The Consumer Duty – the cross-cutting rules

There are three parts to the 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 financial services 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 in respect of the second of these – the cross-cutting rules – 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 cross-cutting rules and how they fit with other parts of the Consumer Duty; and
  • Comments on each of the cross-cutting rules.

The FCA’s proposals under CP21/36 in respect of the Consumer Principle and each of the four consumer outcomes are discussed in other articles.

The cross-cutting rules and how they fit with other parts of the Consumer Duty

Under the Consumer Duty, the Consumer Principle sets a standard required of firms and the outcomes rules specify what should be delivered to customers and what they should receive. The cross-cutting rules might seem like an unnecessary layer of complexity but they are intended to:

  • Build out the standards to be achieved under the Principle, setting out how firms should act to deliver good outcomes for consumers; and
  • Provide a framework for the customer outcomes – and the FCA says that they will help firms to interpret the four outcomes. An example given is that one way for a firm to know a product doesn’t offer fair value (the price and value outcome) would be if it were to lead to foreseeable harm in breach of one of the conduct rules.

I expect that it will be tricky for firms to become fluent in the cross-cutting rules and the consumer outcomes, to learn how to combine them and become used to the interaction between them, using one to inform the other. It’ll take time for this to bed down.

The cross-cutting rules state that firms must:

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

The previous reference in CP21/13 to “all reasonable steps”, in relation to the second and third cross-cutting rules, has been removed, although the FCA says in CP21/36 that the Consumer Duty as a whole “is underpinned by a concept of reasonableness”. (I’ve commented on ‘reasonableness’ in the article providing an overview of the Consumer Duty and in the article about the Consumer Principle.)

The cross-cutting rules are intended to work together, and potential overlap between them seems to be intentional – the FCA refers, in the draft non-Handbook guidance in CP21/36, to poor conduct often breaching more than one of the rules. Firms should assume that the FCA takes the cross-cutting rules extremely seriously; they should not be considered a poor relation within the Consumer Duty pantheon and they most certainly aren’t redundant.

On a number of occasions in the draft guidance, the FCA shows how the cross-cutting rules would be complied with (or breached) by reference to the outcomes and the interdependencies between the rules is a theme running through CP21/36. The guidance also helps to clarify what the FCA is seeking from the rules and the standards that it considers will (and won’t) meet the requirements.

The first cross-cutting rule: Firms must act in good faith towards retail customers

In the guidance, the FCA says that this rule is “a standard of conduct characterised by honesty, fair and open dealing, and consistency with the reasonable expectations of consumers”. So far, so good and nothing much to quibble with.

Essentially, this is about a firm’s intent, and proving ‘intent’ – good or bad faith – can be difficult. It will be important for firms to create strong audit trails of discussions and decisions that evidence their good faith to support compliance with this rule. That will apply at all stages of implementation work to embed the new Consumer Duty in the business, at all stages of the product design process, at all stages of the customer journey, when setting strategy, when monitoring and carrying out assurance work and so forth. It will also need to be embedded in training.

It will also require firms to identify what, for them, evidences good faith. It will be fairly straightforward to evidence honesty and fair and open dealing. Evidencing consistency with the reasonable expectations of consumers will be tougher and will involve:

  • Identifying the cohort of consumers that the firm is dealing with;
  • Identifying their expectations – in the context of the products and services outcome, this will involve considering the consumers’ needs and objectives and whether those are met by the product or service offered by the firm;
  • Sense-checking that those are ‘reasonable’ expectations of each customer cohort (and, if not, refining the expectations to reflect what’s reasonable); and
  • Identifying a standard of conduct consistent with the reasonable expectations in relation to each customer cohort.

The second cross-cutting rule: Firms must avoid foreseeable harm to retail consumers

The key word here is foreseeable and it’s been the subject of discussion during the consultation process so far. The FCA says, in CP21/36, that the rule “is not intended to 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”.  It also doesn’t “require firms to protect customers from:

  • Unforeseeable harm,
  • All poor outcomes, or
  • Risks that the customer reasonably understood and accepted”.

But that still begs the question of what is foreseeable harm.

  • Because the rules are subject to the wider concept of reasonableness, it should follow that the harm is reasonably foreseeable.
  • The FCA says, though, that there should be proactive and reactive steps to avoid causing harm where it’s within the firm’s control to do so. It isn’t clear how proactive and reactive a firm is supposed to be or whether the action a firm should take can also be what it considers to be reasonable (having regard to cost, time spent, the interests of other customers, the firm’s business and so forth) even where that action is within the firm’s control.
  • The FCA anticipates that firms should consider:
    • What information they need in order to determine whether foreseeable harm will arise and can be avoided; and
    • How consumers’ behavioural biases (such as inertia) might result in products or services causing foreseeable harm.
  • However, there doesn’t seem to be any requirement for consumers to behave reasonably.
  • The obligation to avoid foreseeable harm applies throughout the customer relationship and so needs to be re-assessed frequently by reference to the circumstances at the time. The degree of frequency is something firms will need to determine for themselves and will, itself, need to be kept under review. The appropriate frequency will be determined by, for instance, the type of product and its duration, whether there’s an on-going relationship between the customer and the firm and the customers’ circumstances and characteristics.
  • What’s foreseeable is likely to vary between customer cohorts and establishing and comparing the position of those groups will be relevant when complying with this rule as well as in meeting the customer outcomes.

It will be important for firms to have a clear, documented position on how this cross-cutting rule is applied in its business.

The third cross-cutting rule: Firms must enable and support retail customers to pursue their financial objectives

The FCA says that the focus of this cross-cutting rule is on “enabling and supporting consumers to make effective choices for themselves and enjoy use of the product and service they have purchased”. “Enjoy” is a slightly strange word to include here; it implies more than just ‘using’ a product. In the guidance, the FCA picks up themes we’ve seen elsewhere, referring to firms proactively and reactively focusing on putting consumers in a better position to make decisions in line with their needs and financial objectives. There’s particular emphasis on provision of information in a form that allows the customer to be able to make decisions. As with other cross-cutting rules, expect the boundaries to be pushed, with the FCA probably looking for greater efforts on enabling and supporting customers as standards are raised.

The steps a firm should take will be determined by:

  • What’s within the firm’s control;
  • Knowledge of the customer and their needs and financial objectives – and, perhaps, what they ought reasonably to know – and this will depend on the types of consumers the firm deals with;
  • The product or service a firm is offering;
  • The nature of the relationship with the customer – for instance, whether it is providing a one-off service, whether it is advising the client and whether it has an on-going relationship with the client; and
  • How the customer’s circumstances, needs and financial objectives change over time – bearing in mind that the cross-cutting rule applies throughout the relationship with the customer.

It isn’t clear how firms are expected to approach situations where customers have more than one product and/or service from a firm, including whether any assessment is to consider how these work together and whether a firm needs to consider the customer’s position across all products and services together or each in isolation.

The guidance does, though, say that firms aren’t required to go beyond what’s reasonably expected by consumers in the delivery of their service. The difficulties for firms will be determining what consumers reasonably expect and responding as those expectations increase in the future.

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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