The FCA’s new Consumer Duty – A Summary
The FCA’s new “Consumer Duty”
Following two consultation papers issued in 2021 and the final guidance being published in July 2022, the Financial Conduct Authority (“FCA”) has published its non-handbook guidance (FG22/5[1]) and feedback (PS22/9[2]) for a new “Consumer Duty” (“the Duty”), which is contained within the FCA Handbook’s High-Level Standards, Principles for Businesses at PRIN 2A.[3]
The Duty came into force for new and existing products and services on 31/07/2023 and is set to come into force for closed products and services on 31/07/2024. Open relates to those products and services purchased after 31/07/2023 and contracts entered after 31/07/2023, whereas closed relates to all existing contracts with retail customers entered before 31/07/2023. Any products or services open for renewal on or after 31/07/2023 are deemed to be closed.
The aim of the Duty is to require a higher standard of customer care which means that consumers should be receiving communications they can understand, products and services that meet their needs and offer fair value, and any support needed is provided to consumers.
Who does it apply to?
The Duty applies to “all firms with a key role in delivering retail customer outcomes, including those with no direct customer relationship.”
The Duty applies to products and services that are provided by UK-authorised firms to retail customers who can be divided into four financial service categories:
- Investment Services: applies to business conducted with a “retail” client but does not extend to professional clients.
- Consumer Credit Businesses: applies to consumers served by authorised consumer credit businesses.
- Deposit-taking / Payment service and e-money providers: applies to products provided to consumers, micro-enterprises and small charities.
- Insurance business: applies when services are provided to individuals acting for purposes outside of their trade, business, or profession.
What does the Duty comprise of?
- The Consumer Principle
“A firm must act to deliver good outcomes for retail clients.”
This principle will become Principle 12 in the FCA’s Handbook[4] and where it applies will replace the existing Principles 6 (customers’ interest) and 7 (communications with clients).
The aim of this principle is to direct firms to play a greater and more positive role in delivering good outcomes for consumers and reflecting the overall standard that the FCA expects firms to adhere to.
Firms are to be responsible for ensuring consumers can make informed decisions. Firms are not required to go beyond what is reasonably expected given the nature of their role, the product or service, or the characteristics of a customer. It is not intended that consumers’ responsibilities for their actions are removed in their entirety.
The aim behind the principle is to place a new emphasis on consumer outcomes and firms’ obligations to be proactive in delivering those outcomes.
- The Cross-Cutting Rules
The rules provide greater clarity on the FCA’s expectations and aim to help firms interpret the required outcomes.
- Act in good faith towards retail customers – firms must act in good faith at all stages of the customer journey and during the whole lifecycle of the product.
- Avoid foreseeable harm – firms are to be proactive and take reactive steps to avoid causing harm to customers through their conduct, product, or services where it is in their control to do so.
- Enable and support retail customers to pursue their financial objective(s) – the FCA wants there to be a focus on putting consumers in a better position to make decisions in line with their needs and financial objectives.
- The Four Outcomes
These outcomes cover the key elements of the firm-customer relationship.
- Products and Services – these are to be designed to meet the needs, characteristics, and objectives of a specified target market.
- Price and Value – the products and services are to provide fair value with a reasonable relationship between the price consumers pay and the benefit they receive.
- Consumer Understanding – firms are to communicate in a way that supports consumer understanding and equips customers to make effective, timely and properly informed decisions.
- Consumer Support – support is to be provided that meet consumers’ needs throughout the lifetime of the product or service.
What does this mean for businesses?
For anyone subject to the Duty, the FCA expects firms to provide information and data to evidence their compliance by using Management Information (“MI”).
Management Information is data gathered and presented to support decision making. It involves the analysis of information to enable informed choices to be made and appropriate actions taken.
The FCA therefore expects firms to:
- Monitor and review the outcomes customers are experiencing.
- Identify sources of poor outcomes and harm.
- Act to better enable customers to achieve good outcomes, including making changes when necessary.
There is not one set of MI which is to be used for all participants, and firms themselves are to determine the most appropriate MI depending on the size and range of the firm, ensuring all products, services and customer types are covered.
Summary
The Duty requires a higher standard of customer care and is intended to improve the standard of care FCA-regulated firms are offering to consumers.
The FCA’s aim with the Duty is to ensure consumers receive communications they can understand, products and services meet their needs and offer fair value, and any support is provided if/when required.
[1] https://www.fca.org.uk/publication/finalised-guidance/fg22-5.pdf
[2] https://www.fca.org.uk/publication/policy/ps22-9.pdf
[3] https://www.handbook.fca.org.uk/handbook/PRIN/2A/?view=chapter
