UK: FCA consults on a new Consumer Duty

The FCA has published its second consultation paper (the "CP") on its proposed Consumer Duty (the “Duty”). This deals with responses to its initial consultation paper (published last May) and sets out in draft the detailed rules and guidance required to bring the Duty into force. The FCA has asked for responses to this second consultation by 15 February 2022, with the new rules due to be published and come into force on 31 July 2022.

The Duty itself will impose a higher standard than existing Principles 6 and 7, which cover treating customers fairly and client communications. The FCA states that it will impose a "higher and more exacting" standard of conduct in relation to firms’ retail market business. It will also apply more broadly than Principles 6 and 7, with greater focus on consumer protection outcomes for retail clients of a product whether the retail customers have a client relationship with firms in the product chain or not. Any firm that has the ability, through its regulated activities, to influence the outcomes experienced by a retail consumer will be caught. This can be by the way it designs a product or distributes it, so the new Duty will apply along the supply chain.

Formulation of the duty

Following feedback, the FCA has chosen a formulation of the Duty based on outcomes, rather than best interests. Firms will be obliged to act to deliver "good outcomes" for retail clients. Where the Duty applies, Principles 6 and 7 will be disapplied.

The cross-cutting rules and four outcomes underpinning the Duty have been retained. The former sets out the overarching conduct which firms must demonstrate when they act to deliver good outcomes from retail consumers. The outcomes rules and guidance set out firms’ key obligations in relation to the four areas covered. The wording of these has been slightly recast to better reflect the FCA’s objectives here. 

Under the cross-cutting rules, firms will be required to:

• Act in good faith towards retail customers
• Avoid foreseeable harm to retail customers (vs avoid causing foreseeable harm in the initial consultation)
• Enable and support retail consumers to pursue their financial objectives.

The four outcomes are now expressed as follows:

• Products and services.
• Price and value (vs fair value in the first consultation).
• Customer understanding: (changed from communications) reflecting the FCA’s view that comprehension is key. Firms will need to satisfy themselves that they have drafted communications that are reasonably likely to be understood by their target audience and be able to demonstrate this to the FCA’s satisfaction.
• Customer support: changed from customer service as the FCA does not want this to be limited to after-sales service or seen as just the responsibility of customer service teams.

The FCA states in the CP that its focus in on “firms acting reasonably to deliver good outcomes for consumers”, although we would have liked to see the reasonableness qualification had been contained in the duty itself. Crucially, the FCA has removed the requirement that firms must take “all reasonable steps” to comply with the cross-cutting rules, accepting points made in feedback that this potentially imposes an unachievable standard.

Some questions left open by the initial consultation have been resolved. These include:

• The FCA has opted for a definition of "retail consumer" that aligns with the scope of the Handbook in each sector. So for MCOBS, the Duty will apply to regulated mortgage contracts within the perimeter, and for COBS it will apply to a customer who is not a professional client.
• The FCA has repeated that it is possible for a customer to experience what would appear to them to be a poor outcome (such as a repossession) without a firm having breached the Consumer Duty. Whilst this might appear counter intuitive, our reading of the proposals is that they are intended to prevent firms, by their own behaviour, precipitating or contributing to poor consumer outcomes. The Duty will not, nor is it intended to, protect consumers from all harm or risks that they have knowingly taken on. In reality, we expect that the greater the harm the clearer the evidence firms will need to compile to establish compliance with their obligations under the Duty.
• Many respondents queried how the Duty would interact with the jurisdiction of the FOS. The FCA confirms that it will work with the FOS to implement the Duty and agree a consistent interpretation. Firms should only be held accountable against the standard that prevailed at the time any problem arose.
• Where a distributor subject to the Duty sells products manufactured by a firm that is outside of its scope (e.g. because it is based abroad), that distributor must take "all reasonable steps" to comply with its obligations under the Consumer Duty.
• In terms of the "influence" test, which bring firms without a direct customer relationship within the ambit of the Duty, the FCA confirms it will take a proportional approach. All firms in the distribution chain will be obliged to co-operate by sharing relevant sales information with manufacturers, including details of regular reviews of product distribution arrangements.
• In welcome news, the FCA has decided against extending the private right of action to cover breaches of the new consumer principle. It has concluded that this is unnecessary at this point, but this decision will be kept under review.
• The importance of considering the needs of vulnerable customers pervades the CP. The FCA is clear that there should be flexibility and mechanisms at all points of the consumer journey for considering outcomes for vulnerable consumers and those with protected characteristics, in accordance with the FCA’s existing guidance on the treatment of vulnerable customers. Echoing comments made in the recent D&I Discussion Paper, the FCA emphasises that if groups with protected characteristics are experiencing different outcomes, firms will need to prove to the FCA that these are compatible with the standards required by the Duty.

There are also some interesting new proposals:

• The FCA will introduce a new rule for all conduct rules staff, obliging them to act to deliver “good outcomes for retail customers” where their activities fall within scope of the Consumer Duty. The existing individual conduct rule 4 (to pay due regard to consumers) will be disapplied in this context.  
• Boards will be required to consider a report from their firm assessing whether it is acting to deliver good outcomes for consumers, consistent with the Duty, at least annually.

Implementation and monitoring

The importance of monitoring, reporting and evidencing compliance with the duty pervades this second consultation. Even where firms consider that they have systems in place to ensure compliance with the new rules, this will need to be evidenced to the FCA’s satisfaction. Firms can expect to be asked at every stage of the regulatory lifecycle to demonstrate how their business model, the actions they have taken and their culture are focused on good consumer outcomes. Reviews to establish compliance with all aspects of the Duty will need to be undertaken across all new products and any that firms plan on continuing to sell after the Duty comes into force. Comprehensive governance frameworks and reporting protocols will need to be developed. Given this, it is worth noting that the FCA is proposing a short implementation period, with the rules slated to take effect on 30 April 2023, although it is open to feedback on this.

The FCA will be monitoring firms’ implementation as part of their supervisory engagement, reviewing plans and change programmes. Firms will be expected to use the implementation period fully and to demonstrate progress when asked. The FCA will also engage with firms and trade bodies, publishing regular updates, guidance and case studies through a roll-out process that it describes as "iterative".

For more information, see our campaign page, which contains podcasts, infographics and notes setting out our thoughts on the implications of these proposals for firms.