New Consumer Duty in retail financial markets: FCA consults on rules and guidance

10th December 2021

What has happened?

Following its initial consultation launched in May 2021 on the introduction of a new Consumer Duty in retail financial markets, the Financial Conduct Authority (FCA) is now seeking input from stakeholders for a second time, as it sets out the proposals in more detail.

A brief recap

The FCA wants to set a higher expectation for the standard of care that firms give consumers and to bring about a fairer, more consumer‑focused and level playing field, with firms extending their focus beyond ensuring narrow compliance with specific rules, to also focus on delivering good outcomes for customers. It plans to do this by introducing a Consumer Duty.

The proposed Consumer Duty is a package of measures, comprising a new Consumer Principle that provides an overarching standard of conduct, supported by a set of Cross-cutting Rules (requiring firms to: act in good faith, avoid foreseeable harm and enable and support retail customers to pursue their financial objectives) and Four Outcomes (governing products and services, price and value, consumer understanding and consumer support) designed to set clear expectations for firms’ cultures and behaviours. See our earlier briefing for more detail on the high-level proposals in the FCA’s initial consultation.

The FCA expects the focus on acting to deliver good outcomes to be at the centre of firms’ strategy and business objectives. The firm’s board or equivalent management body will be responsible for assessing whether it is delivering good outcomes for its customers which are consistent with the Consumer Duty.

What is the FCA consulting on now?

The FCA is not proposing to change the overall structure of the Consumer Duty as outlined in its initial consultation.

Published on 7 December 2021, this second paper sets out stakeholder feedback on the initial consultation, the FCA’s analysis and responses, and revised and more detailed proposals for the Consumer Duty on which the FCA is consulting further.

These include draft Handbook rules and guidance at Appendix 1 and draft non-Handbook guidance at Appendix 2. The non-Handbook guidance is designed to give greater clarity to firms on the FCA’s expectations. It includes examples of good and poor practice and helpful summary tables of actions that are likely to be consistent or inconsistent with the Consumer Duty.

There is also a detailed cost benefit analysis at Annex 2. Among other things, the FCA envisages firms will incur one-off and/or annual implementation costs to understand the Consumer Duty, perform gap analysis on their policies and processes, make relevant adjustments through change projects, train their staff on the new requirements, monitor and test consumer outcomes and address any required IT system changes.

The FCA acknowledges that some firms will need to adapt more significantly than others. The changes they need to make will depend on a number of factors including: the nature of their business and relationship with customers; their own business models, practices and conduct; their sector, the rules that already exist in that sector and the extent to which they are acting in accordance with them.

Timing and next steps

Stakeholders are requested to respond by 15 February 2022. A list of the consultation questions can be found at Annex 1.

The FCA expects to publish the policy statement summarising responses and to make any new rules by 31 July 2022. It is proposed that firms would then have a further period of nine months until 30 April 2023 to fully implement the Consumer Duty, but the FCA is keen to hear respondents’ views on this proposal now that they have seen ‘the full package’.

The FCA stresses that it expects implementation of the Consumer Duty to be iterative. It is keen to work closely with firms, trade bodies and wider stakeholders during the implementation period. Firms are expected to use the time fully and to be able to demonstrate progress when asked. The FCA expects to carry out work to monitor and assist firms. Among other things, this is likely to include supervisory work to understand their implementation plans and progress, and reviewing implementation plans and proposed change programmes.

How we can help

The consultation paper is lengthy and it is not possible to cover in this briefing all of the points raised. We highlight some of the key points below and will be issuing more detailed follow-up briefings covering specific aspects of the consultation. Affected firms should ensure that they review the proposals in full and consider how they might impact on their own particular operations, including what changes would need to be made to meet the outcomes the FCA wants to see.

Walker Morris has a large cross-departmental team of financial services experts providing advice to the full range of financial services businesses. If you have any queries or concerns about the FCA’s proposals and their practical implementation, or require any assistance with responding to this further consultation, please contact Jeanette or Richard, who will be very happy to help.

Key points

• The new Consumer Principle (Principle 12) ‘A firm must act to deliver good outcomes for retail customers’ would replace and impose a higher standard of conduct than Principles 6 and 7 for retail businesses.

• The Consumer Duty would apply to the regulated activities and ancillary activities of all authorised firms in respect of both products and services for their prospective and actual retail customers. The definition of ‘retail customer’ aligns with the scope of the FCA’s Handbook in each sector.

• In relation to the wholesale sector, it is proposed that the Consumer Duty would apply to firms that have a material influence over: the design or operation of retail products or services, including their price and value; the distribution of retail products or services; preparing and approving communications that are to be issued to retail clients; or direct contact with retail clients on behalf of another firm, such as firms involved in debt collection or mortgage administration.

• The Consumer Duty does not replace the general principle that consumers should take responsibility for their decisions, or operate to impose an open-ended duty.

• The Consumer Duty does not create a fiduciary relationship where one does not otherwise exist, nor require advice to be provided where it would not have otherwise been required.

• The FCA does not propose to introduce a private right of action for the Consumer Duty at this time but will keep this under review.

• The proposed rules would apply proportionately, taking account of the firm’s role in relation to the product or service, the nature of the product or service and the characteristics of consumers.

• The examples in the draft rules and guidance are not intended to be a complete list of how firms should act in all instances. The Consumer Duty sets expectations that can be applied flexibly in a changing environment to new products, services and business models as they emerge.

• In general, firms would be responsible only for their own activities and would not need to oversee the actions of other firms in the distribution chain.

• Firms will need to comply with the Consumer Duty in full for any products or services sold or renewed after the Consumer Duty comes into effect. They would need to review their products and services during the implementation period. This might mean a firm needs to update the contractual terms and conditions of a product or service before it can continue to be sold (or renewed) to new or existing customers following implementation of the Consumer Duty.

• The wording ‘all reasonable steps’ has been removed from the proposed cross-cutting rules; the previous wording was that a firm should take ‘all reasonable steps’ to avoid causing foreseeable harm to retail customers and to enable retail customers to pursue their financial objectives. The FCA wants firms to focus on acting reasonably, rather than on processes and the steps they take.

• Firms are only responsible for addressing harm when it is reasonably foreseeable. If a harm were not foreseeable at the outset, but later became foreseeable, firms would be expected to take the appropriate action to address it.

• In relation to the ‘products and services’ outcome, the FCA proposes to set different requirements for firms depending on their role in the distribution chain – ‘manufacturers’ and ‘distributors’. Firms could be both, depending on their activities.

• The ‘customer service’ outcome has been renamed the ‘consumer support’ outcome and the ‘communications outcome’ is now the ‘consumer understanding outcome’, to emphasise what the FCA wants firms to focus on. The ‘undue hindrance’ language in the consumer support outcome is being replaced with a reference to ‘unreasonable barriers’.

• The FCA does not expect firms to tailor all communications to meet the needs of each individual consumer. However, firms should take particular care when communicating with consumers in vulnerable circumstances, taking account of their needs. The draft rules embed consideration of vulnerable consumers at every part of the customer journey.

• The FCA does not propose to require firms to report on specific metrics, but they need to ensure they can demonstrate effectively how they are monitoring the outcomes that their customers receive, identifying harm or the risk of harm and addressing the issues that they identify. Chapter 14 of the consultation paper provides some examples of how firms might monitor outcomes and examples of data they could use.

• The FCA would expect a firm’s board, or equivalent management body, to consider a report from the firm assessing whether it is acting to deliver good outcomes for its customers which are consistent with the Consumer Duty, at least annually. Paragraph 14.15 of the paper sets out what that assessment should include.

• The Consumer Duty does not require a single senior manager to be responsible for compliance with all aspects. The Consumer Duty imposes expectations across the design, distribution and delivery lifecycle, and each senior manager must take responsibility for the role they can play in delivering compliance with it. All senior managers are responsible for ensuring that the business of the firm complies with the requirements of the Consumer Duty on an ongoing basis.

• The FCA proposes to amend the Senior Managers and Certification Regime individual conduct rules in the Code of Conduct sourcebook to reflect the higher standard of the Consumer Duty by adding a new rule requiring all conduct rules staff within firms to ‘act to deliver good outcomes for retail customers’ where their firms’ activities fall within scope of the Consumer Duty. It is also proposing to include obligations as part of this new individual conduct rule that reflect the Consumer Duty’s cross-cutting rules.

• At least initially, the FCA plans to focus on tackling the most serious misconduct and intervening before harmful practices become entrenched as market norms.