The Consumer Duty (the “Duty”) rules implemented by the Financial Conduct Authority (FCA) will bring wide ranging obligations on those firms affected by its requirements.
The FCA confirmed its final policy, rules and guidance in a policy statement, “A new consumer duty (PS22/9)”, and “Final non-Handbook guidance for firms on the consumer duty (FG22/5)”, which were published in July 2022.
The FCA has stated (in a press release on 27th July 2022) that the Duty will include requirements for firms to:
- End rip-off charges and fees;
- Make it as easy to switch or cancel products as it was to take them out in the first place;
- Provide helpful and accessible customer support, not making people wait so long for an answer that they give up;
- Provide timely and clear information that people can understand about products and services so consumers can make good financial decisions, rather than burying key information in lengthy terms and conditions that few have the time to read;
- Provide products and services that are right for their customers;
- Focus on the real and diverse needs of their customers, including those in vulnerable circumstances, at every stage and in each interaction.
Authorised firms (“firms”) affected should already have been preparing to get ready to ensure their compliance when the rules come into force. An implementation plan should have been prepared and approved by the firms governing body by 31st October 2022 and work on the plan must be completed to ensure compliance by the time the Duty comes into force. The Duty will apply from 31st July 2023 to all new products and services, and all existing products and services that remain on sale or open for renewal. It will apply to all closed products and services from 31st July 2024.
What is the consumer duty?
The Duty is based on a new Principle 12 introduced by the FCA in its Handbook (PRIN 2A). The principle simply states:
“A firm must act to deliver good outcomes for retail clients”.
This is a rather general and commendable statement which requires some further clarity on the expectations firms are expected to fulfil in practice. The FCA has introduced a set of “cross-cutting” rules and guidance to set out the standards of conduct it expects under the Duty. The cross-cutting rules require firms to follow key behaviours, which are:
- Act in good faith;
- Avoid causing foreseeable harm to customers; and
- Enable and support customers to pursue their financial objectives.
Principle 12 and the cross-cutting rules are built on by certain specific outcomes the FCA has determined should be achieved. These “four outcomes” are key requirements which firms must demonstrate in order to comply with their Duty requirements. They are:
- The quality of products and services. The aim is to ensure that all products and services sold to consumers are fit for purpose. That means they are designed to meet consumers’ needs and targeted at the those consumers whose needs they are designed to meet.
- The price and value of products and services. This is to ensure that all products and services represent fair value. That means they must not just meet consumers’ needs and objectives but also represent fair value in their pricing.
- Consumer understanding. This is to ensure that communications with clients consistently support consumers enabling them to make informed decisions about financial products and services. Consumers must receive the appropriate to be given the information they need, at the right time, and presented in a way they can understand. This outcome goes further than Principle 7 (a firm must pay due regard to the information needs of its customers and communicate information to them in a way which is clear, fair and not misleading).
- Consumer support. This outcome is to ensure that firms provide a level of support that meets consumers’ needs throughout their relationship with the firm. This means firms’ customer service should enable consumers to realise the benefits of the products and services they buy and ensure that they are not hindered from acting in their own interests.
The FCA has also made clear that the Duty is underpinned by the concept of reasonableness. That means the application of the rules and guidance must be interpreted in line with the standard that could reasonably be expected of a prudent firm which is carrying on the same activity in relation to the same product or service, and with the necessary understanding of the needs and characteristics of the customers in the relevant target market.
To whom do these rules apply?
The Duty applies to authorised firms who deal with retail customers in relation to retail market business.
The term “consumer” used by the FCA when describing the Duty is misleading since in this context it makes more sense to speak of customers in general and not consumers in the specific sense. The Duty will apply to retail customers or where there is a distribution chain which involves such a retail customer and in respect of a firm’s retail market business. The identification of retail customers is aligned specifically with the scope in the various FCA sourcebooks covering different business types (e.g. in relation to insurance where ICOBS applies a policyholder or prospective policyholder is a retail customer, for financial services business were COBS applies a customer will be a retail client who is not a professional client).
Retail market business includes regulated activities (and ancillary activities), payments services and electronic money issuance where a firm is in a distribution chain which involves a retail customer.
The Duty therefore also applies to firms in a distribution chain to the end retail customer even if that customer is not a direct customer of the firm but where the firm can determine or have a material influence over retail customer outcomes.
This means firms will be covered by the Duty where they can determine or have a material influence over any of the following:
- The design or operation of retail products or services;
- The distribution of retail products or services;
- The preparation of and approval of communications for retail customers; and
- The provision of support for retail customers.
Firms will need to comply for their own activities and would generally be responsible for those activities but would also need to oversee the actions of others in the distribution chain. The FCA will expect those firms that are directly involved with retail customers will have the greatest responsibility but others which may not have direct contact with customers but still have a material influence on the retail process will have some obligations also and will need to consider their obligations on customer outcomes.
What are the implications for firms?
The implementation of the Duty for firms will have wide ranging consequences to ensure compliance.
The aim is to change the culture in firms to ensure that customers’ interests and outcomes are clearly focussed on. A firm will need to review its processes and activity to ensure that the Duty is considered at every level of its structure.
This means senior managers will be responsible for ensuring that the Duty is met across the business in the areas they are responsible for. Firms will be expected to place greater emphasis on placing customers in positions where they can make decisions or pursue their financial objectives. The FCA expects that firms will, in many cases, need to exercise more judgement in determining how their behaviours, policies and processes act in achieving the desired outcomes. In addition, firms will need to monitor, test and (where necessary) adapt their practices and processes on an ongoing basis, to satisfy themselves that they are delivering the expected outcomes.
What do firms need to do going forward?
Once the Duty is in force firms will need to undertake ongoing monitoring activities and engrain in their culture the necessity to comply with the Duty requirements.
The FCA has certain expectations during the implementation period leading to the first implementation date of 31 July 2023 and can review whether firms are complying with these expectations. These are:
- By the end of October 2022 firms should have agreed implementation plans with their board or management body;
- By end of April 2023 firms should have completed all reviews to meet the outcome rules for all existing products and services enabling them to share information with distributors which allows the distributors to meet their obligations under the Duty and also identify the required changes to products and services that are to be implemented before 31st July 2023;
- The Duty applies in respect of open products and services as from 31st July 2023 and in respect of closed products or services as from 31st July 2024.
The changes that may need to be undertaken by a firm to be compliant with the Duty can be significant and can encompass a firms’ policies and procedures including governance, the products and services themselves, the terms and conditions of customer agreements, as well as communications undertaken with customers.