The new Consumer Duty

Key points:

  • The proposed new Consumer Duty represents a step-change in regulation and firms need to start planning now; there’s a lot to do in what’s probably a tight timescale.
  • Although most firms will have documented outcomes-based measures, more granularity is likely to be needed and there are significant dependencies and interconnectedness between the proposed outcomes under the Consumer Duty.
  • The price and value outcome will need to take account of a range of factors, including the value of data received by a firm and the extent to which other outcomes have been achieved.
  • Vulnerable customers and customers with protected characteristics under the Equality Act 2010 will require particular attention as part of the Consumer Duty and firms may need to treat them as distinct customer groups.
  • Adjustments will almost certainly be needed to monitoring and review activities and to MI.
  • Expect the FCA to want to see clearly-documented policies, procedures, outcomes, monitoring programmes, assessments, testing and reports, along with clear MI and governance across all stages of the product, service and customer-relationship lifecycles.

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From time to time, regulation is re-set. There’s a step-change, something more than a tweak to standards and expectations. I think that’s how we’ll come to see the new Consumer Duty. I’ll say more about the detailed provisions and their implementation when the proposed Handbook wording is issued; this is an assessment of where we’ve got to so far.

What is the new Consumer Duty?

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

  • A new Consumer Principle that provides 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 represent what the FCA sees 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 second-half of this article looks at these in more detail.

Who does the proposed new duty apply to?

Under the current proposals, the Consumer Duty is wide-ranging on four counts.

  • It’s proposed to apply to all sectors of the retail financial services market, so it will apply where products or services are offered or sold to retail clients and customers (including SMEs, but not professional clients and eligible counterparties).
  • It’s intended to apply to e-money institutions, payment institutions and account information service providers, as well as to regulated firms authorised under the Financial Services and Markets Act 2000.
  • It extends to firms involved in the manufacture and supply of products and services to retail clients, even where they don’t have a direct relationship with the end-consumer.
  • The proposed duty is a consumer duty, rather than a customer duty, because it applies to those who have the potential to become retail customers in the future, including the SMEs referred to above.

Why is the Consumer Duty being proposed?

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.

At present, 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 is therefore looking to introduce additional protections and add to its regulatory toolkit to address failures to meet the required standards.

A ‘duty of care’ has been mooted for some time as a way of achieving better consumer outcomes. It appeared in DP18/05, ‘A duty of care and potential alternative approaches’ (July 2018), and the FCA issued a response in feedback statement FS19/02. If FCA resource hadn’t been diverted by the COVID-19 pandemic, the new Consumer Duty may have been presented at an earlier stage.

Finally, the Financial Services Act 2021 requires the FCA to consult on the level of care firms provide to consumers, including whether it should make general rules providing for a duty of care. CP21/13 therefore needs to be seen in the context of this wider legislative initiative.

Why is the new Consumer Duty so significant?

The Consumer Duty is a coherent set of proposals designed to raise standards in the retail market and improve outcomes for consumers. We’ve seen the FCA seeking to address these concerns before, through ‘treating customers fairly’ initiatives, focus on outcomes to consumers and conduct risks of harm. There are also obligations in the Handbook that overlap with aspects of the duty (for instance, the requirement to act in the best interests of customers and requirements in the Product Intervention and Product Governance Sourcebook (PROD)) and CP21/13 points out that there’s significant overlap between the duty and some of the Principles for Businesses, particularly Principle 6 regarding fair treatment of customers. However, the Consumer Duty will be embedded in the Handbook to a much greater extent than previous initiatives and will be more wide-ranging. The three components proposed for the duty also provide tiers of consumer protection, requiring firms to comply with broad standards and more detailed rules and guidance.

It also appears that the Consumer Duty is being used to support other regulatory initiatives. There are multiple references in CP21/13 to firms needing to take additional care when dealing with vulnerable customers and designing products and services that meet their needs in order to achieve outcomes that are at least as good as those for other customers. The care to be shown to vulnerable customers becomes part of the Consumer Duty, rather than existing alongside it. And there are extensive references to the duty in discussion paper DP21/1 (issued by the FCA, the Prudential Regulation Authority and the Bank of England, considering diversity and inclusion in the financial services sector). Responding to diverse customer needs and achieving consumer inclusion in retail financial services will be another element of the new Consumer Duty although firms will need to decide for themselves how this can be achieved for their products, services and consumer relationships.

But the tone of the consultation paper is important too. There’s a confidence and commitment in CP21/13, a clear sense of mission and a determination to introduce the Consumer Duty. That’s borne out by the FCA’s strategy and feedback statement on consumer investments, issued on 15 September 2021, which says that implementing the duty is one of the actions it will take in the next three years. This underlying message is all the stronger for being balanced and measured and is particularly striking in two places.

  • Two options are given for the wording of the new Consumer Principle (see below). The focus of the consultation is around which wording to adopt, rather than whether to have the Consumer Principle – or a Consumer Duty – at all.
  • CP21/13 finishes with a section on giving consumers a private right of action against firms for breach of the duty, something that doesn’t exist (at present) for breach of the Principles for Businesses. The arguments are rehearsed, for and against, and views are invited. But I don’t think it’s a coincidence that Suggested benefits of a private right of action appear first, followed by Suggested potential unintended consequences.

Timing and next steps

Although the Consumer Duty is subject to consultation, my view is that firms should assume it will come into effect, broadly in line with CP21/13, and start planning now. The components of the duty are well-developed which suggests that the Handbook provisions are already well-advanced. New rules are expected to be made by 31 July 2022 which is a tight timeline for firms to respond to and implement what may well be extensive changes. Any organisation considering applying for authorisation (whether by the FCA or the PRA) will also need to take account of the duty and what it will need to do to comply. That might delay the authorisation process.

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Some further detail about the new Consumer Duty

The FCA is consulting on the framework and components of the Consumer Duty in CP21/13 and so detailed provisions aren’t available at this stage; another consultation paper is due by the end of 2021 setting out a more developed position and the proposed rules and guidance. I’ll post an article when the detail is available but some high-level comments on the current proposals are set out below.

Two forms of wording have been proposed for the Consumer Principle:

  • A firm must act to deliver good outcomes for retail clients.
  • A firm must act in the best interests of retail clients.

The objective is to set a higher standard than Principle 6 of the Principles for Businesses. Rather than define the Consumer Principle too tightly, clarification and amplification is to be provided through the cross-cutting rules and guidance and the four outcomes.

The cross-cutting rules (and related guidance) will require three key behaviours from firms:

  • Take all reasonable steps to avoid causing foreseeable harm to customers;
  • Take all reasonable steps to enable customers to pursue their financial objectives; and
  • Act in good faith.

Although these are broad in scope, the FCA has said that it proposes embedding a concept of reasonableness within the Consumer Duty. It will be helpful to work through how that will apply in practice and to see more detail on how the cross-cutting rules and guidance will apply under the Handbook wording when that’s issued.  However, I expect it will remain light on specifics as the focus is on achieving outcomes rather than complying with the letter of the rules.

That brings us to the four outcomes, which are given a chapter of their own in CP21/13.

Communications – the FCA is seeking the following outcome:

Communications equip consumers to make effective, timely and properly informed decisions about financial products and services.

It says that consumers need to be able to understand and assess:

  • The features of products and services;
  • The costs they’re likely to incur, the risks they might take and the benefits they’re likely to derive from products or services; and
  • Whether products and services will meet their needs.

Consider this as part of the current push, on a number of fronts, to enable consumers to make informed decisions, whether that relates to fair treatment of vulnerable customers, a ‘gateway’ process for firms approving financial promotions or review of financial promotion exemptions.

Products and services – here, the FCA is seeking the following outcome:

Products and services are specifically designed to meet the needs of consumers, and sold to those whose needs they meet.

The objective is to ensure that all products and services sold to consumers are fit for purpose, that they’re designed to meet consumers’ needs and are targeted at the consumers whose needs they’re designed to meet.  Where this is achieved, that will help to ensure that the products and services provide fair value for consumers. The FCA is concerned that this isn’t happening at present, in too many cases, and that firms are designing products that can be sold profitably and then looking at who they can be sold to.

Because the new Consumer Duty is intended to apply to all aspects of the retail financial services market, this outcome will affect product manufacture and design and distribution of products, with monitoring and feedback to the manufacture/design and distribution processes.  Firms involved in any part of these activities will need to consider the impact of this outcome.

Customer service – the outcome sought here is that:

Customer service meets the needs of consumers, enabling them to realise the benefits of products and services and act in their interests without undue hindrance.

The undue hindrance refers to so-called ‘sludge’ practices, which are heavily criticised in CP21/13.  These are instances of deliberate design to hinder consumers from taking action that would benefit them – for instance, having to go into a branch to close an account (when there are alternatives to that) or procedures that make it time-consuming and/or irksome to prevent autorenewal of an insurance policy. There’s also specific reference to consumers not having to incur unreasonable additional costs.

Firms would be required to take various actions, including:

  • Designing customer service processes in a way that takes consumer needs into account.
  • Considering the customer service needs of their customer base and the target market for their products and services and making sure the customer service meets the range of those customers’ needs.
  • Monitoring processes, looking for information that may indicate areas where they fall short of the customer service outcome and acting promptly to address those.
  • Regularly reviewing processes to ensure they remain fit for purpose and don’t disadvantage particular groups of customers, including those who may be vulnerable, particularly as innovation and technology develop.
  • Taking responsibility for meeting the customer service standard where customer service activities are outsourced.

Price and value­ – the outcome sought here is:

The price of products and services represents fair value for consumers.

The FCA is clear that it will not be acting as a price-controller; the focus is on achieving fair value, with ‘value’ meaning the relationship between the overall price to the customer and the benefits the customer receives. It includes consideration of at least the following:

  • The nature of the product, including the benefits that will be provided or that may reasonably be expected, their quality and any limitations;
  • The type and quality of services provided to customers; and
  • The expected total price the customer will pay.

Firms therefore need to be clear about the benefits that customers should expect to receive and be able to monitor and review whether those benefits are received in practice. Different customer groups (including vulnerable customers and customers with diverse needs) will need to be considered: are they receiving the benefits that should be expected? The price to customers will need to be assessed across the value chain and this might require provision of information to and from various parties involved in the design, manufacture and distribution processes. Assessing outcomes achieved will include assessing whether consumers – and each group of consumers targeted by the firm and holding the product – have received fair value. Vulnerable customers may be susceptible to receiving poor value and I expect firms will need to show that customers with protected characteristics under the Equality Act 2010 aren’t receiving poor value for the price paid.

As a final point, the price paid needs to be considered in broad terms. Personal data provided by a consumer to a firm is seen as being of value to the firm; it can also be seen as a ‘cost’ to the consumer. The value of data will need to be monetised, taking into account different types of data, the potential use of data by firms (and how that might alter over time), differences in value between data received from different customer groups and other relevant factors.

Although these four outcomes have been considered separately here, there will be close connections between them in practice. For instance, the price and value outcome will be influenced by the type of product or service offered and whether the customer service outcome is achieved. It will be important to scope the work carefully – and sufficiently broadly – at the outset.

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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