In May this year we reported on the Financial Conduct Authority’s (FCA’s) initial proposals for a Consumer Duty for financial services firms in its consultation CP21/13, which was intended to articulate clearer, higher standards for firms by focusing on outcomes experienced by consumers (see our blog post here). Last week the FCA published its follow-up consultation CP21/36, containing its response to the feedback it received and its revised proposals for the Consumer Duty. The FCA indicated that it expects the new rules, which it will finalise by July 2022, to “fundamentally shift the mindset” of firms.
The FCA’s proposals are broadly unchanged from CP21/13, although it has made some important amendments and clarifications which has the effect of softening them slightly, and it has provided the text of the draft requirements for the first time. It has also decided not to attach any private right of action to the Consumer Duty at this stage, and commented on the way in which it expects to regulate the Consumer Duty.
Key elements of revised proposals
Some of the key changes and/or clarifications to the FCA’s original proposals in CP21/13 include:
- Scope of the duty: Rather than applying the Consumer Duty to one definition of “retail client”, the FCA proposes to align it with the scope of its sectoral sourcebooks, meaning that in an insurance context, for example, the definition would follow the position in the Insurance Conduct of Business Sourcebook. The effect of this is to ensure that certain larger SMEs are not caught by the Consumer Duty in circumstances where they would not be caught by any of the FCA’s detailed Handbook rules. The FCA has clarified that the Consumer Duty will also apply to prospective customers.
- Application to existing and closed products and services: In CP21/13, the FCA noted that the Consumer Duty would not apply retrospectively to past business. It has now clarified that the Consumer Duty will apply, on a forward-looking basis, to existing products and services which are still being sold to customers, or which are closed and not being sold or renewed.
- Formulation of duty: From the two options it consulted on, the FCA has settled on articulating the overarching Principle of the Consumer Duty as “A firm must act to deliver good outcomes for retail clients”, on the basis that this wording reflects the shift it wants to see and the expectation that firms should consistently focus on consumer outcomes and on putting consumers in a position to act and make decisions in their own interests. The FCA did acknowledge that it is not possible for all consumers to receive (or feel that they have received) a good outcome, but has clarified that its focus is on firms acting reasonably to deliver good outcomes.
- Fit with existing Principles: Given the overlap between the Consumer Duty and existing Principles for Businesses 6 and 7 (a firm must pay due regard to the interests of its customers and treat them fairly, and 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, respectively), the FCA has decided to disapply Principles 6 and 7 where the Consumer Duty applies. The FCA’s draft Guidance specifically explains that the Consumer Duty imposes a higher standard than the existing Principles 6 and 7, and that existing guidance in relation to those Principles will remain relevant, although firms should be aware that the guidance no longer encapsulates the FCA’s expectations in full.
- Change in cross-cutting rules: In the cross-cutting rules which sit underneath the Principle, the FCA has removed the reference to “taking all reasonable steps” to the obligation to avoid causing foreseeable harm to consumers and to enable retail consumers to pursue their financial objectives. This is in response to industry concern that “all reasonable steps” was a very high, unachievable, and potentially very procedural standard.
- Changes in the names of certain outcomes: The FCA has renamed two of the outcomes to better emphasise the area of focus for firms. Those two outcomes are now the “consumer understanding outcome”, and the “consumer support” outcome. The FCA has also proposed draft requirements for each of the four outcomes.
No private right of action
In CP21/13, the FCA had asked for feedback on whether to attach a private right of action to the Consumer Duty to allow individuals to take action against a firm for damages. It noted that the question was a “polarising issue”, as most consumer representatives strongly supported it and most industry respondents warned against it. However, it decided not to attach a private right of action to any part of the Consumer Duty at this stage, on the basis that the existing redress framework, including consumers’ ability to go to the Financial Ombudsman Service, was likely to be the more appropriate route for almost all consumers to seek redress, and on the basis that a private right of action was unlikely to be needed to incentivise firms to deliver better outcomes. However, it indicated that it would keep the possibility of a private right of action under review.
Monitoring, reporting and enforcement
In addition to the amendments and clarifications set out above, the FCA has explained in the consultation how it expects firms to monitor consumer outcomes and to report on them to their boards, and has commented on how it expects to regulate the Consumer Duty. From a supervisory perspective, it has indicated that it will be employing data, technology and analytics to assist it, and that firms can expect challenge and robust intervention to prevent harm. It will expect firms to be able to demonstrate how they are achieving good consumer outcomes, including at business model, culture and conduct levels. From an enforcement perspective, it has indicated that it sees the Consumer Duty as sitting at the heart of its enforcement work, and that it intends all departments of the FCA to work together to detect, triage and act on breaches of the Consumer Duty.
Timeframes and implementation period
The consultation closes on 15 February 2022, and the FCA has confirmed that it still intends to finalise the new rules by 31 July 2022. In terms of implementation, the FCA recognises that the new duty is a “unique regulatory intervention” which affects all firms, products and services, comes at a time of wider market and economic change, and involves a significant amount of work to implement. For that reason, it proposes allowing firms until 30 April 2023 to implement the Consumer Duty, although it emphasises that firms should make good use of the implementation period and be able to demonstrate progress if asked.
The FCA’s detailed explanations in this consultation of how it expects the duty to work in practice and the draft requirements themselves make it clear that by introducing the Consumer Duty, the FCA is intending to implement a standard that is significantly higher than catered for by the current rules, and that is able to be supervised and enforced differently too. Overall, the FCA is effectively asking firms to take on the onus of demonstrating how they are meeting the rules at any particular time (and delivering good outcomes to consumers) with reference to their business model, actions and culture.
In practical terms, the new rules raise complex questions which firms will want to work through carefully with their advisers. The most challenging aspect will likely be the way in which firms design and implement the fair value assessments required by the new rules, to demonstrate how their prices provide fair value to consumers in their target market – not only when the products and services are introduced, but over time and when circumstances change. There will also be questions about how specific categories of consumers (such as vulnerable customers, for example) are catered for, and the extent to which firms must equip consumers with all relevant information and take into account consumers’ behavioural biases. Given the planning involved, we suggest that this is something that firms begin considering as soon as possible.
The most challenging aspect will likely be the way in which firms design and implement the fair value assessments required by the new rules, to demonstrate how their prices provide fair value to consumers in their target market [...]