The new Consumer Duty – an overview

A “significant change and a unique regulatory intervention” is how the Financial Conduct Authority describes its proposals for the new Consumer Duty in CP21/36, A new Consumer Duty: feedback to CP21/13 and further consultation, issued on 7 December 2021. That is almost certainly an understatement. CP21/36 – and particularly the draft guidance document at the end – sets out a vision of how the FCA wants the retail financial services market to operate and a highly-developed framework for achieving that. Think of it as a manifesto, one that the FCA intends to deliver.

These are proposals: CP21/36 doesn’t provide us with the final form of the rules or the guidance and there are some significant points that will need to be addressed. However, the concept of a Consumer Duty is now sufficiently advanced (with a legislative basis in the Financial Services Act 2021) for us to assume that it will be implemented broadly along the lines in CP21/36. Firms will therefore need to start work now; waiting to see the detail of any adjustments isn’t an option.

I’ve put together a series of articles on different aspects of the Consumer Duty. This one is designed as an overview and looks at the following points:

  • The FCA’s objective in proposing the new Consumer Duty;
  • A brief summary of the proposals in CP21/13 and key developments under CP21/36;
  • Comments on the proposals as a whole, what they say about the FCA’s approach to the retail financial services market and likely problem areas; and
  • The timeline for implementation.

Other articles will consider: the Consumer Principle; the cross-cutting rules; each of the four outcomes; and the Consumer Duty and the senior managers regime. Within each of the eight articles, I’m flagging points that I anticipate will create problems or uncertainty. I’ve tried to be even-handed in assessing whether the provisions are workable and are likely to be fair in practice but I apologise in advance for anything that might seem biased one way or the other – please let me know if you think I’m off the mark.

The FCA’s objective in proposing the new Consumer Duty

The FCA’s key objective is to address concerns that the current regulatory framework might not be sufficient, or might not be applied effectively enough, to minimise the level of consumer harm in retail financial services markets. It considers that markets operate effectively, and in the interests of consumers, where:

  • Firms offer products and services that are fit for purpose in meeting the needs of customers in their target market and offer fair value;
  • Consumers are able to effectively access information and assess which products and services best meet their individual needs; and
  • Consumers are able to act effectively, taking responsibility for making decisions to meet their needs.

The FCA doesn’t consider that retail markets are working well for consumers: they aren’t achieving the outcomes they should receive and that they have the right to expect. It therefore looked, under CP21/13 (and is now looking, under CP21/36), to introduce additional protections and add to its regulatory toolkit to address failures to meet the standards it requires.

The previous proposals – a recap

In May 2021, the FCA issued a consultation paper (CP21/13), ‘A new Consumer Duty’, proposing a package of measures comprising:

  • A new Consumer Principle that would provide an overarching standard of conduct;
  • Cross-cutting rules and guidance to develop and amplify the standards of conduct expected of firms under the Consumer Principle; and
  • Four outcomes that represented what the FCA saw as the key elements of the relationship between a firm and consumers, relating to:
    • Communications;
    • Products and services;
    • Customer service; and
    • Price and value.

The new Consumer Duty was proposed to apply to all sectors of the retail financial services market, where products or services are offered or sold to retail clients and customers (including SMEs, but not professional clients and eligible counterparties). It would also apply to e-money institutions, payment institutions and account information service providers, as well as regulated firms authorised under the Financial Services and Markets Act 2000.

Key developments in respect of the Consumer Duty under CP21/36

The basic framework remains unaltered. The proposals provide for a Consumer Principle, cross-cutting rules and four outcomes, and the Consumer Duty is still intended to apply across the retail financial services market. However, there are some important differences.

  • The Consumer Principle – we now have the wording the FCA is proposing: A firm must act to deliver good outcomes for retail customers. It has also been clarified that this will be a new Principle 12 in the Principles for Businesses, with Principles 6 and 7 being disapplied where Principle 12 applies.
  • The cross-cutting rules – these are being kept but the wording has been adjusted and it’s now clearer that there are three rules. 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 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” – see more about this below.

  • The four outcomes the FCA is seeking to achieve for consumers – these have been re-cast as follows:
    • The products and services outcome;
    • The price and value outcome;
    • The consumer understanding outcome (rather than the communications outcome); and
    • The customer support outcome (rather than the customer service outcome).

The order in which the outcomes are listed has also been altered although I’m not reading too much into that.

The other key development is that the FCA has decided not to include a private right of action for breach of the Consumer Duty – at least, not at this stage. This would have allowed a consumer to take legal action for damages against a firm that had breached the Duty and one of the concerns for firms was that this would have allowed class actions to be brought by groups of consumers. The FCA has said that the existing redress framework (focused on the complaints rules and the Financial Ombudsman Service) is likely to be a more appropriate route for almost all consumers to seek redress, particularly as firms’ handling of complaints should be enhanced under the new requirements of the Consumer Duty – a point to bear in mind when considering where the FCA expects work to be done in implementing the new requirements. However, the FCA says it will keep the position under review and there remains the possibility of the private right of action being brought back to the table, presumably if the FCA considers that firms are not fully implementing the Consumer Duty in the way it expects.

The other point to make here is that the draft rules and guidance in CP21/36 provide a more complete picture of how the FCA sees the Consumer Duty working in practice. It’s one thing to read about the Consumer Duty (in CP21/13); it’s another matter entirely to see the potential scope and detail in CP21/36.

Comments on the proposals under CP21/36

When reading the first part of CP21/36 (the feedback to CP21/13 and the proposed changes), the impression is that the Consumer Duty represents an important change to the retail financial services agenda. The full impact of the proposals only emerges under the non-Handbook Guidance document that makes up the last 70 pages or so of CP21/36. It’s essential to read the Guidance document because that sets out how the FCA sees the Consumer Duty working in practice and that’s where the reset the FCA is seeking to achieve hits home.

The devil is in the detail of the Guidance, and there’s a lot of detail. It’s also in the immense interconnectedness of the comments and examples that appear in that document. And it might be significant that most of the examples of poor practice or poor outcomes for consumers appear to be taken from examples the FCA has seen in its work, whereas a number of the examples of good practice (of which there are much fewer) seem to be fictitious. However, the attention given to detail is balanced by the attention that’s also given to broader topics. For instance, the new Consumer Duty is put on a par with strategy, financial performance and risk management and aligning strategy with obligations under the Consumer Duty is referred to on a number of occasions.

I’m providing more analysis in other articles but my view is that, in broad terms, the following topics are likely to present particular challenges under the current proposals:

  • Achieving the price and value outcome – this seems to me to be the most challenging of the four outcomes to achieve, largely because of the breadth of what the FCA proposes to include in ‘value’ and ‘price’ and what doesn’t seem to be included. The need to make judgements about what’s fair when assessing price and value and to compare price and value across consumer groups will involve a significant amount of work in implementing the current proposals and on an on-going basis. Failure to meet the standard required under other consumer outcomes and decisions made in respect of those outcomes is also likely to affect the value assessment and whether the price and value outcome is achieved.
  • Identifying customer groups – the FCA emphasises that there needs to be granularity within the target market and there are extensive references to identifying groups of customers. Those more specific customer groups will then be used to determine whether products and services are appropriate, when carrying out value assessments, when determining what support customers need and how to communicate with customers. The customer groups are also relevant when identifying customers in vulnerable circumstances (which, along with customers with characteristics of vulnerability, seems to be the new expression for vulnerable customers) and to test whether they and customers with protected characteristics under the Equality Act 2010 receive good outcomes.
  • Outcomes for customers in vulnerable circumstances and ensuring diversity and inclusion – these are areas where the feedback material in the first part of CP21/36 appears to raise the bar considerably. I say appears because I don’t think the FCA’s proposals here are as clear as in other parts of the CP and the parts that are clear seem to require a significant amount of work, information and analysis. I’m not at all sure that firms will be able to obtain all the information which, it seems, might be needed. Requests for the information required could, quite reasonably, be seen by consumers as intrusive (and so unlikely to achieve good outcomes).
  • The impact of the cross-cutting rules and how they will work with the outcomes rules – the cross-cutting rules will apply in addition to the Consumer Principle and the outcomes rules, and the Guidance document sets out a number of examples where the FCA considers at least one cross-cutting rule would be breached as well as a consumer outcome not being met. The objective is to comply with the cross-cutting rules and achieve the outcomes and so, on one analysis, there should not be a problem. However, having to consider and document and oversee compliance with the cross-cutting rules as well as achieving the consumer outcomes will add complexity to governance and controls activities.
  • Clarifying the extent of ‘no retrospective effect’ – the FCA has confirmed that the Consumer Duty won’t apply, retrospectively, to past business and that the new rules for the Consumer Duty won’t, therefore, apply to past actions. The Consumer Duty and the new rules will, though, apply on a forward-looking basis to existing products or services, whether or not they are being sold or renewed. Applying the new rules and standards will be far more straightforward where new customer relationships are being established in respect of new products and services being offered and sold. The position is more complicated where:
  • Existing products and services continue to be offered and sold once the new requirements have come into effect;
  • New customer support and information requirements take effect partway through a customer relationship; and
  • Price and value assessments come into effect partway through the relationship and where adjustments might be needed to a product or service or how it’s delivered in order to meet the standard required under the price and value outcome rules.

The FCA will almost certainly expect firms to consider and assess customer outcomes across the whole of the customer relationship – the end-to-end customer journey. This raises the prospect of firms having to apply the standards prescribed under the new consumer outcome rules to the period before the rules applied in order to achieve the outcomes required once the new rules apply. The alternative would be to apply two standards from 31 July 2022: one that applied before the Consumer Duty came into effect and one that applies under the Consumer Duty. That approach is unlikely, given the FCA’s focus on considering customer outcomes across the end-to-end customer journey (i.e. the whole of the customer’s relationship with a firm). This is a point where clarification and a workable approach are needed.

All aspects of the Consumer Duty are to be interpreted by reference to a ‘reasonableness’ test, drawing on the common law concept and based on a standard of how a reasonable prudent firm would act. This is an objective test, with a single standard applying to all firms, but tailored to the particular firm’s business – i.e. what 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.

This requires firms to understand the needs and characteristics of its customers to the required standard (and see above in relation to the different customer groups that will need to be considered). The reference to “the same product or service” also suggests that firms will need to work to different standards of ‘reasonableness’ according to the particular product or service, as well as the particular customer groups. It’s likely to be important, though, to set a base standard across the whole of the business, with any adjustments to specific products or services and customer groups. Standards will need to be clear to everyone involved, from product or service design, through all stages of the customer relationship.

The timeline for implementation

The current proposals provide for a two-staged approach:

  • The new requirements would take effect on 31 July 2022; but
  • Firms would have until 30 April 2023 to implement them in full.

I think this is to allow for the new Consumer Duty coming into effect by the date specified in the Financial Services Act 2021 whilst recognising the considerable amount of work firms will need to carry out in order to achieve this reset of the retail financial services agenda. It’s unclear, at this stage, exactly what firms will need to do by 31 July 2022 and the level of further work that will be acceptable during the implementation period to 30 April 2023. However, it’s likely that significant progress will need to be made by 31 July 2022 and work should start now on the assumption that the final rules and guidance will be close to those set out in CP21/36. Any changes will, though, need to be picked up and time will need to be allowed for that. An early steer from the FCA on when the final rules will be available would seem to be essential for planning and related governance and oversight of the work to be carried out.

Organisations applying for authorisation should also assume they will need to comply with the new requirements and that their authorisation application will be considered by reference to them.

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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