Consumer Duty – update and reminder
An industry report published in March 2023 has indicated that many advisers are in a relaxed mood about the new Consumer Duty that will come into force on 31 July 2023. The report goes on to state that over 80% of advisers felt that the Consumer Duty was a rebranded version of the existing fair treatment of customers requirement. Further it was reported that a third of firms had not appointed a Consumer Duty champion at board or equivalent level despite this being an expectation from 31 October 2022.
Regulators have emphasised that this relaxed approach should not be maintained and that the changes to the regulatory regime should not be underestimated.
The Financial Conduct Authority (“FCA”) recently issued “Dear CEO/Director” letters to organisations “…whose primary business model is providing Retail Finance to help them implement and embed the Duty effectively”. It stated that “We [the FCA] expect the Consumer Duty to be a top priority for you [the CEO/Director] personally”.
The Consumer Duty is the largest shift in 10 years regarding firms’ treatment of retail customers. The Consumer Duty replaces the existing rules with higher expectations for the standard of care that firms give to their consumers - see the Financial Conduct Authority’s Policy Statement PS22/9 (July 2022)[1] (the Policy Statement). The Consumer Duty also requires firms to put consumers’ needs first [1].
Under the Consumer Duty, firms will need to assess and evidence the extent to which and how they deliver good outcomes. A more outcome-focussed approach (rather than prescriptive rules) gives firms greater flexibility to adapt and innovate to accommodate technological change and market developments [2].
Legislation that sets out the new Consumer Duty
The FCA published the Policy Statement (PS 22/9) (“Policy Statement”) and Finalised Guidance (FG22/5) (“Finalised Guidance”) in July 2022 following the publication of consultation papers to set out how firms should comply with the new standard of care to customers in retail financial markets. The reform of the standard of protection of consumers was also debated by Parliament during the passage of the Financial Services Act, with Parliamentarians calling for change to the existing requirements.
Both the Policy Statement and Finalised Guidance were issued under section 139A of the Financial Services and Markets Act 2000 (Power of the FCA to give guidance).
The new Consumer Duty rules and guidance can be found in the FCA Handbook (FCA Handbook - FCA Handbook) through amending the “Version” date to the date that you require.
Who does the new Consumer Duty apply to?
The Consumer Duty applies to all firms that have a “material influence” over, or determine, retail customer outcome – not just those with a direct customer relationship. The Consumer Duty applies across all firms involved in the manufacture, provision, sale and ongoing administration and management of a product or service to the end retail customer, from product and service origination through to distribution and post-sale activities.
In practice, this can seem to be broad to some businesses or organisations, such as those who are not intending to profit maximize their financial dealings with retail customers.
What is changing?
- The new Consumer Principle requires firms to act to deliver good outcomes for retail customers
- New cross-cutting rules that are intended to provide greater clarity on the FCA’s expectations
- Rules relating to four outcomes that the FCA want to see under the Consumer Duty are being introduced
New Principle 12 (PRIN 2.1.1R, PRIN 2A)
The new Principle 12 in the FCA Handbook will require firms to “act to deliver good outcomes for retail customers”, which sets a higher standard than the existing Principle 6 (Customers’ Interests - A firm must pay due regard to the interests of its customers and treat them fairly) and Principle 7 (Communications with clients - A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading). However, it does not mean Principle 6 and Principle 7 will be disapplied by the FCA. They will still be applicable to conduct outside the scope of the Consumer Duty to certain small and medium enterprises and wholesale businesses.
The new Principle 12 will also impose obligations on firms towards customers of products and services, irrespective of whether the customer is a direct client of the firm. For example, a wealth management firm will need to consider the end retail customers in the distribution chain as well as treating financial advisers as their client for the purpose of assessing proposed transactions.
Cross-cutting obligations
The new cross-cutting rules provide more explanations of the FCA’s expectations:
- Act in good faith – firms must act in good faith at all stages of the customer journey and during the whole lifecycle of a product or service. For example, firms must provide services to support the customers’ objectives and offer fair value;
- Avoid causing foreseeable harm – sometimes firms may cause foreseeable harm to customers through their actions or omissions. Firms must take reasonable steps to avoid causing such harm. For example, the firms did not test their products or services in the market before offering to the customers; and
- Enable and support retail customers – firms should understand customers’ specific objectives and provide products or services to help the customers, including vulnerable customers, to achieve such objectives. Firms need to understand and evidence whether those outcomes are being met.
Four outcomes
The key elements of the business‑consumer relationship which are instrumental in helping to drive good outcomes for customers. These outcomes relate to:
- products and services – the FCA requires all the products and services for consumers to be fit for purpose;
- price and value – the FCA wants all consumers to receive fair value and quality. It means firms need to assess their products and services to ensure the price paid for a product or service and the overall benefit a consumer receives from it;
- consumer understanding – the FCA requires firms’ communications to support and enable consumers to make informed decisions about financial products and services; and
- consumer support – the FCA requires firms to provide a level of support that meets consumers’ diverse needs throughout their relationship with the firm.
Timeline for complying with the Consumer Duty
30 April 2023
(1) Manufacturers should aim to complete all the reviews necessary to meet the four outcome rules for their existing open products and services; and
(2) Manufacturers shall also share the necessary information with the distributors to enable them to meet their obligations under the Consumer Duty.
31 July 2023
(1) Manufacturers should have identified where changes need to be made to their existing open products and services to meet the Duty and have implemented these remedies; and
(2) The Consumer Duty will apply to all new products and services, and all existing products and services that remain on sale or open for renewal.
31 July 2024
- the Consumer Duty will come fully into force and apply to all closed products and services.
How to comply with the Consumer Duty and how can we help
The Consumer Duty does not have retrospective effect. This means it will be applicable to new and existing products and services, including closed products and services.
However, given the deadline for complying with the Consumer Duty is rapidly approaching, prompt and significant actions should be undertaken by firms such as updating terms of business and reviewing their strategies, governance, leadership and people policies. The FCA also requires firms to evidence whether the required outcomes are being met.
The FCA will hold senior managers accountable for the non-compliance of the Consumer Duty.
For further information on this topic please contact Jeremy Ladyman and Melody Li
[1] Paragraph 1.1
