- The FCA has set out proposals to introduce a new Consumer Duty, ‘setting higher expectations for the standard of care that firms provide to consumers’. The Consumer Duty will comprise of a new Principle (likely placed alongside the existing Principles for Businesses), underpinned by cross-cutting rules and four customer outcomes.
- Although the FCA’s overall policy intent is very clear, it is less clear precisely how it will achieve its aim. Nevertheless, firms should be mindful that the Consumer Duty is intended to create a ‘paradigm shift in [the FCA’s] expectations of firms in retail markets’, requiring many firms to ‘adapt significantly to meet them’. We set out below our answers to some of the key questions firms are likely to have about the proposals at this stage.
- The FCA points to making firms’ senior management accountable for all elements of its proposals. We assume this will be through the SM&CR, although the FCA does not specify this.
- Whilst there is still much work to do (including a further consultation), the areas targeted by the four customer outcomes set out by the FCA are, in our view unlikely to change significantly. The FCA has clearly been thinking about them for some time. If firms are not already testing for these outcomes, they should do so without delay.
- Our paper Improving Customer Outcome Testing | A practical guide for Boards provides guidance to firms on improving their approach to outcomes testing. We also set out in an Appendix to this blog a number of ‘no regrets’ actions firms can take to prepare for the outcomes.
Summary of the FCA proposals
On Friday, the FCA issued a consultation on a new Consumer Duty (the Duty), setting ‘clearer and higher expectations for firms’ standards of care towards consumers’. The Duty is a package of measures, comprised of:
A Consumer Principle which reflects the overall standards of behaviour the FCA wants from firms. The FCA wants the Consumer Principle to set a ‘higher standard’ than the existing requirement in Principle 6 (to ‘pay due regard to the interests of customers and treat them fairly’) and indicate to firms that they need to play a ‘greater and more positive role’ in delivering good outcomes for consumers.
It is seeking views on two options for the wording of the Consumer Principle:
- Option 1: ‘A firm must act to deliver good outcomes for retail clients’
- Option 2: ‘A firm must act in the best interests of retail clients’
Cross‑cutting Rules which develop and amplify the standards of conduct the FCA expects under the Consumer Principle. The FCA is not yet consulting on detailed wording of the Rules, but is proposing that they require three key behaviours of 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.
Four Outcomes: a suite of rules and guidance setting more detailed expectations for firm conduct across key elements of the firm‑consumer relationship. These 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.
The FCA’s proposals relate to products and services sold to ‘retail clients’ and, in the CP, the FCA uses the term ‘consumer’ or ‘customer’ to mean ‘retail client’. This includes all clients (other than professional clients and eligible counterparties). The proposals would also apply, in most cases, where the FCA regulates the provision of services to SMEs. As with the existing Principles, the Duty would apply to e-money institutions, payment institutions and registered account information service providers. The Duty will not apply retrospectively to past business.
The CP highlights that firms should take additional care to ensure vulnerable consumers receive outcomes that are as good as for other consumers. This aligns with its recently published guidance on the fair treatment of vulnerable consumers.
Key questions about the new Duty
We set out below our answers to some of the key questions firms may have about the proposals at this stage:
Will these proposals change anything? The new Duty is, in many ways, an extension of the FCA’s existing focus on customer outcomes and a number of the proposals, such as the wording of the Consumer Principle and those around product governance, reinforce and elevate the status of rules and guidance many firms already comply with. Consequently, some firms may be inclined to underestimate the importance and impact of the changes. However, they should be mindful that the FCA means the new Duty to bring about a ‘paradigm shift’ in its expectations of retail firms, saying they need to consider the Duty ‘at every stage of [their] processes and at every level of [their] organisational structure’.
Many of the FCA’s proposals are framed as positive, proactive actions required by firms. For example, the proposal that firms ‘communicate in a way that is reasonably likely to be understood’ goes beyond Principle 7 (‘A firm must pay due regard to the information needs of clients’), requiring firms to satisfy themselves that their communications can equip consumers to make effective decisions. In practice, we expect the concept of ‘proactivity’ will require firms, and senior management in particular, to demonstrate, to greater extent than is the case today, the actions they have taken to ensure their products and services deliver good outcomes for customers.
The FCA also proposes to embed the concept of ‘reasonableness’ within the Duty, setting out the factors that influence what is reasonable. For example, what firms would need to do to comply with the Duty will vary depending on what a reasonable consumer would expect. We expect firms will, in future, need to exercise far greater judgement in determining how their actions, behaviours, policies and processes deliver fair outcomes for consumers.
What does the FCA expect firms to do? The FCA acknowledges that many firms already deliver the right outcomes for consumers. Accordingly, some may question what more, in practice, the FCA expects them to do. Where firms believe they are generally delivering the right outcomes, we expect that the reality is that some, but not necessarily all, products and services will meet the higher standards the FCA expects. Firms should use the time afforded by the consultation period(s) to perform a robust, ‘stand back’ appraisal of products and services against the Duty, identifying any which fall short. Firms may also wish to consider testing new products and services against the standards set out under the proposed Duty.
More thoughts on the ‘no regrets’ actions firms can take to prepare for the Duty can be found in the Appendix.
How will the new Duty fit with Principles 6 and 7? The Duty overlaps with Principles 6 and 7 and the FCA has not made any firm decisions, at this point, about whether to disapply them. The FCA says that, in future, it is likely to make use of the Consumer Duty, and its more developed rules, in preference to the existing Principles 6 and 7. The FCA acknowledges firms may find it easier if it disapplied Principles 6 and 7. However, it points out that there is a lot of Handbook and non-Handbook material that reflects the wording of these Principles as well as guidance to firms on how to comply with them.
What is the approach to enforcement? The CP focuses mainly on the scope and structure of the Duty and does not provide much detail on the FCA’s proposed approach to enforcement. However, the Duty is only one part of the FCA’s wider transformation, through which it is pursuing a more robust approach to supervision and enforcement. The FCA wants the Duty to ensure more firms ‘get it right in the first place’ resulting in less need for enforcement or remediation. However, proposals to underpin the Duty with rules and guidance mean that if the requirements of the Duty are breached, the FCA will have additional routes to enforce against firms.
Notably, the FCA has not ruled out a private right of action (PROA) for breaches of the Principles (including the new Principle), which is likely to create continued concern amongst firms regarding the potential for large-scale litigation or remediation exercises. Senior management should also be mindful that, tucked away within the CP, the FCA points to increased accountability: ‘as with all of the elements we propose in this consultation, our intention is that firms’ senior management would be accountable’. Moreover, the ‘reasonable steps’ language the FCA uses when describing two out of the three possible Cross-cutting Rules is the same formulation as used in the SM&CR.
How long do we have to prepare? The FCA plans to publish a second consultation by 31 December 2021 and will make any new rules by 31 July 2022. The FCA will consult on an appropriate implementation period for the Duty, so that firms have sufficient time to implement the requirements.