FCA’s new Consumer Duty: What firms need to know

What is the new Consumer Duty?

The new Consumer Duty is a package of measures intended to improve the standard of care firms offer to consumers.  The Consumer Duty comprises a new Consumer Principle that provides an overarching standard of conduct; a set of cross-cutting rules which are intended to clarify the FCA’s expectations; and four outcomes relating to key elements of the firm-consumer relationship.

The FCA expects the Duty to be reflected in firms’ strategies, governance, leadership and people policies.  Senior managers will be accountable for delivering the higher standards and good customer outcomes required by the new Duty within their areas of responsibility.  Changes to individual conduct rules within the Senior Managers and Certification Regime rules in the FCA’s Code of Conduct sourcebook will be made accordingly [1].

The Consumer Duty in more detail

The Consumer Principle

The new Consumer Principle will become Principle 12 in the FCA’s Principles for Business Handbook.  It will replace existing Principles 6 (customers’ interests) and 7 (communications with clients) in this context [2] and will state: “a firm must act to deliver good outcomes for retail customers”.

The Consumer Principle sets a higher standard than existing Principle 6 (which requires firms to pay due regard to the interests of its customers and treat them fairly).  It directs firms to play a greater and more positive role in delivering good outcomes for consumers.

The FCA has confirmed that, as with any Principle, the Consumer Principle cannot be defined exhaustively. Its meaning is, however, clarified and amplified through the cross-cutting rules and four outcomes (see below) and firms will need to take responsibility for serving consumers’ interests and delivering good outcomes.

The FCA has clarified that the Consumer Principle will apply proportionately.  Firms will not be required to go beyond what is reasonably expected given the nature of their role, the product or service they offer and the characteristics of the customer (in particular, their financial capability) [3].  What can be ‘reasonably expected’ is an objective standard and will be assessed on the facts.  Neither will firms be responsible for the activities/actions of others within the distribution chain (except in the case of specific regulatory or contractual requirements).  Consumers will remain responsible for the decisions they make, but firms must use more judgement when considering the impact of their actions on consumers.

Overall, the Consumer Principle places a new emphasis on consumer outcomes and firms’ obligations to be proactive in delivering those outcomes. Firms should not focus simply on processes, but on the impact of their actions on consumers. Delivering good outcomes goes much further than simply paying “due regard” to customers’ interests.  Whilst delivery of a “good outcome” does not have an established legal meaning, relevant factors include: whether the firm communicates the support available to customers; whether firms ensure that support works effectively; operational resilience; dealing with non-standard issues; and whether firms take into account and properly deal with customers with protected characteristics and customers with changing needs.

Although the FCA will dis-apply Principles 6 and 7, it’s Handbook and non-Handbook material linked to them will continue to be applicable to firms and business activities outside the scope of the Consumer Duty (see below) and should remain helpful to firms in considering their obligations where the Duty does apply.

Cross-cutting rules

The cross-cutting rules provide greater clarity on the FCA’s expectations and aim to help firms interpret the four required outcomes.  The rules require firms to:

• Act in good faith towards retail consumers. The FCA has confirmed that acting in good faith involves a standard of conduct characterised by honesty, fair and open dealing, and acting consistently with the reasonable expectations of retail consumers. Paragraphs 5.6 – 5.16 of the Guidance contain relatively detailed information and examples which aim to further clarify the concept of good faith for these purposes.
• Avoid causing foreseeable harm to consumers through action or inaction, either in direct relationships with customers or as a result of their position in the distribution chain [4]. What is foreseeable is dynamic: if harm was not foreseeable at the outset but later becomes foreseeable, firms should take action to address it. Firms therefore need to stay abreast of, and respond to, new and emerging sources of harm.  Paragraphs 5.20 – 5.36 of the Guidance provide detailed information and examples to explain concepts of reasonableness and foreseeability, and also include some important carve-outs for firms.  The Guidance confirms that a firm’s responsibility to avoid causing reasonable harm can involve taking proactive steps; not exploiting customers’ vulnerabilities, lack of understanding or behavioural biases; and being clear and fair when it comes to communications with customers throughout the customer journey and in relation to the description of products and services.
• Enable customers to pursue their financial objectives. The actions a firm might need to take to support customers in pursuing their financial objectives will be determined by the nature of the products or services and what is within the firm’s control based on its role and its knowledge of the customer.  Firms should take account of behavioural biases and vulnerabilities and should empower customers to make choices in their own interests.  See paragraphs 5.37 – 5.48 of the Guidance.

Four outcomes

The four outcomes cover the key elements of the firm-customer relationship:

1. Products and services outcome. The new Consumer Duty requires all products and services to be fit for purpose.  That is, designed to meet the needs, characteristics and objectives of customers and targeted/distributed accordingly.  Non-exhaustive key questions which are likely to impact a firm’s delivery of this outcome include: Has the firm considered the target market of its products and services in sufficient granularity? Has the firm satisfied itself that its products and services meet the needs of consumers in the target market, and perform as expected? How has the firm identified if products or services could risk harm, for example for vulnerable groups of customers? Is the firm sharing all necessary information with other firms in the distribution chain, and receiving all necessary information itself? Is the firm properly monitoring distribution strategies?  Is the firm regularly gathering/reviewing/acting upon data relating to this outcome?
2. Price and value outcome. This outcome centres on consumers receiving fair value.  Value means more than just price.  It involves firms assessing products and services ‘in the round’ to ensure that there is a reasonable relationship between the price paid and the benefit a customer receives.  The FCA has confirmed that it does not expect firms to quantify non-monetary costs and benefits, but it does expect firms to qualitatively consider these factors.  Chapters 7 of the Policy Statement and Guidance together provide detailed information, examples and assistance for firms in relation to assessing value, including suggestions as to the types of data that firms can use to monitor their performance against this outcome.
3. Consumer understanding outcome. The consumer understanding outcome requires that firms’ communications give customers the necessary information to support and enable customers to make informed decisions about financial products and services.  Information must be provided to customers at the right time and in a way the particular targeted customers can understand.  This outcome requires firms to communicate information in a way which is clear, fair and not misleading.  It goes further than existing Principle 7 because it specifically requires communications to be tailored taking into account the characteristics of the customers intended to receive the communication, including any characteristics of vulnerability; the complexity of products; the communication channel used; and the role of the firm.  It also requires firms, when interacting directly with a customer on a one-to-one basis, and where appropriate, to ask if the customer has understood and whether they have any questions. This outcome also involves firms demonstrating consumer understanding through testing and ongoing review/improvement.
4. Consumer support outcome. The consumer support outcome: involves the design and delivery of support that meets the needs of customers, including those with characteristics of vulnerability; ensures that customers can use their products as reasonably anticipated; ensures that the customer journey allows for the mitigation of risk of harm and gives customers sufficient opportunity to understand and assess their options; ensures that customers do not face unreasonable barriers (including unreasonable additional costs) during the lifecycle of a product or service; and requires firms to monitor the quality of the support they are offering and to act promptly if/when issues arise.

Scope and application

The new Consumer Duty will apply to regulated firms’ activities in relation to products and services sold to ‘retail clients’ [5].  Regulated firms in the e-money and payments sector are in scope.  In addition, firms which are involved in the manufacture or supply of products and services to retail clients are in scope, even if they do not have a direct relationship with the end consumer.

The Duty will not have retrospective effect.  It will apply, on a forward-looking basis, to new and existing products and services, including closed book products and services.  In relation to firms currently applying for authorisation or to vary their permissions, the FCA has clarified the need to demonstrate, from now on, the ability to meet the requirements of the new Consumer Duty.

Timing and next steps

The Duty will come into force via a two-phase implementation period:

• On 31 July 2023 for new and existing products and services that are open to sale or renewal
• On 31 July 2024 for closed products and services.

Importantly, Chapter 12 of the Policy Statement sets out a roadmap of the FCA’s expectations of firms during the implementation period.  In particular:

• By the end of October 2022, firms’ boards/management bodies should have agreed their implementation plans and be able to evidence that they have scrutinised and challenged their plans to make sure they are deliverable and robust enough to meet the new, higher standards. Firms should expect to share their implementation plans and supporting board papers/minutes and to be challenged on their contents.  The timetable for this particular step is extremely tight.
• Manufacturers should aim to complete all necessary reviews to meet the four outcome rule, and to share all necessary information with distributors, by the end of April 2023.
• Manufacturers should also identify where changes need to be made to existing products and services, and implement remedies, by the end of July 2023.

• Where firms identify serious issues causing immediate consumer harm, this must be prioritised.
• Where actions to comply with the Consumer Duty can be taken more quickly than the implementation deadlines, firms should consider doing this.

What practical advice arises?

Compliance with the new Consumer Duty will involve urgent and significant action on the part of all affected firms.

In the immediate term, that relates to the imminent requirement – by the end of next month – that firms should have undertaken the necessary reviews to enable them to have demonstrably agreed implementation for meeting the new, higher standards.

Over the coming months, the reviewing and amending of all relevant policies and procedures, as well as products, services, contracts and communications, will be required.

Staff training will, of course, also be essential.  Staff training should embody not only an explanation of all legal, regulatory and practical changes, but also an emphasis on the cultural shift which fundamentally underpins the new Duty.

Firms must act swiftly, to set up project teams tasked with benchmarking their compliance against the new requirements and effecting a programme of change to address the gaps identified in accordance with the tight deadlines prescribed.

How we can help

Walker Morris has a large cross-departmental team of financial services experts providing advice to the full range of financial services firms.  For detailed, tailored and practical advice in relation to the impact of, and compliance with, the Consumer Duty; for assistance with the review and updating of policies, procedures, products, services, contracts and communications; and for the delivery of staff training, please contact Jeanette Burgess or Richard Sandford from our Regulatory & Compliance and Finance Dispute Resolution teams respectively.  Jeanette or Richard will be very happy to help.

[1] Chapters 13 and 14 of the Policy Statement and Chapters 10 and 11 of the Guidance contain detailed information concerning accountability and the FCA’s supervisory and enforcement strategy.  Chapter 11 of the Policy Statement confirms that the Consumer Duty does not currently provide a private right of action in respect of any breaches, but that this policy remains under review

[2] See our sub-section on ‘Scope and application’

[3] Importantly, the size or financial standing of a firm is not a factor to be taken into account when it comes to the proportionate application of the Consumer Principle

[4] Firms are not responsible for, or required to oversee, the actions or activities of others.  However, where a firm can reasonably foresee harm to a retail customer, it should act where it can and raise any issues with other relevant parties

[5] ‘Retail clients’ are all those other than professional clients.  (Professional clients would include large corporates and government bodies, for example)