This blog was published on 09 December 2021.
At a glance:
- The FCA promised a paradigm shifting set of proposals and it has delivered on this. The Consumer Duty (the Duty) has far-reaching implications for firms’ treatment of consumers and will require firms to consider almost every aspect of the firm-consumer relationship.
- The consultation paper (CP) makes some welcome amendments and clarifications to the scope and application of the Duty. Nevertheless, firms will have to confront a complex matrix of different, overlapping requirements. These will take time to unpick.
- The consultation is open until 15 February 2022 and the FCA expects to confirm any final rules by the end of July 2022.
- The timeline for compliance is demanding with 30 April 2023 set as the provisional date within the CP. Firms should prioritise the assessment of requirements in Q1 2022, performing a gap analysis where appropriate and understanding the resulting activity and actions required.
- Accountability for the Duty will be reinforced through amendments to the SM&CR. These set a higher standard than the existing rules, requiring all conduct rules staff to ‘act to deliver good outcomes for retail customers’.
Summary of the proposals
The FCA has issued its second CP on proposals for the Duty. The Duty sets higher expectations for the standard of care that firms give consumers and follows an earlier consultation in May 2021.
The Duty is a package of measures, comprised of:
A new Consumer Principle (Principle 12) - ‘a firm must act to deliver good outcomes for retail customers’ - that will replace Principles 6 and 7 for retail business.
Cross-cutting rules setting out how firms should act to deliver good outcomes and providing greater clarity on the FCA’s expectations under the Principle. The cross-cutting rules require firms to:
- act in good faith;
- avoid foreseeable harm; and
- enable and support retail customers to pursue their financial objectives.
Four Outcomes: updated from the first consultation, the outcomes provide more detailed expectations across the key elements of the firm-consumer relationship:
- products and services;
- price and value;
- consumer understanding; and
- consumer support.
This blog summarises some of the key messages for firms from the FCA’s consultation and the immediate steps they should consider taking in response to the proposals.
Deloitte will be hosting a webinar on the Duty on 11 January 2022 at 09.30. Sign up here to learn more about the practical implications of the Duty, the key challenges and the action your firm should be taking.
The Private Right of Action (PROA)
The FCA is not proposing to provide a PROA for breaches of any part of the Duty. Whilst this will be welcome news to firms which were concerned about the potential for increased litigation, it is clear that the FCA has not abandoned the PROA altogether. It intends to keep the PROA under review and can be expected to revisit it in the absence of evidence that firms have thoroughly embedded the Duty into their culture, policies, and processes.
Application and scope
The new Principle, and most of the new rules and guidance in relation to the Duty, are set out in the Principles for Businesses (PRIN). This straightforward approach avoids the FCA having to make detailed changes across several different sourcebooks. Given the overlap between the Duty and Principles 6 and 7, the FCA is proposing to disapply both Principles where the Duty applies. Most existing handbook rules and guidance, including those relating to Principles 6 and 7, continue to apply.
The consultation makes important clarifications to scope of the Duty including:
Retail scope: rather than applying to all ‘retail clients’ (i.e., all clients other than professional clients and eligible counterparties), the FCA is proposing to align the scope of the Duty with the existing scope of the sectoral sourcebooks. For example, for insurance, the scope will follow the position in the Insurance Conduct of Business Sourcebook (ICOBS).
The distribution chain: the FCA has clarified that firms are generally responsible only for their own activities and would not need to oversee the actions of other firms in the chain. Whilst this clarification is welcome, in some instances, the responsibilities of firms throughout the chain remain complex (for example, the role of distributors in assessing fair value), and will require very careful consideration.
The clarifications are intended to drive consistency between the Duty and the FCA’s existing handbook requirements and ensure firms’ obligations are proportionate to their ability to influence end outcomes for consumers. In practice, however, firms now have to confront a complex matrix of different scopes and overlapping requirements. These will take time to unpick, and firms are likely to uncover tensions between expectations under the Duty and existing requirements, which they will need to resolve. For example, the requirement to support consumer understanding is at odds with statutory and sourcebook requirements mandating the provision of certain complex information to consumers.
Action for firms: Take the time to understand and consider which of the new requirements of the Duty apply to their business model and consider what this paradigm shift in expectations means for them and any cultural shifts needed. The planning phase of this programme of work will be critical to success once firms move to the design, implementation and embedding phases.
Application of the Duty to existing products and services
Whilst the Duty will not apply retrospectively to past business, the FCA says it will apply on a forward-looking basis to existing products and services which are either: still being sold to new customers, or closed products and services that are not being renewed or sold.
The FCA is clear that firms will need to comply with the Duty in full for any existing products and services sold or renewed after the Duty comes into effect. Firms need to review products and services during the implementation period and may need to amend their terms and conditions before products and services can continue to be sold (or renewed). This will be a considerable undertaking, particularly for firms with large numbers of current and legacy product or service lines.
To compound the challenge, expectations in respect of closed products and services are unclear. Whilst expecting firms to undertake a review of such products and services, the actions the FCA expects firms to take where they uncover issues or harm are not clearly defined.
Actions for firms: Firms will need to review and potentially update and expand existing product review processes to ensure that they meet the requirements of the Duty and are sufficiently resourced where existing products require review during the implementation period.
Communications and consumer understanding
The FCA is proposing to rename the communications outcome ‘consumer understanding’ to emphasise that it wants firms to focus much more on consumer outcomes and understanding throughout the customer journey. In response to concerns that widespread testing of communications would be disproportionate, the FCA has clarified that testing consumer understanding is unlikely to be required for many communications. Nevertheless, firms’ approach to testing must be proportionate, taking into consideration the type of communication, its purpose and context, the needs and types of recipients and the scope for harm to intended recipients.
Action for firms: firms should begin to develop a risk-based approach to testing and reviewing consumer communications, focused on the type and channel of communication, the needs and characteristics of the recipient and the potential for harm.
The Senior Managers and Certification Regime (SM&CR)
The FCA is proposing to amend the SM&CR individual conduct rules to reflect the higher standards of the Duty. It will add a new rule requiring all conduct rules staff to ‘act to deliver good outcomes for retail customers’ where their firm’s activities fall within scope of the Duty. This will be underpinned by obligations reflecting the cross-cutting rules, meaning conduct rules staff will be required to:
- act in good faith towards retail customers;
- avoid foreseeable harm to retail customers; and
- enable and support retail customers to pursue their financial objectives.
The new conduct rule sets a higher standard than the existing Conduct Rule 4 (‘You must pay due regard to the interests of consumers and treat them fairly’) by requiring staff to act to deliver good outcomes. The FCA intends this obligation to be proportionate and an individual’s role and seniority may influence what is expected of them under the rule. Nevertheless, firms will need to demonstrate, to a greater extent than is the case today, the actions all staff have taken to ensure they deliver good outcomes for customers.
Actions for firms: Firms will have to refresh SM&CR training to ensure that staff at all levels of the firm understand their obligations under the Duty and the individual conduct rules.
Senior Managers will need to revisit their reasonable steps frameworks to ensure they can evidence compliance with the Duty proportionate to their role and seniority within the firm.
The concept of reasonableness
The FCA proposes to embed the concept of ‘reasonableness’ within the Duty, saying that it is an ‘objective standard’ and one firms are already familiar with under common law. Whilst a reasonableness standard exists in English tort law (for example, in relation to the provision of professional services), it has come before the courts frequently because it can be a difficult concept to understand, especially where parties have competing interests and have a different view of what is reasonable in a given situation.
The assessment of reasonableness is often quite fact-specific with individual cases turning on their own facts rather than providing very clear and specific obligations that would apply in all circumstances. This may create uncertainty for firms and they will need to exercise far greater judgement in determining how their actions, behaviours, policies and processes deliver fair outcomes for consumers.
Monitoring customer outcomes
Under the Duty, supervisors will focus increasingly on the outcomes being experienced by consumers. The FCA is clear that firms will need to demonstrate how they are monitoring the outcomes their customers receive and address any issues they identify. The Board will need to sign off, at least annually, an assessment of whether the firm is acting to deliver good outcomes for customers.
Action for firms: Firms, and Boards in particular, need to ensure that they have appropriate and effective management information alongside an outcome testing framework across the organisation to ensure they can monitor outcomes. Our paper - Improving Customer Outcome Testing | A Practical Guide for Boards - provides suggestions to firms on improving their approach to outcome testing.
The FCA is proposing to give firms until 30 April 2023 to implement the Duty. This is a demanding timetable and firms should waste no time in assessing the requirements, understanding gaps and developing their priority actions and overall implementation plans.
The FCA expects the implementation of the Duty to be iterative and it may provide further updates including good and poor practice examples, case studies or further handbook amendments. Whilst firms are likely to welcome additional clarity, it is possible that the FCA’s expectations evolve significantly, necessitating further, ‘in-flight’ revisions to policies, procedures, and practices.
Actions for firms: Firms should develop detailed implementation plans, to ensure a consistent approach across franchises, businesses products and third parties which provide relevant services to them. Firms should prioritise those activities, such as product and communications reviews, which are likely to be most time consuming. It will also be important for firms to build in flexibility from the outset to enable them to adapt both to the FCA final rules and also good practice, as the industry responds to the implications of the Duty.