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Published 28 julio 2022
"We want to break new ground with our new Consumer Duty, which will ensure all firms take account of the actual impact of their services and product suitability on the consumer” Speech by Nikhil Rathi, FCA Chief Executive, delivered at the Peterson Institute for International Economics, 14 July 2022.
The UK Financial Conduct Authority has published its policy statement and final rules and guidance setting out how it intends to implement its new Consumer Duty in Policy Statement 22/9 and Final Guidance 22/5.
The fundamental elements of the FCA’s proposals have not changed from those set out in its consultation paper CP21/13 in December 2021, though there are some important clarifications. The accompanying non-handbook guidance has significant clarificatory amendments and is key to understanding the FCA’s intentions. In response to feedback from many firms, trade bodies and advisers, the timetable for implementation has been extended and is being phased. From end July 2023 the Consumer Duty will apply to all new products and services and all existing products and services that remain on sale or open for renewal. From end July 2024 the Consumer Duty will also apply to all closed products and services.
The UK regulatory regime under the Financial Services and Markets Act 2000 has always included a number of high-level principles as well as detailed rules. The FCA currently has 11 Principles for Businesses, while the Prudential Regulation Authority has 7 Fundamental Rules.
The Consumer Duty will take the form of a new Principle, Principle 12, as follows:
“A firm must act to deliver good outcomes for retail customers”.
Unlike the other Principles for Businesses, the Consumer Duty will be supplemented by two further elements: the “cross-cutting rules” and 4 outcomes, which together set out in more detail the FCA’s expectations for firms who are subject to the Consumer Duty.
The cross-cutting rules will require firms to:
o act in good faith towards retail customers
o avoid causing foreseeable harm to retail customers, and
o enable and support retail customers to pursue their financial objectives.
The 4 outcomes that the FCA wants to see under the Consumer Duty relate to:
o products and services
o price and value
o consumer understanding, and
o consumer support.
The FCA has said that the Consumer Duty sets a higher standard that existing Principles 6 and 7 (the requirements to treat customers fairly and communicate in a way that is clear, fair and not misleading), so these Principles will be switched off whenever the Consumer Duty applies.
The Duty applies across all of a firm’s activities, from high-level strategic planning to individual customer interactions.
Though the FCA has, on the face of it, given an additional three months for implementation for new and open products and services, this is still extremely challenging for regulated firms. This is particularly so because FCA has set milestones it expects firms to meet during this period and will monitor firms’ progress.
By the end of October 2022 firms’ boards should have agreed their implementation plans and be able to evidence they have scrutinised and challenged the plans to ensure they are deliverable and robust to meet the new standards. Firms should expect to be asked to share implementation plans, board papers and minutes with supervisors and be challenged on their contents.
Manufacturers must share with distributors by the end of April 2023 the information necessary for them to meet their obligations under the Duty (for example in relation to price and value) and must have identified where changes need to be made to existing open products and services. Such changes and remedies must be implemented by end July 2023.
Firms should notify the FCA if as part of implementation of the Duty they are considering withdrawing or restricting access to products or services. Firms should alert the FCA if they believe that they will not be able to complete all work necessary to be compliant before the implementation deadlines. Firms should take a risk-based approach and prioritise implementation work that is likely to have the biggest impact on consumer outcomes, for example, reviewing first the most complex or risky products and the most significant communications.
The potentially all-encompassing nature of the Consumer Duty can make it hard to know where to start. To some extent, the FCA has helped with this by identifying 4 key outcomes.
The extent to which a firm has to make changes to its current products and processes in order to implement the Consumer Duty will depend on where it is starting from in terms of its current compliance with a number of existing obligations, many of which have been the subject of recent FCA initiatives.
The Consumer Duty has particular overlap with existing obligations such as:
The FCA has helpfully clarified that firms to which the PROD section of the FCA Handbook applies and which comply with them, will be deemed to comply with the Consumer Duty. Firms that currently follow PROD as guidance can opt to treat these PROD requirements as the relevant rules going forward.
Similarly, firms already subject to and complying with fair value rules will be regarded as meeting the price and value outcome of the Consumer Duty. The FCA has helpfully clarified that firms are not required to re-do or challenge other firm’s value assessments but are responsible only for the prices they control, though that will have to be considered in light of the overall value the customer will receive. For example, FCA guidance states that a financial adviser, being at the end of the distribution chain, will often have the clearest oversight of the customer’s overall position and an overview of the total proposition, and so should consider the overall outcomes being delivered for the customer including the overall cost.
Importantly, the FCA has also confirmed that the Consumer Duty will not alter the advice/guidance boundary.
Regarding the customer understanding objective, the FCA has stated that where firms are already subject to regulatory and legal requirements to disclose complex information (such as the disclosure obligations for UCITS funds) with which customers likely struggle, firms should consider what additional steps they can take to support customer understanding.
The FCA has emphasised that it expects all firms will need to do more in the area of governance in relation to the Consumer Duty, and the leadership of boards and senior managers will be critical in ensuring the effective application of the Consumer Duty. Further, in what is a new development for the FCA in its approach to implementing regulatory change, a firm’s governing body must at least annually review and approve a report on the outcomes being received by the firm’s retail customers and confirm whether the governing body is satisfied that the firm is complying with the Consumer Duty.
All senior managers will be responsible for ensuring that the business of the firm complies with the requirements of the Consumer Duty on an ongoing basis.
In addition, the FCA will amend the individual conduct rules in its Code of Conduct sourcebook by adding a new rule requiring all conduct rules staff to ‘act to deliver good outcomes for retail customers’ where their firm’s activities fall within scope of the Consumer Duty. Firms will therefore need to plan for training of all staff subject to the conduct rules to explain this additional rule and its implications.
You would be forgiven for assuming that the Consumer Duty will apply only where a firm is dealing with a consumer – that is, a person acting for purposes outside their trade, business or profession. However, the definition of “retail customer” for these purposes also includes “any person who is, or would be, the end retail customer in the distribution chain whether or not they are a direct client of the firm”. (This is an example of where the scope of Principle 12 will be wider than the scope of Principles 6 or 7).
The FCA has clarified that this means the Consumer Duty applies to all firms that have a material influence over, or determine, retail customer outcomes. For example, an investment bank that designs a structured product for ultimate sale to retail customers would be subject to the Duty. On the other hand, an investment bank providing wholesale instruments that a third-party firm independently uses as component parts of a retail product would not. Similarly a fund manager of an institutional investor-only fund would not be subject to the Duty if a third party, without its involvement, invests into the institutional fund via a retail fund of funds.
Further the Consumer Duty applies not just to consumers with whom firms have a contract but also to prospective customers and can include customers who have been declined a product or service.
In order to meet the FCA’s milestone of end October 2022 for boards to have agreed implementation plans, to the extent that firms have not done so already, they should urgently carry out a complete assessment of the application and impact of the Consumer Duty on all areas of their regulated activities. Given the sometimes confusing scope of the Consumer Duty, this may not be straightforward.
Firms should also consider the extent to which their current products and services might need to be adapted in order to meet the requirements of the Consumer Duty, as well as mapping customer journeys to identify particular areas where outcomes can be adversely affected by poor processes or behaviours.
Firms should consider the distribution chains that they are part of, and manufacturers should consider whether their distribution methods and oversight are consistent with their obligation under the Consumer Duty to deliver good outcomes.
Finally, there should be a particular focus on governance and oversight – as always, tone from the top will be key to ensuring meaningful implementation, particularly where this may require a shift in culture or a significant change in product design or distribution channels. The FCA sees the Consumer Duty as a major cultural shift.
We can support firms in assessing the application and impact of the Consumer Duty on their products and services and in identifying any changes that may need to be made to those products and services. We can support firms in developing the implementation plans that must be agreed by boards by the end of October 2022 and putting these in a form suitable for sharing with the FCA.
We shall be sending out more detailed analysis on aspects of the Consumer Duty in the coming months and plan to hold a series of client events.
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