The Financial Conduct Authority (FCA) has outlined its new Consumer Duty proposals aimed at improving how regulated firms serve consumers. Contained within a July Policy Statement (PS22/9: A new Consumer Duty (fca.org.uk)) and Finalised Guidance paper (FG22/5: Final non-Handbook Guidance for firms on the Consumer Duty (fca.org.uk)), the new rules will set further expectations on how regulated firms should engage with and protect their customers.
Who this applies to
The new Duty applies to all firms authorised under the Financial Services and Markets Act 2000 (FSMA), Payment Services Regulations 2017 (PSRs) and E-money Regulations 2011 (EMRs), with regards to any products or services offered to retail customers. Notably, the Duty will apply across the whole distribution chain, from origination to any post-sale activities, providing any firm within said chain has a material influence over the retail customers’ outcomes. However, the FCA has stressed that firms will only be responsible for their own actions or omissions when complying with the Duty, and not for the distribution chain as a whole. Whilst unregulated activities will generally fall outside of the scope of the Duty, ancillary activities, defined as unregulated activities undertaken in connection with regulated activities, will fall within the scope.
Application to existing products and services
The Duty is set to be introduced on a forward-looking basis and will not have a retrospective effect on past actions. Firms will be expected to undertake a wholesale review of their products and services against all aspects of the Duty on an ongoing basis and prior to the end of the implementation period.
The consumer principle
The Duty itself is set to introduce a new ‘Consumer Principle’, Principle 12, which will require firms to ‘act to deliver good outcomes for retail customers’. This will require firms to, among other things, be proactive in delivering good outcomes in a way that reflects how consumers actually behave, ensure they have sufficient understanding of their customers in order to demonstrate good outcomes and identify and address areas where good outcomes are not being achieved. Closely linked to this Consumer Principle are the three cross-cutting rules which outline how firms can deliver good outcomes. They require firms to:
- Act in good faith towards retail customers
- Avoid causing foreseeable harm to retail customers
- Enable and support retail customers to pursue financial objectives
The ‘Four Outcomes’ also compromise a large part of the Duty. These provide further guidance and expectations for firms in four areas which the FCA has identified as key parts of the firm-consumer relationship as outlined below.
Product and Services Outcome
This focuses on requiring firms to produce, distribute and continually review their products and services to ensure that they meet the needs and objectives of the customers within the identified target market.
Price and Value Outcome
This outcome aims to ensure that the price the customer pays for the product or service is reasonable compared to the overall benefit they receive.
Consumer understanding outcome
Consumers should be able to understand communications received by firms so that they are equipped to make effective and informed decisions. In order to facilitate this, firms should tailor their communications to the specific needs of their identified target market or to the specific customer they are communicating with.
Consumer Support Outcome
Consumers need to be supported with the products or services provided by a firm in order to make effective use of them. Linked to the consumer understanding outcome, consumers should be able to both understand communications and act on them without facing unreasonable barriers. This is particularly applicable to vulnerable customers.
Monitoring outcomes
Firms under the new Duty will also be expected to assess, test and monitor the outcomes their customers are receiving and identify problem areas. These outcomes will then need to be assessed to ensure that they are consistent with the new Duty. This process should be data driven and therefore will require firms to collect customer information regularly. Senior Managers and Certification Regime (‘SM&CR’)
A new individual conduct rule will be introduced – Individual Conduct Rule 6, to reflect the new, higher standard of the Duty. It requires all conduct rules staff to ‘act to deliver good outcomes for retail customers’ where the activities of the firm fall within the scope of the Duty.
Payment and e-money firms, which are not currently subject to the SM&CR will still be expected to ensure that they have senior management oversight and accountability for the Duty and to ensure their staff are acting in accordance with the requirements of the Duty.
Firms will need to include this new rule in conduct rules training for all conduct staff.
Timeline
The FCA has proposed to undertake a phased approach to introducing the new Duty; requiring firms to apply the new Duty to existing products and services that are open to sale from 31 July 2023, and 31 July 2024 for products and services held in closed books
