Sourcebook (MCOB), so applies to all regulated mortgage contracts, but not, for example, unregulated buy-to-let contracts or commercial lending. Where the owner of a mortgage book is unregulated but a regulated firm is the loan servicer, the Consumer Duty would apply 'in an appropriate and proportionate manner to their function';
  
• payment services: the duty applies to business conducted with consumers, micro-enterprises and charities in line with the Payment Services Regulations 2017 (so will not apply to the extent that certain rules can be contracted out of for larger corporate/charity customers, for example).

There are some exclusions, but the duty can apply to prospective customers as well as unregulated activity that is ancillary to regulated activity. 

Firms will need to take additional care to ensure vulnerable consumers achieve outcomes that are as good as those of other consumers. 

Framework of the Consumer Duty

A new consumer principle: The FCA will add a 12th Principle for Business ("A firm must act to deliver good outcomes for retail clients"). This is considered to be a higher standard than "A firm must pay due regard to the interests of its customers and treat them fairly" ('treating customers fairly" or 'TCF'). While this overarching standard of conduct is 'clarified and amplified' through 'cross-cutting rules' and four (non-exhaustive/exclusive) 'four outcomes' it must be judged on its own, in terms of what is reasonably expected given the nature of the firm's role and the product or service it offers. 

Cross-cutting rules: Firms must: 

• Act in good faith (characterised by honesty, fair and open dealing and consistency with the reasonable expectations of consumers);
  

• Avoid causing foreseeable harm to customers (including taking proactive steps to avoid it where that is within the firm’s control);
  

• Enable and support customers to pursue their financial objectives (establishing an environment in which consumers can act in their own interests; understanding consumers’ behavioural biases and the impact that their vulnerability can have on their needs; using their knowledge of how consumers behave to enable and support them to make good decisions). 

The “four outcomes”: 

• the quality of firms’ products and services: these must be 'fit for purpose'; designed to meet consumers’ needs; and targeted at the consumers whose needs they are designed to meet, with different requirements for firms depending on their role in the distribution chain as 'manufacturers' and/or 'distributors';
  

• the price and value of products and services: the FCA wants both manufacturers and distributors to ensure the pricing represents fair value to consumers and to regularly assess that outcome;

• consumer understanding: firms’ communications must consistently support consumers by enabling them to make informed decisions about their products and services, giving consumers the information they need, at the right time, and presented in a way they can understand. Communications must be clear, fair and not misleading, as well as tailored in various ways, accurate, relevant and timely; and
  

• support for consumers: must meets consumers’ needs throughout their relationship with the firm, to enable them to realise the benefits of the products and services they buy and ensure they are not hindered from acting in their own interests. 

Impact of the Consumer Duty

The impact of the Consumer Duty will be enormous on an industry that tends to see compliance as a bolt-on to commercial operations and a cost-centre rather than an inherent part of product development lifecycle, even if policies, processes and procedures incorporate the concept of 'Treating Customers Fairly' and require legal/compliance checks and approvals.

The FCA expects firms to consider and determine what behaviours, policies, procedures, monitoring and feedback/reporting is necessary for them to satisfy the Consumer Duty - and be able to demonstrate how they have implemented the duty. 

Firms will need to be proactive and show that their focus is on consumer impact/outcomes rather than the firm's own compliance processes; and acting reasonably, rather than merely 'taking all reasonable steps' to comply with the duty and related rules.

The FCA expects senior managers to be responsible for ensuring the Consumer Duty is met across any business areas that they are responsible for, rather than mandating one senior manager as solely responsible under the Senior Managers and Certification Regime (SM&CR). There will be a new rule requiring all conduct rules staff within firms to “act to deliver good outcomes for retail customers” where their firms’ activities fall within scope of the Consumer Duty. 

In these circumstances, it would seem that the implementation process will be similar to preparation for the introduction of 'Treating Customers Fairly' principle as well as SM&CR, but the FCA will expect  to see more evidence of the impact of the higher standard both culturally and in terms of changes to organisation, policies, processes and procedures. 

The scale of change should therefore be 'seismic'. But whether it will actually deliver better outcomes for consumers remains to be seen... 

Please let me know if you would like any help.