On 7 December 2021, the FCA published its second consultation on a new Consumer Duty, with the aim of setting a higher expectation for the standard of care that firms give consumers. The Duty aligns with the FCA's work on and approach to vulnerable customers, as well as diversity and inclusion.
The FCA's first consultation on the Duty (CP21/13) was published in mid-May 2021 (see our article here) and set out the FCA's high-level proposals to deliver a higher level of consumer protection in retail markets. This second consultation sets out the FCA's proposals in more detail, focussing on positive consumer outcomes, delivering products and services that are fit for purpose and providing fair value to retail clients (alongside draft Handbook Rules and Guidance).
The FCA has historically addressed poor practices of bad actors through regulatory and supervisory tools. This new Duty is designed to achieve a fairer playing field at the outset, with firms putting customer interests at the heart of their businesses. While the FCA will supervise and enforce the Consumer Duty, there is an expectation (from the FCA) that there will be less need to intervene after things go wrong.
The Duty itself was borne out of a perceived need to minimise the level of consumer harm in retail markets. This was first discussed in the FCA's Discussion Paper on 'A duty of care and potential alternative approaches' (DP18/05) and its subsequent Feedback Statement (FS19/02), where the FCA set out potential options for implementation (including a new statutory duty of care and a new duty within the Principles for Businesses). The FCA has determined that a new outcomes-based Principle, rather than a specific duty of care, is the most appropriate way to advance their consumer protection objective. The detailed rules and guidance produced by the FCA are intended to assist firms understand the FCA's expectations.
In summary, the proposals for the new Duty include:
- A new Consumer Principle for retail business. 'A firm must act to deliver good outcomes for retail clients'. Both existing Principles 6 (Customers' Interests) and 7 (Communications with Clients) will be disapplied when this new Consumer Duty applies.
- Cross-cutting rules setting out how firms should act to deliver good outcomes. The cross-cutting rules require firms to (i) act in good faith towards retail customers, (ii) avoid foreseeable harm to retail customers, and (iii) enable and support retail customers to pursue their financial objectives.
- Rules relating to the four outcomes that the FCA wants to see under the Consumer Duty, relating to (i) the governance of products and services, (ii) price and value, (iii) consumer understanding, and (iv) consumer support (also relevant to this last strand is the FCA's work on operational resilience in the financial services sector).
The FCA expects the ultimate responsibility for monitoring and delivering good outcomes to sit with a firm’s board or equivalent management body. The Consumer Duty should be embedded within the firm's strategy in the same way, and receive the same level of attention as financial performance, risk and strategy. In this vein, the FCA is proposing to amend the SMCR individual conduct rules to reflect the Consumer Duty, further increasing the FCA's focus on individual accountability. Firms and managers should follow the development of the Consumer Duty carefully and ensure that they understand their responsibilities and obligations going forward.
The Consumer Duty will become a central part of the FCA's supervisory approach and integral to its processes. The FCA makes clear that this specifically includes in relation to enforcement, where it points out that protecting consumers is at the heart of its enforcement work. At least initially, the FCA has made clear that it plans to focus on tackling the most serious misconduct and intervening before harmful practices become entrenched as market norms. Supervision and enforcement activities will play a key role in highlighting those areas of bad behaviour which the FCA has identified as requiring reform. Where the FCA identifies serious misconduct by firms in relation to the Consumer Duty, it intends to use its full range of powers to tackle this.
The second consultation closes on 15 February 2022. The FCA expects to publish the policy statement summarising responses and to make any new rules by 31 July 2022. The FCA is proposing an implementation period starting after those final rules are published and ending on 30 April 2023. Given that the FCA wants to see a higher level of consumer protection in retail financial markets, regardless of the precise level of adoption of the proposed rules and guidance, it is not difficult to foresee a level of enforcement activity to help it achieve its aims.