Our key takeaways from the FCA's consultations (CP21-13 and CP21-36) on Consumer Duty for firms in retail markets.

May 2022 - Written by Caroline Ironmonger & Prashan Fernando

In retail financial markets, the FCA will be introducing a new “Consumer Duty” that will set higher expectations for the standard of care that firms provide to consumers.  The FCA have issued two consultation papers (CP21-13 and CP21-36) and the final rules are expected to be published at the end of July 2022. Firms will be expected to meet the new requirements by 30th April 2023.

Scope

Consumer Duty will relate to products and services sold to retail clients*.

It will include firms that are involved in the manufacture or supply of products and services to retail clients, even if they do not have a direct relationship with the end customer.

*“Retail clients” is a wide term that includes all clients other than professional clients (such as large corporate entities and government bodies) and eligible counterparties.

Consumer Duty

The Consumer Duty would require firms to:

  • ask themselves what outcomes consumers should be able to expect from their products and services

  • act to enable rather than hinder these outcomes

  • assess the effectiveness of their actions

Consumer Duty is made up of a Consumer Principle, Cross-cutting Rules and Four Outcomes.

Consumer Principle

A new FCA Principle of Business will be added to set the tone and reflect the standards of behaviour that is expected from firms:

Principle 12: A firm must act to deliver good outcomes for retail clients.

Where Principle 12 applies, i.e. to retail markets, existing Principles 6 (A firm must pay due regard to the interests of its customers and treat them fairly) and 7 (A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading.) will no longer apply.

Principles 6 and 7 will still apply to non-retail regulated activity.

The Cross-cutting Rules

The Cross-cutting Rules set out the key behaviours required by the Consumer Duty, and make clear that the Consumer Principle requires firms to:

  • Act in good faith

  • Take all reasonable steps to avoid foreseeable harm to consumers

  • Take all reasonable steps to enable consumers to pursue their financial objectives

The Four Outcomes

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.

 

1. Communications

Outcome: Communications equip consumers to make effective, timely and properly informed decisions about financial products and services.

Consumers must be given the information they need, at the right time, and that they can understand, so that they can evaluate: 

  • the options available to them  

  • the costs, risks and benefits attached to those options  

  • which options offer fair value and would meet their needs  

2. Products and Services

Outcome: Products and services are specifically designed to meet the needs of consumers, and sold to those whose needs they meet.

The products and services that are sold to consumers must be fit for purpose.

3. Customer Service

Outcome: Customer service meets the needs of consumers, enabling them to realise the benefits of products and services and act in their interests without undue hindrance.

Firms’ customer service levels do not always enable consumers to get the full benefit from products and services and can create barriers to consumers taking action that would benefit them, or which cause harm to consumers through unnecessary cost, delay or stress.

 

4. Price and Value

Outcome: The price of products and services represents fair value for consumers.

Firms should be able to demonstrate that the benefits of their products and services are reasonable relative to their price.

Impact

Under Consumer Duty, firms will be expected to:

  • Test, monitor and regularly review the outcomes that their customers are experiencing

  • Ensure that the products and services they provide are delivering the outcomes that they expect in line with the Consumer Duty

  • Identify where they are leading to poor outcomes or harm to consumers

  • Adapt, where necessary, to support the correct outcomes

Governance

A report assessing whether the firm is acting to deliver good outcomes for its customers must be reviewed and approved by the firm’s management body, at least annually.  The report should include:

  • The results of any monitoring that the firm has undertaken to assess whether their products and services are delivering the outcomes that they expected

  • New and emerging risks to good outcomes for consumers

  • Any evidence of consumers or groups of consumers who are not achieving good outcomes and an evaluation of the impact and the root cause

  • Any evidence of consumers or groups of consumers who have characteristics of vulnerability and are not achieving good outcomes

  • Actions taken to address any risks or issues

  • Whether the firm’s future business strategy is consistent with it acting to deliver good outcomes under the Consumer Duty

Senior Management and Certification Regime (SMCR)

A new rule will be added to the individual conduct rules, applicable to all conduct staff, to reflect the higher standard of the Consumer Duty:

Individual Conduct Rule 6: You must act to deliver good outcomes for retail customers.

Where rule 6 applies, i.e., to retail markets, the existing individual conduct Rule 4 (You must pay due regard to the interests of customers and treat them fairly) will no longer apply. Rule 4 would still apply to conduct related to non-retail activity.

Firms will need to include this new rule in conduct rules training for all conduct staff.

Preparing for Consumer Duty

The new rules are likely to come into force on 30 April 2023.  Before then, there are a number of steps firms can take to start preparing:

  • Conduct an impact analysis against the principle, cross-cutting measures and outcomes to assess their customer journey against the new requirements

  • Implement any changes to processes to ensure consumer duty is met

  • Draft the format for the report for the management body

  • Draft changes to compliance manuals and policies to include the new requirements

  • Prepare and deliver updated conduct rules training to all conduct staff