YOUR COMPLIANCE MATTERS:          New Consumer Duty

YOUR COMPLIANCE MATTERS:         New Consumer Duty

 

Relevance:                 All firms.

 

Action required:       Understand forthcoming FCA requirements under consumer protection.

 

 

The Financial Services Act 2021 includes a requirement for the FCA to carry out a public consultation about whether it should introduce a duty of care. The FCA must carry out the consultation, and publish its analysis of the responses, before 1 January 2022 and then publish any final rules by 1 August 2022.

 

This is why the FCA has recently issued a Consultation Paper entitled “A new Consumer Duty”. The full Consultation Paper can be found at the following link: CP21/13: A new Consumer Duty (fca.org.uk)

 

This is a brief outline of the proposals.

 

The introduction includes the following statement:

We want to see a higher level of consumer protection in retail financial markets, where firms are competing vigorously in the interests of consumers. We are proposing to introduce a new ‘Consumer Duty’ that would set higher expectations for the standard of care that firms provide to consumers. For many firms, this would require a significant shift in culture and behaviour, where they consistently focus on consumer outcomes, and put customers in a position where they can act and make decisions in their interests.”

 

The Consumer Duty would require firms to:

·        ask themselves what outcomes consumers should be able to expect from their products and services;

·        act to enable rather than hinder these outcomes;

·        assess the effectiveness of their actions.

 

The FCA is proposing to introduce a new Consumer Principle, which is likely to be an additional Principle for Businesses. This would be a high-level obligation, and much like the existing Principles, firms would need to use their judgment to consider how the Principle might apply in any given situation.

 

The FCA is consulting on two options:

1.    A firm must act to deliver good outcomes for retail clients.

2.    A firm must act in the best interests of retail clients.

 

The FCA considers that the new Principle would go beyond Principle 6 (“A firm must pay due regard to the interests of its customers and treat them fairly”). However, its scope would be limited to what could reasonably be expected of a firm carrying out its particular role (e.g., a firm with a very limited role in a distribution chain might not be expected to ensure that a client receives a good outcome overall).

 

The FCA is also proposing supporting rules and guidance to expand on the Consumer Principle, in the form of “Cross-Cutting” rules and a set of four outcomes.

 

The Cross-Cutting rules would require firms to:

·        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 towards customers.

 

The FCA plans to embed a concept of reasonableness across the new measures, to provide an objective standard for firms to meet. It proposes to set out factors that influence reasonableness, such as the nature of the firm’s role and the type of product or service being provided. As part of this, firms will be expected to consider the outcomes for different types of consumers, and identify if a particular type of consumer is receiving worse outcomes.

 

The above measures would all be underpinned by a set of four Outcomes:

1.    Communications must allow consumers to make effective, timely, and properly informed decisions about financial products and services.

2.    Products and services must be designed to meet the needs of consumers, and sold to consumers whose needs they meet.

3.    Customer service must meet the needs of consumers, enabling them to act in their own interests without undue hindrance.

4.    Pricing for products and services must represent fair value for consumers.

 

The FCA acknowledges the overlap of the proposed new Principle and supporting measures with Principles 6 and 7, and firms may question whether the new measures will add anything new. There is also significant overlap with existing conduct of business rules, which require firms to act in their clients’ best interests, and with the product governance regime. However, whereas existing rules apply to business involving specific products, the FCA is proposing that the new measures will apply across the retail sector. The extent to which the Consumer Duty represents a significant shift in expectations ultimately will depend on how different it is in practice to existing standards.

 

The FCA acknowledges that greater protections are needed for consumers of UK retail financial services, and intends to introduce new measures that set a higher standard of care than the existing rules with a view to achieving a shift in perceived mindset by firms.

 

In particular, the FCA expects that a firm will need to consider the new measures “at every stage of its processes and at every level of its organisational structure”. The FCA considers that, in many cases, firms will need to exercise more judgment in determining how their behaviours, policies, and processes help to achieve positive outcomes for consumers.

 

In addition, the FCA will expect firms to monitor and test their policies and practices on an ongoing basis and be prepared to provide relevant information and data to the FCA. However, the FCA is keen to stress that the new measures will not remove consumers’ responsibility for their own decision-making, nor will they specify exactly how firms should act.

 

Finally, although the Consumer Duty would apply in relation to products and services sold to retail clients, a firm will have to consider whether through its regulated activities, it can influence material aspects of the design, target market, or performance of a product or service that will be used by retail clients. Therefore, firms operating in the wholesale sector may be caught even if they have no direct contact with retail clients (e.g., if they have a role as part of a distribution chain for products or services sold to retail clients).

 

The FCA requests feedback by 31 July 2021. The regulator plans to issue a further consultation by the end of the year, in which it will set out proposed drafting for the new rules and guidance. It will also consider the impact of the new measures on the existing Principles for Businesses, and how the FCA intends to supervise compliance. The FCA plans to make any new rules in this area by 31 July 2022.

 

We will keep firms posted of any developments in this area.

 

If you need to discuss any aspect of this matter with us, please make contact in the normal way.