On 27 July 2022, the FCA set out its final rules and guidance for a new Consumer Duty to be introduced into the FCA’s principles for businesses. The Consumer Duty aims to increase the current level of consumer protection in the retail financial services market by setting clearer and higher standards for the culture of firms and the conduct the FCA expects of them. Firms will be required to consider the impact of the products and services they sell to consumer both at pre-sale and post-sale stages.
Central to the FCA’s proposal is the introduction of a new consumer principle requiring firms to act to deliver good outcomes for retail customers. The consumer principle is underpinned by cross-cutting rules providing greater clarity on the FCA’s expectations under the new Principle and helping firms interpret the four outcomes (see in point III below). Under the new rules, consumers should: (i) receive communications they can understand; (ii) receive products and services that meet their needs and offer fair value; and (iii) get the customer support they need, when they need it.
The FCA has signalled that it thinks the new Consumer Duty will lead to a major shift in how financial services are delivered and firms will need to adapt their governance mechanisms to ensure their regulatory compliance with the requirements set out in the Consumer Duty. Below you may see an overview of the Consumer Duty and its implication for UK financial services firms (including authorised Payment Institutions and Electronic Money Institutions).
Nikhil Rathi, the FCA’s CEO, delivered a speech on the importance of the Consumer Duty on 16 November 2022. Mr Rathi referred to the Duty as ‘the elephant in the jungle’ and highlighted, amongst others, the role of the Consumer Duty in facilitating innovation and financial inclusion. MR Rathi also expressed the view that the Consumer Duty alongside the Senior Manager’s and Certification Regime will give the FCA the framework to respond quickly to innovations and the use of Artificial Intelligence in a way that could enable new products to be trialled, with informed consent and consumer interests standing front and centre.
The Consumer Duty will apply to firms’ regulated activities and the FCA’s proposals relate to products and services sold to ‘retail clients’. The FCA has explained that this term includes all clients other than professional clients (such as large corporate entities and government bodies) and eligible counterparties. The FCA’s proposals also extend to payment institutions and electronic money institutions so that customers that are consumers or micro-enterprises will be considered “retail clients” for the purposes of the Consumer Duty. However, in relation to outsourcing, the FCA has stated that ‘unless an FCA-authorised outsource provider can determine or has a material influence over retail customers, it would not be subject to the Duty’.
Importantly, the FCA’s proposals extend to firms which are involved in the manufacture or supply of products and services to retail clients, even if said firms do not have a direct relationship with the end customer. The FCA has referred to the markets covered under the proposed rules by using the term ‘retail markets’.
Through the introduction of the consumer principle and the Consumer Duty as a whole, the FCA aims to apply an enhanced level of care that would also strengthen the existing requirements in its Principles, in particular in Principle 6 (customers’ interests).
This principle currently reads that a firm must have due regard to the interest of its customers and treat them fairly. On implementation of the Consumer Duty, this will become an objective standard that will require firms to consider the reasonable expectations of their customer base as a whole, rather than them aiming to achieve the absolute best outcome for each individual customer (see our analysis below on the concept of “reasonableness”).
A set of cross-cutting rules will develop and amplify the standards of conduct the FCA expects from firms. The new rules require firms to:
a) Avoid causing foreseeable harm to consumers
b) Enable customers to pursue their financial objectives
c) Act in good faith
The Four Outcomes represent the key elements of the firm-customer relationship: how firms design, sell and service products and services, and the key contact points along the customer journey. The Four Outcomes are the following:
The concept of reasonableness has been embedded in the Consumer Duty. The standard reflects the tortious concept of how a reasonable prudent firm would act and will apply to the interpretation of all the elements of the Consumer Duty, including the consumer principle, as discussed above. This is an objective standard of conduct that firms would need to meet and not something that they can define for themselves. The FCA has set out its expectation that firms should already be familiar with this principle due to their existing duties under common law.
The Consumer Duty is expected to have wide-ranging implications for firms:
The FCA expects the implementation of the Consumer Duty to be iterative, and it will engage with firms to determine good practice in terms of implementation and reviews of products and services.
The new rules will come into force on a phased basis:
a) for new and existing products or services that are open to sale or renewal the rules come into force on 31 July 2023; whereas
b) for closed products or services the rules come into force on 31 July 2024.
The FCA has recognised that these deadlines, although longer than what it had initially consulted on, will still be challenging for many firms, particularly for those manufacturing and/or distributing large numbers of open products.
Against this background, the FCA has set out clearer expectations for actions firms should take during the implementation period. This includes key milestones for when the FCA expects firms to have finished planning their implementation work, reviewing their existing open products and services, and remedying any identified issues to ensure they are fully compliant with the Consumer Duty.
It should be noted that the FCA has already updated its dedicated webpage and inserted a caveat mentioning that “authorisations’ assessments of firms and individuals is forward looking (i.e. firms and individuals must demonstrate they can comply with our rules and guidance on an ongoing basis). So, any firm or individual applying for authorisation (and those applying to vary their permissions will have to demonstrate that they can meet the requirements of the Consumer Duty, as they relate to them, from now on”.
On 5 October 2022, the FCA published an information notice to help firms implement the Consumer Duty and prepare their implementation plans by the end of October 2022.
The end of October deadline reflects that firms will need clear plans in order to implement the Duty properly and timely. Whilst the FCA did not expect from firms to have necessarily fully scoped all work required to embed the Duty by the October deadline, the FCA’s expectation had been that firms could set out how they would do so by the end of October to ensure timely implementation.
The FCA’s update imposed the following obligations to firms:
The primary role of the Board Champion will be to support the Chair and CEO in ensuring that: (a) the Duty is being discussed in all relevant discussions; and (b) the Board is challenging the firm’s governing body/management on how it is embedding the Duty and focusing on Consumer outcomes. The designation does not affect the Board’s collective responsibility in relation to the Duty or anyhow alters the respective roles of the Board and the executive in ensuring compliance with the Consumer Duty under existing governance procedures. It must be made clear that the Board champion will note be responsible for the implementation of the Duty but rather for ensuring that the Duty is discussed at the Board.
 References to data and monitoring are contained, amongst others, in sections 6.64 (following); 7.44 (following); 8.58 (following); and 9.42 to the Final non-Handbook Guidance for firms.
 Closed products have been defined as those that are no longer marketed or distributed to retail customers or open to renewal. When existing customers can continue to make payments under the existing product terms this would still be considered closed, as long as the product or service is not open to new customers.
 See also our analysis on the 05 October 2022 update published by the FCA and discussed in the last section of this article
Sep 22 2023
Sep 22 2023