What’s the discussion about?
On 27 July 2022, the FCA set out its final rules and guidance for a new Consumer Duty to be introduced into the FCA’s principles for businesses. This Consumer Duty aims to increase the current level of consumer protection in the retail financial services market by setting clearer and higher standards for the culture of firms and the conduct the FCA expects of them. Firms will be required to consider the impact of the products and services they sell to consumer both at pre-sale and post-sale stages.
Central to the FCA’s proposal is the introduction of a new consumer principle requiring firms to act to deliver good outcomes for retail customers. The consumer principle is underpinned by cross-cutting rules providing greater clarity on the FCA’s expectations under the new Principle and helping firms interpret the four outcomes (see in point III below). Under the new rules, consumers should: (i) receive communications they can understand; (ii) receive products and services that meet their needs and offer fair value; and (iii) get the customer support they need, when they need it.
Why is the Consumer Duty relevant?
The FCA has signalled that it thinks the new Consumer Duty will lead to a major shift in how financial services are delivered and an increasing number of firms will be interested in how the new rules are going to affect their regulatory compliance. We have provided below an overview of the Consumer Duty and explained the potential implications for UK financial services firms.
Which activities and products are in scope?
The Consumer Duty will apply to firms’ regulated activities and the FCA’s proposals relate to products and services sold to ‘retail clients’. The FCA has explained that this term includes all clients other than professional clients (such as large corporate entities and government bodies) and eligible counterparties. The FCA’s proposals also extend to payment institutions and electronic money institutions so that customers that are consumers or micro-enterprises will be considered “retail clients” for the purposes of the Consumer Duty.
Importantly, the FCA’s proposals extend to firms which are involved in the manufacture or supply of products and services to retail clients, even if said firms do not have a direct relationship with the end customer. The FCA has referred to the markets covered under the proposed rules by using the term ‘retail markets’.
Which are the three key pillars of the Consumer Duty?
I. The Consumer Principle
Through the introduction of the consumer principle and the Consumer Duty as a whole, the FCA aims to apply an enhanced level of care that would also strengthen the existing requirements in its Principles[1], in particular in Principle 6 (customers’ interests). This principle currently reads that a firm must have due regard to the interest of its customers and treat them fairly. On implementation of the Consumer Duty, this will become an objective standard that will require firms to consider the reasonable expectations of their customer base as a whole, rather than them aiming to achieve the absolute best outcome for each individual customer (see our analysis below on the concept of “reasonableness”).
II. Overarching cross-cutting rules
A set of cross-cutting rules will develop and amplify the standards of conduct the FCA expects from firms. The new rules require firms to:
a) Avoid causing foreseeable harm to consumers
- firms will be prohibited from causing harm to customers through their conduct, products or services and required to take proactive steps to avoid causing such harm to consumers;
- firms should not seek to exploit customers’ vulnerabilities, behavioural biases or lack of knowledge; and
- firms should be fair in describing the benefits and risks of their products and services.
b) Enable customers to pursue their financial objectives
- firms must ensure that consumers are able to act in their own interests; and
- firms should use their knowledge of consumers’ behavioural characteristics to enable and support consumers in making informed decisions.
c) Act in good faith
- a new standard of conduct characterised by honesty, fair and open dealing, and consistency with the reasonable expectations of consumers will be established.
III. The Four Outcomes
The Four Outcomes represent the key elements of the firm-customer relationship: how firms design, sell and service products and services, and the key contact points along the customer journey. The Four Outcomes are the following:
- Quality of products and services
The FCA wants all products and services to be fit for purpose (i.e., designed to meet consumers’ needs and targeted at them). The proposed rules will apply in relation to all new products and/or services, or even to any significant adaptations to said products or services, before those are marketed or distributed to retail consumers. The rules will also apply to existing products and services before they are sold to new customers.
Senior management will be expected to ensure that the likely outcomes customers will receive from the products and services sold are properly assessed and documented. - Price and value of products and services
Following the implementation of the Consumer Duty, the assessment of whether the price of a product or service provides for a fair value must – consider at least the following factors: the nature of the product or service; any limitations that form part of a given product or service; the price consumers will pay; as well any characteristics of vulnerability amongst the targeted audience.
Senior management will be expected to document and evidence that the firms’ products and services are delivering fair value for customers and are being regularly assessed. - Consumer understanding
Firms’ communications must support consumers and enable them to make informed decisions about financial products and services. To achieve this, communications must be tailored according to the characteristics of the intended audience, the complexity of the product, the communication channel used, and the role of the firm; be communicated to retail customers in a way that is clear, fair and not misleading; and provide information to retail customers that is accurate, relevant; and on a timely basis.
Senior management must ensure that customer communications are transparent and fully disclose all costs and fees involved. They will also be responsible for establishing an effective complaint-handling process for consumers who might not fully understand the fees’ structure or might be dissatisfied with the level of fees charged. - Consumer support
Firms will be required to provide a level of support that meets consumers’ needs throughout their relationship with the firm. Firms must not disadvantage retail customers, including those in vulnerable circumstances; must ensure customers can use products as reasonably anticipated; and ensure that consumers do not face unreasonable barriers (including unreasonable costs) when pursuing their financial objectives.
Senior management will be expected to commission regular reviews on the level of service provided to customers through complaints’ analysis and call monitoring.
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