Commission Disclosure on Motor Finance Has Broader Significance

Please see my 'Keynote' on this topic.

FCA Finalises Updated Guidance On Financial Promotions Via The Social Media

The FCA has finally finalised its updated guidance on financial promotions via the social media, basically confirming the draft on which it consulted in July 2023.

Perhaps the only real changes are to clarify where a foreign promotion may be capable of having an effect in the UK and so be subject to the UK restrictions.

The finalised guidance explains:

• what a financial promotion is
• the various financial promotion rules and where they apply
• the need for each communication to be 'standalone compliant'
• certain information must be given 'prominence'
• where the social media may or may not be suitable for financial promotions
• restrictions on high risk investments
• certain prescribed risk warnings
• marketing strategies in the context of the consumer duty, sharing/forwarding promotional communications and affiliate marketing
• restrictions on the use of influencers and social media platforms.

This post summarises the FCA's proposed new social media guidance for information purposes only. If you require legal advice, please get in touch.

Anti-fraud and Complaints Handling in UK Payment Service Providers

The UK's Financial Conduct Authority has published a summary of its findings of its review of anti-fraud controls of UK payment service providers, particularly focused on Authorised Push Payment (APP) fraud. Let me know if you need assistance in this area.

E-money and payment institutions should at least consider these findings and recommendations as part of their continuing work on staying ahead of fraudsters, even if they consider their systems to be already robust. There is more detail in the FCA web page, but in summary, they found: 

• an insufficient focus on delivering good consumer outcomes in many of the firms we reviewed 

• management information and actions often focused on commercial risk appetite, rather than customer impact and treatment 

• significant scope in many firms to improve the support provided to victims of fraud including from the first point of contact. In many cases, firms need to do more to enable customers to report fraud easily and promptly 

• poor complaint handling including firms often taking too long to respond to customer complaints 

• customers provided with decision letters that were sometimes unclear, confusing, or included unhelpful and, on occasion, accusatory language 

• limited evidence that firms are appropriately taking account of characteristics of customer vulnerability when making decisions about fraud claims and complaints.

Let me know if you need assistance in this area.

FCA Updates Social Media Guidance To Cover Crypto, New Platforms And Influencers

Hard on the heels of the EU adding a chapter on online marketing of financial services (including 'dark patterns' and influencers) to the Consumer Rights Directive, the UK's Financial Conduct Authority is also updating its 2015 guidance on financial promotions in the social media to address influencer marketing. This post summarises the FCA's proposed new social media guidance for information purposes only. If you require legal advice, please get in touch.

In substance, the FCA's guidance remains the same but adds specific guidance on 'new' design features and channels, such as influencers; and explains the impact of the new Consumer Duty.

The core principles of the FCA's view of social media remains, of course, that financial promotions must be fair, clear and not misleading as well as "standalone compliant": each stage of a financial promotion must comply with the financial promotion rules relevant to the type of business being promoted. Certain features of the social media have always raised issues, whether it be character limits, small or scrolling banners: 

When assessing the compliance of a promotion that is viewed via a dynamic medium (such as Instagram stories), we assess the promotion as a whole and take a proportionate view based on the number of frames and where information about risk is displayed within the promotion. To meet our expectations regarding prominence, firms should aim to display the key information about risk upon a consumer’s first interaction with the promotion and the warning should be displayed for a sustained period.

Complex services, like debt counselling may not lend themselves to social media promotion at all.

Use of memes may also be inappropriate or impracticable, given the nature of the invitation or inducement in the meme and/or the need for risk warnings and other information to be prominent and 'balanced'.

The Consumer Duty raises fresh considerations:

Firms advertising using social media must consider how their marketing strategies align with acting to deliver good outcomes for retail customers. All the cross-cutting rules will be relevant to social media promotions, and firms should take into account how promotions that do not support consumer understanding may cause consumers to buy products that are unsuitable for them, leading to foreseeable harm... 

Firms’ communications should support and enable informed decision-making, equipping consumers with the right information in a timely way. Firms must also consider how they tailor communications to account, for example, for the likely audience on social media and the features of different platforms.

Firms remain responsible for any original non-compliance, even if a promotion is forwarded or shared (whether as part of a formal affiliate programme or by random recipients). This can itself trigger a breach of financial promotions rules (e.g. forwarding to the wrong type of investor). For that reason, the social media may not be an appropriate channel at all.

And just because somebody 'likes' an ad or 'follows' the firm in the social media does not mean they are no longer protected from 'cold calling':

...a financial promotion is likely to be non-real time if it is made or directed at more than one recipient in identical terms, creates a record which is available to the recipient at a later time, and is made by way of a system which in the normal course does not enable or require the recipient to respond immediately. This means channels like live-streams or gaming steams are likely to be considered a non-real time promotion and be subject to the full scope of our financial promotion rules.

A specific chapter of the guidance covers influencers, who have also been the target of the Advertising Standards Authority.

This post summarises the FCA's proposed new social media guidance for information purposes only. If you require legal advice, please get in touch.

FCA Consumer Duty Implementation: Are Firms Trying To Wing It?

The UK's Financial Conduct Authority has conducted a review of firms' progress in implementing the new Consumer Duty for new or existing products by 31 July 2023 (and for closed products with existing customers by 31 July 2024). Firms had until 31 October 2022 for their board to approve their implementation plan and show that it has scrutinised and challenged the plans to ensure they are deliverable and robust. Since then, the FCA has checked on larger firms with dedicated FCA supervision teams and found that: 

"some firms may be further behind in their thinking and planning for the Duty. This brings a risk that they may not be ready in time, or they may struggle to embed the Duty effectively throughout their business."

Aside from my February blog post here, I summarised the Consumer Duty requirements and key steps for implementation in a Keynote last September. That explains there is another recommended milestone at the end of April and the board must also oversee progress to ensure deadlines are met...

 

However, the FCA has published detailed findings across six aspects of the implementation process which shows where firms may be falling short. Generally, in the remaining six months to the end of July, the FCA wants firms to: 

• ensure they are prioritising efforts where they are likely to be furthest away from the requirements; 
• carefully consider the substantive requirements in reviewing products, services, communications, customer journeys and identify/make the changes needed; and 
• work on all this with other firms in their distribution chain. 

Please let me know if you need assistance.

Overdue Reform of the UK Consumer Credit Act

The Treasury is consulting on a long overdue overhaul of the Consumer Credit Act 1974 (CCA) which covers the UK’s £200bn non-mortgage consumer credit industry, including personal loans, credit cards, hire purchase and pawn-broking. I'm waiting on publication of a longer note summarising the detail, and will post a link to that here. You have until 17 March 2023 to respond. Let me know if I can help you in understanding the proposals and likely impact. 

Brexit

As previously mentioned, the current consultation was actually proposed in June, just prior to the European Commission proposal for a new Consumer Credit Directive (CCD2).  Extensive changes were made to the CCA in 2010 to implement CCD1, which had considerable input from the UK. 

Supervision of the CCA transferred from the Office of Fair Trading to the Financial Conduct Authority  in 2014 under the Financial Services and Markets Act 2000 (FSMA). This meant adding consumer credit and hire agreements, and related activities, to the FSMA (Regulated Activities) Order 20012 (RAO); and transferring some CCA regulations to the FCA’s rules. The Treasury now wishes to transfer “the majority” of the CCA to FCA rules, which seem likely to align with CCD2. 

Some aspects that are specific to Scotland and Northern Ireland will be addressed later in the review process.

Scope and Impact

The CCA regulates consumer credit and consumer hire, although the latter has less protection. The government has already announced plans to regulate many Buy-Now Pay-Later (BNPL) products that are currently unregulated. 

Broadly, the activities of entering into regulated credit and hire agreements require FCA authorisation and specific permission when carried on by way of business, as do the activities of exercising the rights of a lender (or owner, for hire purposes) and various ‘ancillary services’ such as credit broking, debt collection, debt counselling, debt adjusting, debt administration, operating an electronic system in relation to lending (peer to peer lending), credit information services. 

Advertising credit and hire products is also regulated, even for unauthorised firms. 

The FCA’s new Consumer Duty does not apply to unregulated or exempt individuals or products in the same way as the CCA regime, but that new duty changes the context in which the CCA protections operate; and makes authorised firms liable for certain activities of unauthorised firms in the product 'distribution chain'.

About 6,000 authorised firms have permission to enter into consumer credit or consumer hire agreements; and 36,000 FCA firms have credit permissions (mainly credit broking). 

I will update this post with a link to the more detailed note shortly.

FCA To Allow Simpler Advice On 'Mainstream' Investments

The UK's Financial Conduct Authority is consulting on a new investment advice regime to allow consumers to access simplified advice on investments that qualify for stocks and shares ISAs from April 2024, and reflecting the fact that the new Consumer Duty will apply. 

The FCA's research revealed that "less wealthy" consumers do not access professional support where they want it to make financial decisions like investing in stocks and shares ISAs. Those who receive advice are those who already hold investment products. Investors are more confident in a personal recommendation and value human interaction in the advice process. If offered a free consultation, only 6% of adults would choose a robo-adviser, whereas 51% would choose to meet face-to-face with an adviser (Mintel, 2021).

The FCA plans to:

• Cut the existing qualification requirements to reflect the lower risk of the narrower scope of advice (the necessary technical and regulatory understanding to advise on mainstream investments and where clients have straightforward needs). 

• Reframe the suitability requirements to reflect the narrower scope and less complexity of the advice relevant to the more limited decision consumers will be making, with new guidance on minimum information expected for the 'fact find' to reduce time and liability consequences for firms not doing a more fulsome inquiry.

• Limit the range of investments advisers can recommend to a set of mainstream investments and excluding any recommendations to invest in high‑risk investments. 

• Allowing consumers to pay for transactional advice in instalments.

You have until 28 February 2023 to respond to the FCA's consultation.

FCA Consumer Duty - Final Rules and Start Dates

The FCA has published its final policy statement and rules implementing its new Consumer Duty. The FCA has also published Guidance on how the Consumer Duty should work in practice. Firms will need to apply the Duty to new and existing products and services that are open to sale (or renewal) from 31 July 2023; and to products and services held in closed books from 31 July 2024. However, the FCA says that firms must have their board's approval for an implementation plan by 31 October 2022 and take certain other steps outlined below. I summarised the general proposal for a Consumer Duty in February. This post contains my own notes of some changes to that approach and some key 'lessons' that emerged from the consultation, but is not exhaustive and does not constitute advice of any kind and must not be relied upon to make any decisions or as any guide to implementation. If you would like advice, please let me know.

Not retrospective

While the Consumer Duty applies to new and existing products/services and closed book products, the FCA says this is not retrospective. Actions taken before the Duty comes into force will be subject to the FCA rules that applied at the time. Firms don't need to consider whether any actions in the past were in breach of the Duty. 

The Duty covers only the parts of FCA rule books that apply to a firm

Where only certain aspects of a 'sourcebook' of FCA rules apply, all the components of the Consumer Duty apply (the Principle, cross‑cutting rules and the outcome rules) but only to the areas of the firm's activities that are covered by those rules (e.g. regulated buy‑to‑let mortgages are subject only to rules on financial promotion in MCOB and only relevant aspects of the Duty – in relation to communications – would apply). 

The Consumer Duty applies to non-customers!

The Duty applies to any authorised firm that can 'determine or materially influence' retail customer outcomes, including customers with whom a firm does not have a direct relationship. Therefore, it applies to firms that can influence material aspects of, or determine aspects of the product or service design and distribution chain, such as: 

• the design or operation of retail products or services, including their price and value;
• the distribution of retail products or services;
• preparing and approving communications that are to be issued to retail customers; and
• customer support for retail customers. 

Liability for breaches of the Duty in other links of the distribution chain

Each firm must notify the FCA if they become aware that another firm in the distribution chain is not complying with the Duty; and notify other firms in the distribution chain if the firm thinks they have caused, or contributed to, harm to retail customers.

However, the Duty applies only to the extent that a firm is responsible for determining or materially influencing retail customer outcomes; and proportionately, in a manner that reflects the firm’s role in the distribution chain and its ability to influence retail customer outcomes. 

Where a firm is already subject to rules on product design or the assessment of value, complying with those rules will also satisfy relevant parts of the Duty.

Firms have different responsibilities depending on whether they're classed as the manufacturer or distributor of a product or service:

• Manufacturers: create, develop, design, issue, operate or underwrite a product or service. More than one firm may be involved and intermediaries may be co‑manufacturers where, for example, they set the parameters of a product and commission other firms to develop it. 

• Distributors: offer, sell, recommend, advise on, propose or provide a product or service - regardless of whether other rules or regulations classify the firm as an 'adviser', 'agent', 'appointed representative' or 'distributor'.

Generally the manufacturer’s responsibility is to identify the target market. Distributors may have a specific distribution strategy to supplement the manufacturer’s strategy, but it must be consistent with the manufacturer’s intended distribution strategy and the identified target market.

This does not mean firms are responsible for the activities of other firms or must oversee the actions of others in the distribution chain. But where a firm can reasonably foresee harm to a retail customer, it should act where it can and raise any issues with other relevant parties. 

Unregulated but ancillary activities are in scope

Unregulated activities are subject to the Consumer Duty where they are 'ancillary' to a regulated activity, i.e. carried on in connection with a regulated activity; or held out as being for the purposes of a regulated activity; or necessary for the completion of a regulated activity. 

For instance, product design or customer support are not themselves regulated activities but are 'necessary activities linked to regulated activities'. But selling a separate non‑financial services product while a regulated activity is performed where completion of the regulated activity does not depend on sale of the unregulated product, would not be ancillary.

The FCA found some consumer harm in the e‑money and payment services sectors in which the Duty is expected to play a key part in raising standards. In May 2018, the FCA sent a Dear CEO letter to firms expressing concerns over explanations of how customers' funds are protected; and it has concerns that customer support standards fall where support capacity hasn't kept pace with demand, or firms don't understand their complaints handling obligations.

Territorial scope

Where the chain includes non‑UK distributors selling to non‑UK customers, manufacturers will not be able to gather the same amount of information as when only dealing with UK‑based firms. In this case, they should use any available information to support their work under the Duty but would not be expected to obtain information from firms that are not subject to the Duty.

Outsourcing 

Unless an FCA‑authorised outsource services provider can determine or has a material influence over retail customer outcomes, it would not be subject to the Duty.  The firm outsourcing the relevant process to the service provider will remain responsible for both the activities of the service provider (as per the systems and controls rules in SYSC 8) and meeting the relevant aspects of the Duty.

Products can breach the Consumer Duty as they age

Some older products no longer represent fair value for customers compared to newer products or the contemporary market. Firms must be "confident there is a reasonable relationship, on an ongoing basis, between the price the customer is paying and the benefits of the product or service". 

A product or service "is much more likely to offer fair value" if it meets all of the other elements of the Duty (designed to meet the needs of its target market, transparently sold, customers can choose to switch or exit, customers are properly supported). Firms must consider conditions that applied when products were designed and sold; and can consider the lifetime costs of the product when assessing fair value (e.g. lenders can take account of the costs of providing credit and financing the credit). 

If a firm identifies a product that is not fair value, the firm would not amend 'vested contractual rights' but would need to take appropriate action to avoid causing foreseeable harm and provide fair value, e.g. by changing non‑vested fees or charges, where doing so would not impact on any vested rights; providing additional support or information; or offering forbearance, such as a pause in payments, to help mitigate any harm.

Firms buying old 'books' of business or products

The selling firm must provide information to the buying firm to help it comply with the Consumer Duty going forward. Where the buyer has either limited regulatory permissions or which is exempt on certain conditions (e.g. securitisation SPVs holding mortgages or consumer credit, the unregulated firm would not be subject to the Duty, but would be bound by general consumer law, including the Consumer Protection from Unfair Trading Regulations 2008; and the general standards of conduct anticipated by the Consumer Duty may be relevant to determine any breach. 

The buying firm must also gather relevant information from the selling firm to be able to comply with the Consumer Duty, e.g. in relation to product and service design and value.

What if most rival firms are not acting 'prudently'?

The FCA considers the activities of a ‘prudent firm’ to be an objective standard, rather than "enabling firms to benchmark their compliance to existing low standards and poor practices". 

A prudent firm will fully embed the Duty, act in good faith to meet its requirements, comply with all other relevant law (for example the Equality Act 2010) and deliver good outcomes for consumers. This is what we will expect to see from all firms across retail markets.

A new Principle

The introduction of the Consumer Duty includes the addition of a 12th Principle for Business ("A firm must act to deliver good outcomes for retail customers"). Where the Duty applies it displaces Principle 6 (A firm must pay due regard to the interests of its customers and treat them fairly) and 7 (A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading).

While this overarching standard of conduct is 'clarified and amplified' through 'cross-cutting rules' and the (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.

Principles 6 and 7 will continue to be applicable to firms and business activities outside the scope of the Duty, but the FCA believes the explanatory materials related to those Principles may be helpful to firms in considering their obligations where the Duty does apply (e.g. "where a piece of guidance begins with ‘in order to treat customers fairly a firm should…’"). However, Principle 12 imposes a higher and more exacting standard of conduct than Principles 6 and 7, so failure to act in accordance with existing guidance on Principles 6 and 7 is likely to breach Principle 12.  

Cross-cutting rules

The 'cross‑cutting rules' underpinning the Consumer Duty require firms to:

• act in good faith towards retail customers;
• avoid foreseeable harm; and
• enable and support retail customers to pursue their financial objectives.

Firms do not have a responsibility to protect customers from all foreseeable harm or risks they understood and accepted. However, what is foreseeable is dynamic, so firms must detect and address new or emerging sources of harm, e.g. through consumer complaints, management information, press reporting, and FOS decisions and FCA communications.

This does not remove customers’ responsibility for making decisions, or prevent them from making decisions not in their interests, but firms are responsible for establishing an environment in which consumers can act in their own interests. To do so, firms must consider the limited experience, behavioural biases and the impact characteristics of vulnerability can have on customers in the target market "at all stages of the product lifecycle"; monitor their communications to ensure that customers understand them and those communications help customers to make effective decisions; and monitor and regularly review the customer outcomes to ensure that the products and services deliver good outcomes for retail customers. The firm's resulting actions would depend on what is within the firm’s control, based on their role and knowledge of the customer. An advisory service provider, for instance, should understand more about the individual objectives of the customer than a non-advisory service provider, and would need to act on that knowledge. 

When supporting a customer to pursue a financial objective, firms are not required to go beyond what could reasonably be expected of the firm delivering their products and services or to carry out activities  they are not authorised to undertake.

The Duty (including the cross‑cutting rules) could apply at both target market level (in the product/communications design) and, where they are providing a bespoke service or tailored, advice or communication, at the individual customer level. 

Four Outcomes

The “four outcomes” relate to: 

• the quality of firms’ products and services;

• the price and value of products and services: 

• consumer understanding; and

• support for consumers.

Generally, firms must consider the needs, characteristics and objectives of customers in their target market, including those with characteristics of vulnerability (visual impairment, suffering bereavement,  low financial capability). Firms don't have to adopt an "inclusive‑design" methodology but might wish to consider doing so.  

The Duty applies in a proportionate way based on the standard that could reasonably be expected of a prudent firm. Firms must consider what is reasonable in the relevant circumstances in relation to the nature of the product, the characteristics of the customers in the target market and the firm’s role in relation to the product. Focusing on outcomes avoids a one‑size‑fits‑all approach: where risks are low,  less additional action may be required.

Price and Value Outcome

The 'price and value' rules aim to ensure "a reasonable relationship between the price a consumer pays for a product or service and the benefits they receive from it". A product or service that meets all of the other elements of the Duty (designed to meet the needs of its target market, transparently sold, consumers are properly supported) is generally much more likely to offer fair value because of the benefits received and customers have the information they need about the benefits and limitations of what they are buying to select an alternative product.

The FCA includes examples in the Guidance of good outcomes and the behaviours.

Firms do not need to quantify non‑monetary costs and benefits, but must "at least provide qualitative consideration of these factors, especially if these are a significant part of their business models".

A value assessment is not required where the product or service does not have any financial or non‑financial cost to the consumer (e.g. "debt advice funded through other sources"). But manufacturers of 'free' products or services should still consider whether their customers are 'paying' in non‑monetary terms, and whether those costs are reasonable in relation to the product’s benefits (e.g. lost interest on balances in 'free' current accounts; fees or use of their account data).

Differential pricing is not always harmful, e.g. clear and transparent upfront discounts where the firm can demonstrate that both customers with/without discounts are receiving fair value. The rules do not prevent cross‑subsidies between products or require cost‑plus pricing; and they do not prevent firms from selling similar products with different prices across various brands, as long as both are fair value. But continually increasing the prices on renewal for loyal customers ("price walking"), for example, can lead to some consumers making significant overpayments which do not provide fair value and would not satisfy the Consumer Duty. 

Firms are not required to duplicate value assessments and are responsible only for the prices they control not to challenge other firm’s value assessments.

Distributors must ensure charges accruing down the distribution chain do not cumulatively result in the product ceasing to provide fair value. To enable this:

Manufacturers should provide distributors with the results of their value assessment, but they do not have to include sensitive information such as breakdown of firms’ margins or risk‑based pricing. Information shared can be a high‑level summary of the benefits to the target market, information on overall prices or fees and confirmation that the manufacturer considers that total benefits are proportionate to the total costs.

Firms already subject to fair value rules will meet the Duty by complying with those rules, but some firms - such as payment and e‑money firms - have existing disclosure rules and requirements that do not equate to the price and value outcome, so additional compliance work would be required for e-money and payment institutions. 

While denying that elements of the Duty will necessarily raise costs and therefore prices, the FCA states:  

Firms selling innovative products at a higher price may still be providing fair value if they offer increased benefits to consumers. In our view, increased consumer trust and healthier competition would support innovation and encourage new entrants to the market, with firms competing to drive up quality for consumers.

Consumer Understanding

Firms must not only continue to meet information and disclosure requirements, but also consider the purpose of all their customer communications (conversations with advisers, online, in letters or contracts, individually and as a whole) and the outcomes they are focused on. For instance, unless a template is mandated, a firm could adopt a layered approach to explain context or key information in a simple way, signposting more detailed information.

As will the Duty generally, the scope of this outcome is determined by a firm’s role and authorisations/permissions. A firm is not authorised to provide advice must equip its customers with information to make effective decisions in a way that does not amount to advice. 

The FCA accepts that firms may not be able to directly communicate the availability of new product offerings to customers where the customer has decided to opt out, or has not consented to receive, such communications under the Data Protection Act (and UK GDPR). 

Firms do not need to tailor all communications to meet the individual needs of each customer (except on a one‑to‑one basis where appropriate), but generally only need to take into account the characteristics of customers in the target market more broadly, including characteristics of vulnerability. Firms must understand their customer base and target market for their products and services. In general terms, for instance, the FCA found that one in seven adults have literacy skills at or below those expected of a nine‑ to 11‑year‑old and 17.7 million adults (34%) have poor or low levels of numeracy involving financial concepts. So, communications for even a simple product aimed at the mass‑market must take these characteristics into account and communicate information in a way that supports understanding by such customers. Communicating about a complex product to a more sophisticated retail target market might reasonably be different.

Characteristics of vulnerability in their customer base or target market, such as as inadequate or erratic income, over‑indebtedness or low savings among potential mortgage customers may mean that the availability of support for customers in financial difficulty should be prominently signposted; or a clear way for consumers with a hearing or visual impairment to request communications in a format that meets their needs. Tailored communications may be needed where it becomes apparent to a firm in, say, a conversation with an individual customer that they require particular information or have a specific characteristic of vulnerability (not generally characteristic of the target market).

Firms should test whether consumers can identify and understand the information needed to make effective decisions and that the approach to testing delivers good outcomes. This information customers need is likely to include:

• any actions required by customers and any consequences of inaction;

• the key features, benefits, costs and risks of a product or service where customers need to evaluate or make a choice about the product or service.

• how customers can access any additional information or support they might need.

When communicating on a one‑to‑one basis, it is reasonable to ask the customer if they understand what they have been told and have any further questions.

Firms should apply the same test standards and capabilities to ensure communications are delivering good consumer outcomes as they do to communications designed to generate or maximise sales and revenue. That does not mean all communications must be tested first, but ‘where appropriate’.

Consumer Support Outcome

Firms must ensure the channels of support (e.g. telephone, email, in branch, text, written, webchat, video calls) meet the needs of customers, including those with non‑standard issues and characteristics of vulnerability.

Firms should monitor support, take relevant feedback into account, and look for signs that may indicate they are not meeting the needs of their customers and take reasonable steps to address any shortfall in their support. 

FCA guidance on the fair treatment of vulnerable customers provides examples of how different vulnerabilities can make certain channels of support unsuitable. 

A product with a digital‑only support offering could meet the needs of a specific tech‑savvy target market, so an additional non‑digital full‑service channel would not be needed, but there are still various factors for it to consider to ensure the channel delivers good customer outcomes.

Where firms outsource support or use a third‑party service provider, the usual regulatory principle applies on outsourcing and third‑party arrangements apply, and firms cannot delegate any responsibility to a third party but remain responsible for ensuring the support provided meets the Duty standard. The firm should have systems and controls in place to monitor this and provide assurance that it meets its regulatory obligations.

The consumer support outcome must extend to scenarios where a person is authorised by a customer, or by law, to assist in the conduct of the customer’s affairs. Where a person is representing a customer, such as where a power of attorney applies, firms must provide the same level of support to that assistant or representative. But this does not extend to services provided by regulated firms, such as where a mortgage intermediary is dealing with a lender. There the mortgage lender is seen as a 'manufacturer' and the mortgage intermediary a 'distributor' rather than a representative of the customer, and they must not interact in a way that has an adverse effect on the support and outcomes for the customer.

No Private Right of Action

Controversially, the FCA has not allowed retail customers a private right of action in the courts (PROA) to enforce the Consumer Duty directly against regulated firms. This is explained by suggesting that it would 'create asymmetry in our rules' in a way that reduces consumers’ access to redress for breaches of the Duty (which assumes that it becomes the only way to seek redress, rather than also allowing referrals of complaints to FOS).

Consumer advocates might wonder if a PROA might actually reveal deficiencies in how the FCA supervises the implementation of the Consumer Duty, which is bound to be fraught. 

However, the FCA also has the power to require restitution from firms in breach of its rules.

Next steps toward implementation of the Consumer Duty

The FCA expects that:

• By 31 October 2022, firms’ boards (or equivalent management body) should have approved their plan to implement the Consumer Duty, with evidence they have scrutinised and challenged the plans to ensure they are deliverable and robust. Firms will be asked to share their plans, board papers and minutes with supervisors and be challenged by the FCA on the contents.

• Boards (or equivalent management bodies) should maintain oversight of firm’s implementation plans to ensure they remain on track, and that the work to review and improve the firm’s products and services is sufficient to meet the Duty standards (several steps below would likely require board approval in any event). Firms should take a risk‑based approach and prioritise the implementation work that is likely to have the biggest impact on consumer outcomes (e.g. reviewing the most complex or risky products and most significant communications ahead of others). At the end of implementation period, boards (or equivalent management bodies) should assure themselves that their firm is complying with their obligations under the Duty, and ensure the firm has identified any potential gaps or weaknesses in their compliance and any action needed to remedy this.

• Product/service manufacturers should aim to complete their reviews to meet the 'four outcome' rules for existing open products and services by the 30 April 2023, and:

• share with distributors by the end of April 2023 the information necessary for them to meet their obligations under the Duty (e.g. price and value, and products and service outcomes); 

• identify where changes need to be made to existing open products and services to meet the Duty by the end of 31 July 2023.

• During this process, firms must prioritise action to remedy any serious issues they detect that are causing immediate consumer harm; and report to the FCA any significant breaches of any existing rules (including the Principles for Businesses), as required by SUP 15.3.11R.

• Where actions to bring products and services up to Consumer Duty standards can be completed more quickly than the deadlines, firms should consider doing so.

• Firms must inform the FCA if implementation of the Duty involves considering whether to withdraw or restrict access to products or services in a way that will have a significant impact on vulnerable consumers or on overall market supply.

• Firms must alert the FCA (as required by SUP 15.3.11R) if they believe that they will not be able to complete all work necessary to be compliant with the Duty by the deadlines. 

This post notes some changes to that approach and some key 'lessons' that emerged from the consultation, but is not exhaustive and does not constitute advice of any kind and must not be relied upon to make any decisions or as any guide to implementation. If you would like my advice, please let me know.

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.

 

The FCA's New 'Consumer Duty'

The UK's Financial Conduct Authority is consulting on the introduction of a new "consumer duty" that will apply to regulated firms in relation to their regulated activities by 31 July 2022. This follows the report on a previous consultation in April 2019. The FCA is holding a webinar on the proposals on 10 June 2021; and comments will be open until 31 July 2021. The rules would be consulted on by 31 December 2021. Please let me know if I can help.

Broadly, this would require firms to act in ways that enable retail customers to obtain the outcomes they should be able to expect from the firm's products and services, rather than to hinder customers obtaining those outcomes. This effectively puts firms (and, significantly, the FCA) in the customers' shoes. 

This may require some firms to radically alter their culture and behaviour to focus on consumer outcomes, and putting customers in a position to act and make decisions in their own interests. 

There will be three elements to the new duty:

• A new consumer principle: "a firm must act in the best interests of retail clients" or "a firm must act to deliver good outcomes for retail clients". 
• Broad rules that would require firms to take all reasonable steps to avoid foreseeable harm to customers and enable customers to pursue their financial objectives; to act in good faith. 
• More detailed rules and guidance on firms' conduct relating to four specific outcomes: communications; products and services; customer service; and price and value. 

The FCA is also consulting on the potential benefits of attaching a private right of action to the new duty, and what any unintended consequences of this might be. 

Critics of the FCA's approach to consumer outcomes in the wake of various 'scandals' over the years will be hopeful that this new duty will see the FCA aligned with consumers, rather than tending to protect its own reputation, the 'financial services industry' and the firms its regulates.