Suits you, sir – the new FCA Consumer Duty

At the end of last month, the Financial Conduct Authority (“the FCA”) confirmed its plans to introduce the new “Consumer Duty” in Policy Statement PS22/9 (together with Finalised non-Handbook Guidance FG22/5).  The consumer Duty sets a higher standard for firms when dealing with consumers, and requires them to put customers’ needs first.  This followed an initial consultation by the FCA on the Consumer Duty in May 2021 (CP21/13), followed by feedback to that consultation and a further consultation last December (CP21/36).

The FCA describes the Consumer Duty as an important facet of the FCA’s “transformation into a more assertive and data-led regulator”, and as creating a “major shift” in financial services culture.  It is a new Principle that is accompanied by cross-cutting rules and guidance (in a new section of the FCA Handbook, PRIN 2A).  Firms haver 12 months to implement these changes for all new and existing financial products that are currently on sale, until 31 July 2023.  Firms will then have a further 12 months, until 31 July 2024, to implement the new rules for closed book products too.

Readers of a certain age might recall the FCA introducing another overarching principle many years ago, to “treat customers fairly” (or “TCF”).  That remains part of the FCA Handbook, but the new Consumer Duty is intended to take matters further and be more demanding than TCF, and will carry greater weight than the FCA’s TCF guidance.  Indeed, the FCA will disapply Principles 6 (TCF and customer’s interests) and 7 (communications with clients) where the new Consumer Duty applies, although the related FCA Handbook material will remain to give firms food for thought in applying the Consumer Duty.

So what is this new, demanding Consumer Duty?  It will appear in the FCA Handbook as a new Principle 12, stating simply: “a firm must act to deliver good outcomes for retail clients”.  The aim is for firms to deliver the right level of care to consumers, especially vulnerable customers (which involves ensuring that you “know your client”); and that firms deliver the outcomes that the FCA wants to see from them.  Within this is the concept of reasonableness, confirming that the Consumer Duty relates to the objective standard of the conduct that could reasonably be expected of a prudent firm carrying out the same work and with the necessary understanding of its customer based on the needs and characteristics of an average customer.

The precise legal status of the Consumer Duty is slightly unclear as the FCA has deliberately not labelled it as a “duty of care”.  Nevertheless, given its status within the financial services framework, it seems likely to become a de facto duty of care in substance and in practice.

Generally, under the Consumer Duty firms are only responsible for their own activities in the distribution chain, but if they become aware that another firm in the chain is not complying with the Consumer Duty then they need to notify the FCA.

As with the rest of the FCA’s outcomes-focused regulation, the overarching principle of the Consumer Duty needs some unpacking in practice.  This is where the two further elements of the Consumer Duty come in: the suite of cross-cutting rules, and “the four outcomes”.

As we noted above, the cross-cutting rules will appear in the FCA Handbook as a new section PRIN 2A.  These will require three key behaviours from firms: acting in good faith; avoiding causing foreseeable harm to customers; and enabling and supporting customers to pursue their financial objectives.

The first two behaviours are already reasonably well-defined in law, although it is worth noting that the FCA requires firms to avoid causing foreseeable harm, not just reasonably foreseeable harm (to the extent there is a distinction).  Moreover, firms can cause such harm to their customers directly and indirectly, and by inaction as well as by action.  The final behaviour reinforces the timeless importance of firms knowing their clients properly and therefore understanding what their financial objectives are, and how they wish to pursue those objectives.  It is also perhaps unhelpfully open to revision with hindsight, if the FCA (or the Financial Ombudsman Service, or the customer) decide after the event that a particular financial decision should not have been taken despite it aligning with the customer’s financial objectives at the time.

Finally, we have the “four outcomes”, which are the last element of the Consumer Duty.  These outcomes relate to key elements of the relationship between the firm and the consumer, namely quality of products and services (unless the firm’s product or service is covered by certain rules in PROD in the FCA Handbook); price and value of products and services (which may also engage other parts of the FCA Handbook, especially COLL, but which the Consumer Duty is wider than); consumer understanding (which goes beyond the old requirements of Principle 7 to ensure that communications are clear, fair and not misleading); and consumer support (which requires the culture of the firm to support the customer at all times).

The FCA has not yet introduced a formal reporting requirement for the Consumer Duty, but it is still important that firms assess, test and understand the outcomes that consumers are receiving – and, crucially, that firms can evidence that they are doing so.  This will require firms to collect and interpret substantial amounts of data about all aspects of the customer’s journey with the firm, and act on that information as appropriate to ensure that the Consumer Duty is being met.

As can be seen, the Consumer Duty places great emphasis on the culture of the firm, and is intended to be embedded at all levels of that culture.  Accordingly, the FCA will not permit one senior manager to be designated as responsible for compliance with the Consumer Duty: the FCA expects all senior managers to bear that responsibility.  Nevertheless, the FCA expects firms to have a “Consumer Duty Champion” at board level (or the equivalent), ideally an independent non-executive director, so that the Consumer Duty is being discussed regularly and appropriately.  The Consumer Duty Champion shares this responsibility with the chair and the CEO.

Overall, the new Consumer Duty promises to bring substantial changes to the financial services industry.  Aspects of it reinforce earlier FCA requirements about knowing customers and treating them fairly, but the new duty also goes significantly beyond them and will take some time to fully unpack.  Firms will have their work cut out to get up to speed with the Consumer Duty by next July, but hopefully the changes that it brings about will improve customers experiences of financial services firms, and help those firms and their insurers to reduce some of the risks of complaints, claims and regulatory action to which they might otherwise be exposed.