Putting consumer interests first

On 7 December 2021, the FCA published its second consultation paper (“CP”) on the proposed new consumer duty. Following an earlier consultation in May 2021, the CP responds to stakeholders' feedback and provides a fuller, more developed proposal of what the consumer duty will be and how it will be implemented.

Described by Martin Lewis, founder of MoneySavingExpert.com, as “the biggest change in financial services since 2000”, the consumer duty aims to put consumers and their interests at the heart of financial services. The FCA is pushing for firms to go beyond the current system of mere regulatory compliance, and take an active role in providing a fair and transparent service for consumers. The duty will be made up of three elements – a consumer principle, cross-cutting rules, and four overarching outcomes.

The consumer principle

First, the CP suggests that the consumer principle will replace two principles of the FCA Handbook, principle 6 (“A firm must pay due regard to the interests of its customers and treat them fairly”), and principle 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”), albeit with them remaining applicable to conduct that falls outside the scope of the duty, for example some wholesale business. The new principle, “a firm must act to deliver good outcomes for retail clients”, encapsulates the key message under the consumer duty – that firms must act to protect consumer interests.

Good outcomes may differ depending on the circumstances of each individual case, but the FCA proposes that the cross-cutting rules outlined below offer measures that firms should have regard to when acting in line with this principle. Although the FCA proposes to disapply principles 6 and 7, the CP suggests there is merit in retaining the Handbook and non-Handbook materials, as they will remain relevant. Indeed, a failure to act in accordance with existing guidance on principles 6 and 7 is likely to breach the consumer duty.

Cross-cutting rules

The cross-cutting rules address the imbalance of power that exists between a consumer and a financial services firm. The rules will not create a fiduciary duty where one does not already exist, but they should be adhered to and be considered throughout a consumer's journey.

Under the consumer duty, firms must:

(1) act in good faith toward retail customers;

(2) avoid foreseeable harm to retail customers; and

(3) enable and support retail customers to pursue their financial objectives.

The FCA recognises that not all potential harms are foreseeable, but it would like to encourage firms to regularly review their actions and products with this outcome in mind. It also recognises that financial objectives will vary and change, but firms must support customers with this through their specialist knowledge.

The four outcomes

The third element introduces four outcomes to be realised through the consumer duty:

(1) Products and services: all products and services should be designed with consumer interests in mind and must be fit for purpose.

(2) Price and value: services should be priced fairly and in proportion to their value.

(3) Consumer understanding: consumers should be provided with timely, clear information so they can make informed decisions about financial products and services.

(4) Consumer support: a level of support must be given that meets the consumer's needs throughout their relationship with the financial firm.

The CP goes into detail on each of the three elements of the duty, reflecting on feedback received from the previous consultation and asking for any further comments on the current proposals.

Scope

Importantly, the CP also sets out the proposed scope of the consumer duty. The duty will apply to retail customers only. Instead of having a one size fits all approach to defining “retail customer”, the FCA proposes that the scope of the duty will align with the existing scope of the FCA's sectoral guidance. For example, for insurance the consumer duty will follow the position in the Insurance Conduct of Business Sourcebook (ICOBS), and for mortgages, the consumer duty would follow the Mortgage Conduct of Business Sourcebook (MCOB).

The duty will only apply within the FCA's regulatory perimeter; however, it may be applied to unregulated activities which are ancillary to regulated activity. The duty will apply to high net worth individuals unless that status takes conduct outside the FCA's regulatory perimeter. Additionally, where parts of a supply chain are outside the UK, the FCA proposes to require UK distributors of non-UK products and services to take all reasonable steps to comply with the products and services outcome.

The duty will not apply retrospectively to past business. It is proposed to be forward-looking and will apply to future and existing products or services. Significantly, the CP concludes that it will not constitute a duty of care and it will not introduce a private right of action; however this will remain under review.

Firms are likely to be expected to monitor and review regularly the outcomes that their customers are experiencing, and it is proposed that firms' management boards must assess whether the products and services provided to consumers are in line with the duty, at least on an annual basis.

Implementation

At the moment, there are three key dates to be aware of in relation to the new duty:

• This second consultation closes on 15 February 2022.
• It is proposed that the new rules will be finalised by 31 July 2022.
• Firms will have until 30 April 2023 to fully implement the new duty. During this period, firms will be expected to demonstrate the steps they are taking towards full implementation.

Certainly, the proposals have the potential to strengthen and re-centre consumer protection and interests in the financial services industry – the measures have been praised for their ambitious and proactive direction. However, for the moment, the jury is out on whether they will result in as big a regulatory shift as has been suggested. Ultimately, this will depend on how the new duty is implemented by firms and enforced by the FCA.