The Consumer Duty and the SMCR

As discussed in other articles in this series on the proposed new Consumer Duty, the Financial Conduct Authority is seeking a ‘reset’ in the retail financial services market. Firms must act to deliver good outcomes for retail customers and must achieve four consumer outcomes relating to products and services, price and value, consumer understanding and consumer support.  The proposals also include rules requiring firms to act in good faith towards retail customers, avoid foreseeable harm to retail customers and enable and support retail customers to pursue their financial objectives. A firm’s strategy needs to be aligned with these requirements and it’s expected that a firm’s own financial objectives and risk management activities will be consistent with the Consumer Duty-aligned strategy.

In other words, there are significant changes in store, affecting conduct of business and wider strategic aspects of the business. Governance is needed to support this. The FCA’s latest proposals in respect of the new Consumer Duty, set out in CP21/36, A new Consumer Duty: feedback to CP21/13 and further consultation, issued on 7 December 2021, draw on the senior managers regime to help deliver the Consumer Duty agenda.

Senior managers and the Consumer Duty

Under the senior managers regime and the certification regime (SMCR), senior managers have clear responsibility for compliance with the requirements and standards of the regulatory system. In CP21/36, the FCA says that the Consumer Duty raises this standard, creating a higher standard for senior managers to meet when performing their duties.

One of the points that’s emerged for solo-regulated ‘core’ firms for SMCR purposes is that they haven’t always allocated responsibilities in the granular way that dual-regulated firms and solo-regulated ‘enhanced’ firms have done when considering how overall responsibilities are allocated. If that work hasn’t been carried out, now is the time to do that as it will need to be clear which senior manager is responsible for which aspects of the business, control functions and the like when considering obligations under the new Consumer Duty.

Proposed new conduct rule

In CP21/36, the FCA has proposed a new conduct rule to support the Consumer Duty. For firms that carry on only retail financial services business (in other words, where all a firm’s business falls within the scope of the new Duty), the new conduct rule will be more straightforward to apply. For firms with non-retail business, the position will be more nuanced.

At present, conduct rule 4 requires staff who fall within the scope of the rules to pay due regard to the interests of customers and treat them fairly. This is broadly consistent with the wording of Principle 6 of the FCA’s Principles for Businesses. However, Principle 6 is to be disapplied to retail financial services business when the new Consumer Duty applies; it will be replaced with a new Principle 12: A firm must act to deliver good outcomes for retail customers.

The FCA is proposing that, instead of conduct rule 4, a new rule will be added requiring all conduct rules staff within firms to act to deliver good outcomes for retail customers where the firm’s activities fall within the scope of the Consumer Duty. This new rule would be expanded to reflect obligations under the cross-cutting rules that make up part of the Consumer Duty, so that, where the new conduct rule applies, conduct rules staff will be required to:

  • Act in good faith towards retail customers;
  • Avoid foreseeable harm to retail customers; and
  • Enable and support retail customers to pursue their financial objectives.

As with other conduct rules (and in line with the proposed approach under the Consumer Duty), the scope of a person’s role and their seniority may affect the scope of their duty under the new rule. It follows that the FCA is likely to apply higher standards to someone who is senior and whose role is more relevant to the Consumer Duty. And that brings us back to defining roles and responsibilities for senior managers – and for all staff – having regard to the Consumer Duty and how it’s being implemented at the firm.

Training on the conduct rules is now a standard part of induction, usually with annual refreshers. It’s also most effective where training is tailored to the role being carried out. That will become even more important when the Consumer Duty comes into effect. Firms will need to update their training programmes before the Duty applies and tailor training to the roles and responsibilities allocated to staff in different areas of the business.

This article is intended to provide general information about recent and expected items that might be of interest. It does not provide or constitute, or purport to provide or constitute, advice relevant to any particular circumstances. Legal or other professional advice relevant to any particular circumstances should always be sought.

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