Newsflash: FCA finalises Consumer Duty

What has happened?

The FCA consulted in May and December 2021 on the introduction of a new Consumer Duty in retail financial markets. See our earlier briefing for a summary of the proposals including the FCA’s reasoning for introducing the Duty. The Duty affects all regulated firms, including those in the e‑money and payments sector.

The FCA says in today’s Policy Statement that, in general, the detailed proposals in its December 2021 consultation were received more positively than the first, higher level, consultation in May 2021. It has made some changes to update the rules and guidance in light of the feedback received.

We set out below some of the key themes.

Implementation timetable

Industry respondents felt strongly that the proposed nine-month implementation period ending on 30 April 2023 was highly challenging and would increase several risks. While the FCA wants the Duty to be in effect as soon as practicable, it recognises the challenges some firms will face. The Duty will instead come into force in the following phases:

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

Details including an implementation roadmap are set out in Chapter 12 of the Policy Statement. The FCA expects firms to make full use of the implementation period, and to plan and prioritise implementation work effectively so they meet the standards required by the Duty.

Risk of retrospection

The FCA has been clear that the Duty will not have a retrospective effect and will not apply to past actions by firms. Actions taken before the Duty comes into force will continue to be subject to the rules that applied at the time. However, the FCA proposed that the Duty would apply, on a forward‑looking basis, to existing products and services, including closed book products and services. This raised concerns among some respondents, including that the proposal would amount to retrospection and increase the risk that the Financial Ombudsman Service could then apply the new standards to past conduct.

The FCA is taking forward the proposals but gives further guidance in Chapters 3 and 5 of the Policy Statement on how firms can apply the price and value rules specifically to existing and closed products and services, how they can conduct the review in a proportionate manner, and to address other specific points raised.

Governance and accountability

The FCA has made clear that it expects the focus on acting to deliver good outcomes to be at the centre of firms’ strategy and business objectives. To support this, it proposed amendments to the Senior Manager and Certification Regime rules and requirements on the management or board of firms to make sure their customers were getting outcomes consistent with the Duty.

While many respondents welcomed the proposals, consumer organisations were concerned that, without sufficient senior level accountability and oversight, the Duty would not achieve the outcomes sought. As a result, the FCA has set out new proposals in Chapter 13 of the Policy Statement to make sure firms are clear where responsibility lies. The FCA expects the Duty to be reflected in firms’ strategies, governance, leadership and people policies.

Cost and complexity

Several respondents were concerned that the FCA was unable to quantify the benefits of the Duty in monetary terms. The FCA’s Practitioner Panel recommended that industry should be encouraged to record the costs of implementation, so that the benefits were worthwhile and to learn for the future. Without further evidence on either costs or benefits, the FCA is not proposing to revise its cost benefit analysis.

Some respondents highlighted the increasing complexity of overlaying cross‑cutting rules over the existing Handbook; also that the provisions in the existing Handbook could confuse firms or provide an excuse to not meet the standards required of the Duty. The FCA says it has not identified any conflicts requiring immediate changes to the Handbook. It will consider whether changes might be needed as part of a post‑implementation review, and is open to constructive suggestions on elements of the Handbook that might be revised or removed in light of the Duty’s implementation.

Supervision, monitoring and evaluation

Almost all respondents agreed that supervision and enforcement of the Duty will be critical to its success. The FCA says it is developing a supervisory approach to make sure that firms implement the Duty effectively. See Chapter 14 of the Policy Statement.

During the implementation period, the FCA will monitor firms’ readiness and feed back useful insights to the market. Once the Duty is in force, the FCA will use a range of tools to assess firms’ compliance. It will also monitor how the market may change following implementation. A post‑implementation review is proposed to understand how firms have implemented the Duty, whether it is having the intended effect and whether it is leading to any unintended consequences.

Non-Handbook guidance

In response to feedback, the FCA has provided more examples in the Finalised Guidance of how specific elements of the Duty would work in practice across different retail markets. It expects to build on this as it embeds the Duty through ongoing interactions with firms, and to provide more sector-specific guidance over time.

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 businesses. We will be publishing an in-depth briefing on the FCA’s finalised rules and guidance in due course. In the meantime, if you have any queries or concerns about the new Consumer Duty and its practical implementation, please contact Jeanette or Richard, who will be very happy to help.