Further to their consultation paper CP21/36, the FCA are moving forward to introduce a new Consumer Duty (‘the Duty’), that will set higher expectations for the standard of care that firms provide to consumers. The concept of a Consumer Duty has been on the horizon for a number of years, following concerns of consumer harm within the market and that existing FCA rules for Treating Customer Fairly were not having the desired impact.
Despite many firms adopting good practices when it comes to customer outcomes, there is still evidence of harm, and therefore a need for change. Examples of poor practices include firms presenting information that is misleading or difficult to understand, unsuitable products or services being sold, and poor levels of customer service and support.
In order to achieve good outcomes, Firms need to understand their customers’ needs and have the flexibility to support them. It is important that customers can make informed and effective decisions, and that products or services are providing fair value.
The Duty will set higher standards for Firms to adhere to and there is a clear shift in the focus from achieving ‘Fair’ outcomes or treatment, to ‘Good’ outcomes. As a result of this, a new Principle will be introduced: Principle 12 – A firm must act to deliver good outcomes for all retail customers. In addition, from a SM&CR perspective a new Conduct Rule will also be introduced: Rule 6 – You must act to deliver good outcomes for retail customers.
The Duty sets a higher standard than the current Customer Principle, which requires firms to treat customers fairly. Therefore, it was deemed appropriate to use different language – ‘good’ rather than ‘fair’ – to acknowledge that this is a different, higher standard, and it is this higher standard that firms will be judged against. Firms will be expected to adopt a culture where they consider whether something is the ‘right thing to do’ rather than whether something is ‘within regulations’. In determining whether good outcomes are being achieved for consumers, a question that firms can ask themselves is whether they are applying the same standards and capabilities to delivering good consumer outcomes as they are to generating sales and revenue.
There are four outcomes the FCA want to see under the Duty which are instrumental in helping to drive good outcomes for customers. These outcomes relate to:
- products and services: that are fit for purpose, distributed appropriately and are designed to meet the needs, characteristics and objectives of the target market
- price and value: to ensure there is a reasonable relationship between the price paid for a product or service and the overall benefit a consumer receives from it (Fair Value)
- consumer understanding: communications that support and enable consumers to make informed and effective decisions
- consumer support: service that enables consumers to realise the benefits of the products and services they buy and ensures they are supported when they want to pursue their financial objectives.
The outcomes are further supported by Cross-Cutting Rules that require firms to:
- act in good faith
- avoid causing foreseeable harm
- enable and support retail customers to pursue their financial objectives
Under the Duty, firms will need to assess and evidence the extent to which and how they are acting to deliver good outcomes and can expect to be asked by the FCA to demonstrate how their business model, the actions they have taken, and their culture are focused on delivering good customer outcomes at any point. This maybe the firm’s annual report or other MI as appropriate.
The Consumer Duty applies to Retail Customers which has caused some complexity. The FCA has clarified in the Final Rules and Guidance that it is taking the approach of applying the Duty in line with the existing sourcebooks, therefore where SME’s are currently protected by the provisions of a sourcebook the Duty will also apply. In terms of the Consumer Duty rules specifically, the definition of a Retail Customer defines both a Consumer, and in respect of where the Principles for Businesses Sourcebook (PRIN) applies in relation to ICOBs activity, the definition is a policyholder or prospective policyholder.
Timing and Implementation
The rules come into force on a phased basis:
- For new and existing products or services that are open to sale or renewal the rules come into force on 31 July 2023
- For closed products or services the rules come into force on 31 July 2024
- By the end of October 2022, firms should have agreed implementation plans
- By the end of April 2023 Manufacturers need to have completed their reviews against the four outcomes, identified where changes need to be made, and shared key information with distributors to enable all firms to comply in time.
Further information and the full policy statement can be found on the FCA’s website