The FCA has published Consultation Paper 21/36 (CP 21/36) which includes proposed new rules and guidance setting out a Consumer Duty which it considers will “fundamentally shift the mindset of firms” and establish an appropriate level of care to consumers. The consultation is open until 15 February 2022 and the FCA expects to confirm any final rules by the end of July 2022.
The significance of the impact to firms is highlighted by the FCA’s cost benefit analysis of introducing the new Consumer Duty. It considers that the total one-off direct costs firms may incur to comply with the Consumer Duty could be up to £2.4bn (incurred in performing gap analysis on their policies and processes, making relevant adjustments through change projects, training staff on the new requirements, as well as IT costs from system changes and costs to monitor and test consumer outcomes). The ongoing annual direct costs to be in the range of £74.0m to £176.2m.
In addition, the FCA anticipates (but does not quantify) firms incurring indirect costs in the form of potential loss in profits due to changes they make to their product design and prices.
Proposed new rules and guidance
The new rules are familiar from the previous consultation paper (CP21/13, which we commented upon in this blog), comprising:
- A new Consumer Principle (Principle for Businesses 12) that would replace Principles 6 and 7 for retail business: “A firm must act to deliver good outcomes for retail clients“
- Three cross-cutting rules which require firms to:
- act in good faith towards retail customers;
- avoid causing foreseeable harm to retail customers; and
- enable and support retail customers to pursue their financial objectives.
- Four outcomes the FCA expects the new rules to achieve:
- The product and services outcome: consumers are sold products and services that have been designed to meet their needs, characteristics and objectives.
- The price and fair value outcome: consumers pay a price for products and services that represents fair value to them.
- The consumer understanding outcome: consumers are equipped with the right information to make effective, timely and properly informed decisions.
- The consumer support outcome: customers receive the support they need.
There have been some amendments in response to feedback received on CP21/13.
The FCA has removed reference to firms talking “all reasonable steps” in the cross-cutting rules, as it wants firms to focus on ensuring good outcomes for customers by acting reasonably, rather than focusing on compliance with rules in the steps they take to achieve that outcome.
The FCA therefore seeks to underpin the entire Consumer Duty with a concept of reasonableness in the new proposed rules, reflecting tortious duties under common law. In particular, the new Consumer Principle and related obligations “must be interpreted in accordance with the standard that could reasonably be expected of a prudent firm:
- carrying on the same activity in relation to the same product; and
- making assumptions about the needs and characteristics of its retail customers based on the needs and characteristics of an average retail customer.” 
It also proposes to introduce a new Individual Conduct Rule 6, which mirrors the new Consumer Principle, in requiring certified staff to “act to deliver good outcomes for retail customers” where their firms’ activities fall within scope of the Consumer Duty.
Given the breadth of changes proposed by the FCA it will take some time to fully digest the potential impact and consequences of the proposed implementation of the Consumer Duty, but we set out some initial reflections below.
In its proposed new Consumer Principle (requiring firms to “act to deliver good outcomes for retail clients”), the FCA hasn’t taken on board the concerns that a fair outcome isn’t always a good outcome from a customer’s perspective. There will continue to be situations in which a client is disappointed – by the performance of an investment for instance – even where the firm has complied with both the letter and the spirit of the Duty. “Good practices” do not always result in “good outcomes” and it will be incumbent on the FCA and the FOS to distinguish between good outcomes and fair outcomes, regardless of the wording of the Duty.
Equally, one of the FCA’s proposed cross-cutting rules would require firms to avoid causing foreseeable harm to retail customers. While the FCA says that this is not intended to protect customers from all poor outcomes, the proposals will require firms to conduct regular reviews, and if a harm were not foreseeable at the outset, but later became foreseeable, the FCA would expect firms to take the appropriate action.
A more positive development is that the FCA is not proposing to provide a private right of action for breaches of any part of the Consumer Duty at this time. However, the FCA will keep the possibility of a PROA under review, including in light of the evidence the regulator sees of firms embedding and complying with the Consumer Duty.
Further, it is positive that the FCA intends to work closely with the Financial Ombudsman Service with the aim of having a consistent view on the interpretation of the Consumer Duty while respecting the different roles of the FCA and the Financial Ombudsman.
In considering the proposed rules and guidance and, if implemented, seeking to comply with them firms will need to grapple with some internal tensions:
- The FCA says the new rules should not mean firms are customers’ fiduciaries and that it respects the general principle in FSMA that customers are responsible for their decisions. However, the guidance states that “regulators cannot set a universal requirement of the degree of responsibility a consumer can be expected to take” and that firms must take into account behavioural biases and characteristics of vulnerability on customers’ decisions. This indicates there is a spectrum of responsibility between consumer and firm and, in some circumstances, the onus is more on the firm to be responsible.
- It is helpful that the FCA has been clear that the Consumer Duty will have no retrospective effect. However, firms will need to review their products and services during the implementation period, and this might mean updating contractual terms and conditions of a product or service before it can continue to be sold (or renewed) to new or existing customers following implementation of the Consumer Duty. The FCA notes that significant changes may be required to existing contracts going forward, including to the level of remuneration for firms, to meet the requirements of the Consumer Duty.
In respect of monitoring requirements and governance requirements:
- For many firms, the monitoring and governance requirements of CP21/36 look very similar to, and the language echoes that of, the FSA-era TCF initiative. However, it is fair to say that the FCA will be expecting firms to evolve from the TCF baseline to something more sophisticated, and – critically – to something which is set in the context of a strengthened individual accountability regime. It is reasonable to expect that firms’ approaches to monitoring will evolve over time as the industry gains more experience of the FCA’s approach to the Consumer Duty.
- That the regulator says it is not requiring specific metrics or new reporting may initially seem less onerous, but the FCA expects firms to be able to ‘demonstrate effectively’ how they are monitoring outcomes, identifying harms or the risk thereof, and how they addressing issues they have identified. Further, firms will need to explain how they reached a decision on the most appropriate intervention, demonstrate how that intervention has addressed the concerns that they identified, and delivered good consumer outcomes and, if the intervention has not done so, what further they have done further to address the issue.
- As with any FCA flagship initiative, the role of senior management and board is central. The FCA expects that, at least annually, a firm’s board will review the firm’s assessment of how it is delivering in line with the Consumer Duty. The Board is further expected to agree both (1) the actions required to address any issues which impact on the firm’s ability to deliver good outcomes, and (2) any changes to the firm’s future business strategy, before ‘signing off on the assessment’.
- In addition, the FCA proposes to amend the SM&CR individual conduct rules in the Code of Conduct sourcebook (COCON) by adding a new rule requiring all conduct rules staff within firms to ‘act to deliver good outcomes for retail customers’ where their firms’ activities fall within scope of the Consumer Duty. This adds teeth to the FCA’s expectations on speak-up, not just for the firm but for individuals, because if the firm has succeeded in “allowing staff to feedback honestly when they think processes would be improved”, then a failure to raise an observed issue could constitute a failure to act to deliver good outcomes for retail customers.
- The FCA sets out non-exhaustive lists of data which firms may want to collect, e.g., complaints data, customer retention data, and similar. It also outlines the FCA’s intention to make the Consumer Duty central to its authorisation, supervision, policy and enforcement processes, with the onus being very much on firms (or applicants as the case may be) to demonstrate to the regulator that it is (or can) deliver in line with the Consumer Duty.
In terms of the application of the Consumer Duty to multiple firms in distribution chains:
- The good news is that the rules are intended to apply proportionately, taking account of a firm’s particular role. Firms are also only expected to take responsibility for their own activities and should not need to oversee the actions of others in the distribution chain. There will be no joint and several liability.
- In practice, the application of these principles is likely to be far from straightforward and careful examination of the new rules and proposed guidance will be needed. For example, where end users in a complex distribution chain do not achieve good outcomes, activities of all firms in that distribution chain (including ancillary unregulated activities which are connected with a regulated activity) are likely to come under scrutiny irrespective of how close a firm’s relationship is with those end users. Further, whilst the FCA argues that “potential complications in contractual relationships should not arise”, this may not reflect reality as firms look to implement the new requirements.
- Draft guidance confirms that there are situations in which firms do need to consider actions taken by other firms in a distribution chain. For example, firms will need to look carefully at the wider distribution chain when they put together their distribution strategy for products and services. It also goes without saying that, where Appointed Representatives distribute products, authorised firms must take responsibility for oversight of those activities. This will include compliance with any more onerous requirements that may be imposed by the FCA following the publication of CP21/34 last Friday.
- A particular focus of the FCA in recent years has, of course, been on general insurance distribution chains and on whether they provide “fair value” for customers. Firms that are involved in the distribution of general insurance will need to review how proposed Consumer Duty requirements change, or expand upon, rules that have already been introduced to meet concerns in this area.
The proposals from the FCA will add to the range of regulatory tools to address the poor customer outcomes it has identified in retail markets.
They would therefore give the FCA a greater ability to hold firms and senior management to account if poor outcomes are identified in the future, and they are intended to raise industry standards by putting the emphasis on firms to get products and services right in the first place.
Although the new proposed Consumer Duty will create a further burden on firms, the Handbook rules and guidance and non-Handbook guidance should provide greater clarity on the FCA’s expectations of the outcomes that should be achieved.
Given the FCA first consulted on a potential new duty of care in July 2018, it is good to now have greater clarity on the specific rules and guidance the FCA intends to implement in addition to the Consumer Principle. The changes required by firms will be significant, as highlighted by the FCA’s cost benefit analysis, and will include the need to perform gap analysis, make relevant adjustments through change projects, training staff, as well as IT costs and costs of monitoring and testing of consumer outcomes.
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