Publication alert: FCA - A new Consumer Duty
We communicate that the Financial Conduct Authority (FCA) has published the following documents:
- Policy Statement (PS) 22/9A: Feedback to CP21/36 and final rules
- Finalised Guidance (FG22/5): Final non-Handbook Guidance for firms on the Consumer Duty
1. Context
In 2018 the FCA disclosed a discussion paper (DP18/5) which discussed stakeholders’ concerns that the regulatory framework may not be adequate to tackle the level of consumer harm in retail markets. Later, the FCA published the subsequent feedback statement (FS19/2), setting out the intention to take forward specific options for change. Finally, on May 2021 the FCA released the first Consultation Paper (CP21/13) on a A new Consumer Duty and in December 2021, the FCA consulted on the final proposals for the Duty, including draft rules and guidance (CP21/36).
In this context, the FCA has published the Policy Statement (PS) which presents the feedback to CP21/36 alongside the final rules (named Consumer Duty Instrumet 2022). The rules set higher and clearer standards of consumer protection across financial services and require firms to put their customers’ needs first and to evidence whether this outcome is being met. Additionally, the FCA has published the Finalised Guidance (FG) which contains the non-Handbook guidance for firms on the Consumer Duty which provides further instructions to firms on how they should comply with their obligations including examples of how specific elements of the Duty would work in practice across different retail markets. The analysis below focuses on the general rules set in the PS.
2. Main points
Scope of application.
The Duty applies to the regulated activities and ancillary activities of all firms authorised under the Financial Services and Markets Act 2000 (FSMA), the Payment Services Regulations 2017 (PSRs) and E-money Regulations 2011 (EMRs), in respect of products and services for prospective and actual retail customers.
The Duty does not have a retrospective effect and does not apply to past actions by firms. However, the Duty does apply, on a forward-looking basis, to:
- existing products and services. these are products and services still on sale to new customers or available for renewal by existing customers.
- closed book products and services. these are products and services that are no longer on sale to new customers or available for renewal by existing customers.
New Consumer Principle. The FCA has introduced a new consumer principle (Principle 12) which requires firms to act to deliver good outcomes for retail customers. It sets a higher standard than both existing principles 6 and 7. Principle 12 imposes obligations on firms towards customers of products and services, irrespective of whether the customer is a direct client of the firm.
Cross‑cutting rules. The new cross-cutting rules set out how firms should act to deliver good outcomes for retail customers. These cross‑cutting rules require firms to: i) act in good faith; ii) avoid causing foreseeable harm and iii) enable and support retail customers to pursue their financial objectives.
Four outcomes. FCA has introduced four expected outcomes under the application of the Duty. These are a suite of rules and guidance setting more detailed expectations for firm conduct in four areas that represent key elements of the firm‑consumer relationship, which are instrumental in helping to drive good outcomes for customers. These outcomes relate to: i) products and services; ii) price and value; iii) consumer understanding and iv) consumer support.
Culture, governance and accountability. The rules require firms to ensure their strategies, governance, leadership, and people policies (including incentives at all levels) lead to good outcomes for customers. The rules also make clear that FCA expects customer outcomes to be a key lens for important areas, such as Risk and Internal Audit. This should be supported by individual accountability and personal conduct resulting from the Senior Managers & Certification Regime (SM&CR) rules:
- In this regard, the FCA has introduced minor changes to the individual conduct rule (rule 6) in order to reflect the higher standard of the Duty, and the behaviour expected of all conduct staff.
Monitoring outcomes. A key part of the Duty is that firms assess, test, understand and are able to evidence the outcomes their customers are receiving. The general obligations set are:
- Monitor and regularly review the outcomes their customers are experiencing to ensure that the products and services that firms provide are delivering outcomes consistent with the Duty.
- Identify where customers or groups of customers are not getting good outcomes and understand why.
- Have processes in place to adapt and change products and services, or policies and practices, to address any risks or issues identified and stop it occurring again in the future.
A firm’s governing body should review and approve the firm’s assessment of whether it is delivering good outcomes for its customers which are consistent with the Duty and agree any action required, at least annually.
3. Next steps
The rules and guidance introduced come into force on a phased basis:
- for new and existing products or services that are open to sale or renewal the rules come into force on 31 July 2023.
- for closed products or services, the rules come into force on 31 July 2024.
The FCA has set out its expectation and a roadmap for how firms will use this implementation period to effectively embed the Duty:
- By the end of October 2022, firms’ boards (or equivalent management body) should have agreed their implementation plans and be able to evidence they have scrutinised and challenged the plans to ensure they are deliverable and robust to meet the new standards.
- Manufactures of products and services should aim to complete all the reviews necessary to meet the four outcome rules for their existing open products and services by the end of April 2023.