The Consumer Duty – the Consumer Principle

There are three parts to the new Consumer Duty:

  • The Consumer Principle – a high-level standard setting out the behaviour the Financial Conduct Authority expects to see from firms when dealing with consumers and in the retail financial services market.
  • Cross-cutting rules – overarching requirements that set standards of conduct across all areas of a firm’s retail activities.
  • The consumer outcomes – a more detailed set of requirements that apply to four key aspects of the customer relationship.

This article considers the FCA’s proposals for the Consumer Principle set out in CP21/36, A new Consumer Duty: feedback to CP21/13 and further consultation, issued on 7 December 2021. The topics covered are:

  • A description of the Consumer Principle and how it fits with Principles 6 and 7 of the FCA’s Principles for Businesses;
  • The standard set by the Consumer Principle; and
  • Additional points from the proposed non-Handbook guidance in relation to the Consumer Principle.

The FCA’s proposals under CP21/36 in respect of the cross-cutting rules and each of the four consumer outcomes are discussed in other articles.

Firms might be tempted to focus their work on implementing other parts of the Consumer Duty, where there are specific rules to be met and guidance is more detailed and which might appear to be more directly relevant to delivering the outcomes required under the Duty. However, the Consumer Principle is where the Consumer Duty begins and setting a robust framework to implement the Consumer Duty requirements means starting with that Principle. Remember, too, that final decision notices issued by the FCA at the end of enforcement actions refer – at the start and throughout the document – to breaches of the Principles for Businesses. The Consumer Principle will be an addition to those Principles and a breach could have profound implications for a firm.

The Consumer Principle and how it fits with Principles 6 and 7

Of the two options set out in the May 2021 consultation paper (CP21/13), the FCA proposes the following wording for the Consumer Principle:

A firm must act to deliver good outcomes for retail customers.

This will be a new Principle 12, replacing Principles 6 and 7 for retail financial services activities within the scope of the Consumer Duty. This leaves a rather untidy situation on two counts.

  • First, Principles 6 and 7 will only apply to a limited range of activities (some business conducted with SME’s; wholesale business) although Principles 6 and 7 have generally been regarded as being particularly relevant to retail business. Firms will need to be clear – and make sure that their employees are clear – which business falls under Principle 12 and which business falls under Principles 6 and 7. Policies, procedures, compliance manuals and the like will need to be updated to reflect the position and will need to be kept under review and training will need to be revised.
  • Secondly, the FCA proposes leaving Handbook and non-Handbook material linked to Principles 6 and 7 in place for the time being even though those Principles aren’t aligned with the Consumer Principle (the new Principle 12). One of the points the FCA makes is that the Consumer Principle represents a higher standard of conduct than Principles 6 and 7 so it wouldn’t be wise to rely on any guidance regarding Principles 6 and 7 (whether within the Handbook or otherwise) for retail business once the Consumer Duty comes into effect.

The standard set by the Consumer Principle

The FCA has said that the wording of Principle 12 “reflects the shift we want to see and the expectation for firms to consistently focus on consumer outcomes and putting consumers in a position where they can act and make decisions in their own interests”. There are a few points to consider.

  • The outcomes to be delivered are to be good (rather than, say, ‘fair’, as referred to in Principle 6) and firms will need to define what that means for their customers, by reference to each of the customer groups identified. Bear in mind that the standard expected under the Consumer Principle is higher than the fair-treatment standard under Principle 6 or the ‘due regard’ and ‘clear, fair and not misleading’ standards under Principle 7.
  • Firms aren’t required to deliver (i.e. ensure that they deliver) good outcomes for retail customers but they are required to act to deliver those outcomes. In other words, positive, proactive action is needed, with an objective and purpose of delivering good outcomes. I expect this (or similar wording) will start to appear in strategy, product governance, customer service governance, quality assurance, policy, procedures, terms of reference and other documents as the Consumer Duty is implemented.
  • The FCA has made it clear that firms are required to act reasonably to deliver good outcomes and that neither the Consumer Principle nor the cross-cutting rules that support it:
    • Mean that consumers can or will be protected from all harm;
    • Impose an open-ended duty that goes beyond the scope of the firm’s ability to determine or influence consumer outcomes or protect consumers from all potential harms;
    • Remove the principle of consumer responsibility; or
    • Require the best outcome to be achieved for each customer.
  • The Consumer Duty as a whole is subject to a ‘reasonableness’ test – an objective test, rather than a standard each firm can decide for itself. The FCA proposes that the test is based on how a reasonable prudent firm would act, in line with objective standards of reasonableness established and recognised in the law of tort. The FCA says this means that the Handbook rules and the non-Handbook guidance relating to the Consumer Duty “should be interpreted in line with the standard that could reasonably be expected of a prudent firm:
    • Carrying on the same activity in relation to the same product or service; and
    • With the necessary understanding of the needs and characteristics of its customers”.
  • The reference to ‘products and services’ acknowledges that the retail financial services sector includes a wide range of activities and the outcomes and standards expected for operating a current account won’t be the same as those for discretionary portfolio management or mortgage lending. Risk of harm and complexity will be determining factors, along with the cost of the product or service and the importance to the customer. Firms might therefore find slightly different standards apply to different parts of their business and they will need to be clear about any differences. It’s likely to be important, though, to set a common – or base – standard across the whole of the business, with any adjustments to specific products or services and customer groups, rather than setting standards for each business areas in isolation.
  • The second of the ‘reasonableness’ points is open to different interpretations: what will be determined to be the necessary understanding of the needs and characteristics of a firm’s customers, particularly as those customers – and their needs and characteristics – alter over time? This is something that firms will need to define, monitor and review. Any temptation to treat ‘customers’ as an homogenous group should also be resisted. The average or typical customer will be an initial reference point but firms will also need to consider customers with diverse needs and/or characteristics of vulnerability. This is considered further in the overview article about the Consumer Duty and the articles about the consumer outcomes.
  • Although the proposal draws on an established legal doctrine, I expect it will take time for standards to be clarified and established. The interpretation of how a reasonable prudent firm would act is also likely to alter over time, perhaps as regulatory expectations are reset. That will need to be monitored carefully, by boards and the business, as well as by Compliance, Risk and Legal functions.

My view is that firms (and applicants for authorisation) shouldn’t be lulled into a sense of security by references to reasonableness. The standard expected under the Consumer Principle – as with all other parts of the Consumer Duty – is untested and it is high. And that emphasis on high standards is reinforced by the non-Handbook guidance the FCA is consulting on in the final third of CP21/36.

Additional points from the proposed non-Handbook guidance in relation to the Consumer Principle

The draft guidance that makes up the last 70 or so pages of CP21/36 provides more detail about what the FCA expects to see in relation to the Consumer Duty in general and the Consumer Principle in particular. The key messages are consistent with points already mentioned but there’s also an emphasis on:

  • Outcomes – in many ways, outcomes are at the heart of the Consumer Duty, and the Consumer Principle reinforces the message that firms are to deliver good outcomes and pay attention to whether customers are receiving them.
  • Knowing and understanding the customer – this isn’t ‘knowing’ in an AML/KYC/CDD sense; it’s about understanding a customer’s circumstances and situation, how customers really behave. Think of it as customers in 3D rather than 2D. And it includes what a firm could reasonably be expected to have known at a particular time.
  • Review, monitor and respond – again, this is a key message under the Consumer Duty in general: keep the position under review, work out what’s going wrong or isn’t working as well as it could do for customers; act to put things right or make them better. Establish systems to embed this feedback circle.
  • Challenge – there’s a message of continuous improvement. Think of it as ‘stretch’. If it’s going well, what can be done to make it better? And bear in mind that challenge, stretch and improvement across the industry will raise the standards expected and, therefore, the standard required to meet the reasonableness test discussed in the previous section of this article.
  • Help for customers – in order to take responsibility for their financial decisions, many customers need help from firms. They need information and firms need to deliver that clearly and effectively.

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 circumsta

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