2022 looks set to be a busy year for regulated firms dealing with retail customers. Following its initial consultation in May 2021, on 7 December 2021 the FCA issued a further consultation (CP21/36), announcing its desire to “fundamentally shift” the mindset of regulated firms, by implementing a new consumer duty later this year.
What do the proposals entail?
The FCA’s proposals consist of a package of additions to the regulatory landscape applicable where firms are dealing with consumers.
- The Consumer Principle
First, the FCA intends to introduce a new Consumer Principle (Principle 12) to sit alongside its existing principles for regulated businesses:
A firm must act to deliver good outcomes for retail clients.
One of the key questions in understanding the scope of the Consumer Principle is who should be classed as a “retail client” for these purposes. Having taken feedback on this during the initial consultation, the FCA proposes that the scope of the Consumer Duty will be aligned with the scope of sectoral sourcebooks, and so will vary from sector to sector. This was preferred to utilising a single, overarching definition across all markets, though it means firms may have to apply the Consumer Duty differently in respect of different products. This also means that, in certain circumstances, the Consumer Duty will cover SMEs and other organisations, as well as individuals.
The Principle will apply not just to firms which have a direct relationship with retail clients though. Where firms have a material indirect impact on consumer outcomes, they too will need to consider the duty in that context.
The focus of the duty is on outcomes. That said, the FCA acknowledged concerns from its initial consultation that not all consumers can always receive (or consider they have received) a good outcome. The FCA gives the clear examples that a borrower whose house has been repossessed or a consumer who loses money on an investment may well consider they have not received a good outcome, but that will not mean a firm has not complied with the Consumer Principle.
It is intended that this new principle will impose a higher standard on firms than existing principles addressing consumers (particularly principles 6 and 7). As such, where the new principle applies, principles 6 and 7 will not apply. Where the activity of the firm does not engage the consumer duty, these principles will remain relevant.
The Consumer Duty also applies at all levels of a firm’s business, from strategic planning to individual interactions. There will, therefore, be few, if any, parts of most firms’ business which will not be touched in some way by the new rules.
- Cross-cutting rules
Secondly, new cross-cutting rules will be enacted. These will require firms to:
Act in good faith towards retail customers;
Avoid causing foreseeable harm to retail customers; and
Enable and support retail customers to pursue their financial objectives.
Clearly what is required to satisfy each of these duties will vary depending on the firm’s role. For example, the FCA’s consultation notes that providers of advised or discretionary services will have more information about individual consumers’ objectives than providers of non-advised or execution-only services, and, as such, would need to act on that knowledge to satisfy the duty.
The third level of the consumer duty comes by way of new proposed outcomes with rules to support them. The four proposed outcomes capture:
Requirements for the governance of products and services to ensure fitness for purpose
Ensuring that the price for products and services represents fair value
A focus on consumer understanding throughout the customer journey
Providing a level of support which meets consumers’ needs
The proposed outcomes and rules are detailed, and also supported by non-binding guidance which is included within the FCA’s consultation.
The FCA has explained that in setting out its proposals, it has sought to set expectations which are flexible, so that they can be applied to new products, services and business models, as well as to firms of different sizes and approaches. The rules and guidance which the FCA proposes to implement are also designed to enhance firms’ consideration of vulnerable consumers and the differing needs of consumers in different circumstances.
Enforcement of the new duty
As mentioned, this is the second consultation from the FCA on the creation of a consumer duty. A number of questions were raised by respondents to the initial consultation, which the FCA has sought to address. One particular issue was whether the new consumer duty should be enforceable by way of a private right of action by individual consumers.
Following responses to its initial consultation, the FCA appears to have decided against such a step; deciding that existing redress mechanisms (predominantly the Financial Ombudsman Service) are most appropriate, together with the FCA’s own powers of enforcement.
To aid this, the FCA has clarified that it will work with the FOS to develop a common understanding of the Consumer Duty, to try and ensure consistent interpretation.
What does my business need to do?
The Consumer Duty is still subject to consultation, but it should be anticipated that rules along the lines of those proposed by the FCA will come into force in due course. These changes will, no doubt, have a sizable impact on many firms’ business. The FCA itself acknowledges that the potential implementation costs are likely to range between £688.6m and £2.4bn; plus ongoing direct costs of £74m to £176.2m per year across the body of regulated firms, and other indirect costs. Significant time is also likely to be required to implement these rules across firms’ businesses and products/services.
At the moment, there are three key dates for your diary:
- Anyone still wishing to contribute to the consultation should provide their comments to the FCA by 15 February 2022.
- Firms should be on the lookout for a revised Policy Statement with the final rules by the end of July 2022.
- It is expected that firms will have fully implemented the new requirements by 30 April 2023.
The specific rules proposed by the FCA will, if implemented in their current form, require firms to consider their customer books and existing product/service offerings to ensure they comply with the Consumer Duty. Clearly this will be a material undertaking for many firms. An implementation period to April 2023 means that firms will need to work quickly once the final rules are published to make sure they are ready in time.
Even after that, the extent of this new duty is going to depend on how the FCA approaches (non-)compliance. The FCA’s consultation is clear that the FCA sees this as a cultural shift in how firms approach consumers. There are therefore no proposals for specific reporting or metrics, but firms will need to be able to demonstrate to the FCA how they are meeting their obligations to consumers and monitoring consumer outcomes to ensure issues are addressed. Firms will also be expected to consider at board level (or equivalent) on at least an annual basis, whether it is acting to deliver good outcomes consistent with the Consumer Duty.
The FCA has acknowledged that implementation is likely to be iterative, and further guidance can be expected through the FCA’s usual channels. Firms would be well advised to monitor closely the FCA’s further pronouncements on this new duty as many of the requirements imposed are subjective and require firms to exercise their own judgment, which can make it difficult to gauge what is required or expected.
The Consumer Duty gives plenty for firms’ risk and compliance teams to think about across 2022 and beyond.