YOUR COMPLIANCE MATTERS – Consumer Duty (2)

Following the publication of its Policy Statement (PS22/9) A new Consumer Duty Feedback to CP21/36 and final rules, we now know what the FCA expects in how firms need to act when providing products and services to retail customers.

 

In addition, the FCA has issued a guidance document, (FG22/5) Final non-Handbook Guidance for firms on the Consumer Duty July 2022, to help firms implement the new rules.

 

Each document can be found using the following link: PS22/9: A new Consumer Duty | FCA

 

There is a lot of detail within each document for the Senior Management of each firm to familiarise themselves with and this newsletter is set at a high level only to point firms in the right direction. We will work with individual firms to ensure they are working towards the various deadlines, as indicated below.

 

In its press release on 27 July 2022, the FCA stated “has confirmed its plans to bring in a new Consumer Duty, which will fundamentally improve how firms serve consumers. It will set higher and clearer standards of consumer protection across financial services and require firms to put their customers’ needs first.”

 

BIBA has noted that “As expected, the FCA did not implement wholesale changes or deletions to the proposed rules set out in Consultation Paper21/36 (CP21/36), rather it refined what it had published after receiving feedback from firms in the form of 151 written responses as well as from considerable industry engagement during the consultation period.”

 

Other comments include “The new Consumer Duty rules set a high bar for firms in the way they manufacture, sell and service insurance products to retail consumers. The FCA are seeking to create a baseline standard that will ensure innovation and competition exists in the interests of the retail consumers firms serve. They are seeking to eradicate the scenario of profit driven by consumer confusion and exploitation.”

 

The new Consumer Duty applies to all retail customers; defined as “an individual who is acting for the purposes which are outside their trade, business or profession”.

 

Firms throughout the distribution chain, who manufacture or distribute products intended for retail customers, are directly affected by the new Consumer Duty rules, even if they are not in direct contact with the customer. They need to consider how their role, which is likely to vary by individual product and distribution agreement, covers issues such as:

·          the design, manufacture and servicing of retail products or services, including their price and value;

·          the distribution models used;

·          preparing and approving communications that are to be issued to retail customers; or

·          their role in providing customer support to customers.

 

The FCA is introducing a new Consumer Principle, which has supporting rules and guidance in the form of three “Cross-Cutting” rules and a set of four “Outcomes”:

 

1	Consumer Principle	·      A firm must act to deliver good outcomes for retail clients.
3	Cross-Cutting rules	·      Act in good faith towards retail customers ·      Avoid foreseeable harm to retail customers, and ·      Enable and support retail customers to pursue their financial objectives
4	Outcomes	·      Consumer Understanding. ·      Products and Services ·      Consumer Support ·      Price and Value

 

Timetable for implementation

 

The FCA have been quite explicit that firms need to act sooner rather than later and have set out a roadmap for implementation with some specific milestones. It refers to this as an ‘assertive approach’ and is designed to reduce the risks of failure to act in the manner expected by firms.

 

Firms have 12 months to implement any changes necessary to comply with the new rules, i.e. July 2023, which is an extension to the original date of April 2023.

 

Although deadlines have been extended by 3 months from the original ones, they are still tight:

·          31 October 2022:

o  Boards (or an equivalent management body) are required to have an implementation plan.

·          31 July 2023:

o  new Consumer Duty rules come into force for new and existing products or services open to sales or renewals.

·          31 July 2024:

o  rules come into force for closed products and services.

 

So, by 31 October 2022, the FCA expects that the Board of Directors of each affected firm will have agreed and produced an implementation plan; it is also possible that the FCA may request sight of this document as part of their ongoing monitoring and supervision process so firms will need to put in considerable management time and resource to meet the challenging deadlines for creating an implementation plan and delivering it by 9 months later.

 

Note: the FCA expect the Board to have oversight of the whole process, so plan for this to be a standing agenda item over the next 18-24 months as your firm responds to the change and monitors the effectiveness of delivery of that change.

 

The initial exercise is essentially a “gap-analysis” of the products and services available from a firm and should be aligned with the Outcomes required by the FCA. We are able to provide a draft template document that might assist firms in this respect.

 

Conduct Rules

 

The Consumer Duty, has also introduced a new Tier 1 Conduct Rule, meaning it is applicable to most staff at your firm.

 

The new rule 6 says: “You must act to deliver good outcomes for retail customers”

 

It will be implemented on 31 July 2023; firms will have to provide training on the new Conduct Rule to staff and update necessary documentation, such as employment contracts and employee handbooks, by that date.

 

PROD developments

 

Many firms will have recently received an email with letter attachments from the “Insurance Sector Projects Team” on the subject of their “Product Governance multi-firm review”.

 

It starts off: “We are writing to inform you that we have concluded a multi-firm review on product governance. This review focussed on whether manufacturers of general insurance and pure protection products are undertaking the necessary work to comply with PROD 4 of the FCA Handbook, for products in scope of the transitional provisions.”

 

As a reminder:

·          Manufacturers: firms that create, develop, design, issue, operate or underwrite a product or service would be regarded as a product manufacturer. More than one firm may be involved in the manufacture of a single product. It is also possible that intermediaries may be co‑manufacturers, for example if they set the parameters of a product and commission other firms to build it.

·          Distributors:     firms that offer, sell, recommend, advise on, propose or provide a product or service would be regarded as distributors.

 

The Outcomes reinforce what is already clearly set out in the FCA Handbook. Under PROD 4.2.14R , a firm manufacturing a product, for example, “… must ensure the manufacture of an insurance product is driven by features that benefit the customer and not by a business model which relies on poor customer outcomes to be profitable.”

 

In the case of price and value, PROD 4.2.14E says that: “…‘value’ means the relationship between the overall price to the customer and the quality of the product(s) and/or services provided.”

 

 

This area runs alongside the new Consumer Duty rules and we will be issuing a separate newsletter to cover this.

 

 

If you need any further guidance, please call us and we will be happy to provide more help.