FCA – A New Consumer Duty: Part 2

Friday 5 January 2024

The FCA has published a further consultation on its proposal to introduce a consumer duty for all firms including credit unions.

A consumer principle which stated that ‘A firm must act in the best interests of retail clients’ or ‘A firm must act to deliver good outcomes for retail clients’
Cross-cutting rules to make clear that the consumer principles requires firms to:
- Act in good faith
- take all reasonable steps to avoid foreseeable harm to consumers
- take all reasonable steps to enable consumers to pursue their financial objectives
Four outcomes which would build on the cross-cutting rules and consumer principle:
- Communications
- Products and services
- Customer service
- Price and value
A ‘private right of action‘ which would allow private individuals to sue firms for regulatory breaches.

ABCUL will respond to this consultation on our members’ behalf. We encourage members to get in touch to provide their feedback on the proposals by Friday 11 February 2022 by email at policy@abcul.org or by phone on 0161 832 3694 (option 2).

The second consultation

In this second consultation, the FCA puts forward how it will proceed with the Consumer Duty whilst consulting further on specific details of the proposals. A summary of how the Consumer Duty will work and the areas FCA seeks more feedback on is detailed below.

Scope

The FCA proposes that the Consumer Duty will include all retail business which includes all clients apart from professional clients and eligible counterparties. That is, the scope would not only include individual members but also SMEs. Only large corporate entitles, government bodies and eligible counterparties (defined here and broadly refers to other financial services firms) would be excluded from the Consumer Duty.

The precise definition of retail client will vary from sector to sector; credit unions should use this definition of retail client.

Application of the Consumer Duty through the distribution chain

Regulated firms that are involved in the distribution chain will also be subject to the Consumer Duty, even where they do not deal with the customer directly. An example the FCA gives for this is where an investment bank designs a product for sale to retail customers, even where that product is sold by another firm.

The Consumer Duty would take into account each firms role and would apply to the extent that a firm has a material influence over for example:

the design or operation of retail products or services, including their price and value
the distribution of retail products or services
preparing or approving communications that are to be issued to retail clients, or
direct contact with retail clients on behalf of another firm, such as firms involved in debt collection or mortgage administration

Unregulated activities

The Consumer Duty will only apply to activities within the FCA’s remit, however, unregulated activities that are ancillary to regulated activities will be caught. For example, product design is not a directly regulated activity but would be caught if carried out for the purposes of a regulated activity.

Unauthorised firms

Where activities are outsourced to unauthorised third parties, the firm would have responsibility to ensure that any risks are appropriately addressed and managed. In the case of a credit union outsourcing some of its IT to an unauthorised supplier the credit union would remain fully responsible for compliance. The unauthorised firm would not be subject to the Consumer Duty

Application to existing products and services

FCA states that the Consumer Duty will not be retrospective and apply to activities in the past. However, following an implementation period (30 April 2023) the Consumer Duty will apply to exist products and services which are either:

Still be sold to customers, or
Closed products or services that are not being sold or renewed

The FCA suggests that in order to comply, some firms will need to change the terms and conditions of some of their products and services during the implementation period. For products no longer being sold, the FCA will take into account whether the contracts are fixed term or an ongoing contract.

Firms will need to assess whether existing products are meeting the cross-cutting rules. For example, if any aspect of a product or service could lead to harm or frustrate customers pursuing their financial objectives then the FCA would expect firms to take ‘appropriate action to mitigate harm.

The mitigating action that would need to be taken would depend on the context, for example, a firm would provide greater flexibility on how customers can engage with the product or assist customers in switching to new products and services that do not have the same issues.

The Consumer Duty and Consumer Principle

Following the initial consultation the FCA has proceeded with their proposals for a Consumer Duty and has chose the wording of the new principle which is:

“A firm must act to deliver good outcomes for retail clients”

This will be subject to a objective reasonableness test. Firms will be judged against a standard that could be reasonably expected of a prudent firm:

carrying on the same activity in relation to the same product or service, and
with the necessary understanding of the needs and characteristics of its customers

ABCUL and other respondents expressed concern over the concept of ‘good outcomes’ which cannot be guaranteed even with the best intentions. The FCA clarifies that in the example situations of a borrower having their house repossessed or an consumer losing money on an investment it does not necessarily mean that a firm has not acted in line with the Consumer Principle.

The focus according to the FCA is on firms acting reasonably to deliver good outcomes. Neither the consumer principle nor the cross-cutting rules:

mean that consumers can or will be protected from all harm
impose an open-ended duty that goes beyond the firm’s ability
remove the principle of consumer responsibility

Fitting the Consumer Duty in with existing rules

The FCA also has the following principles which the Consumer Duty overlaps with considerably:

Principle 6: A firm must pay due regard to the interests of its customers and treat them fairly
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

The FCA has chosen to disapply Principles 6 and 7 where the Consumer Duty applies. Confusingly, for credit unions this will mean applying the Consumer Duty to individual members and some corporates within definition of retail client (discussed above) and Principles 6 and 7 for professional counterparties, the most common example for credit unions perhaps being local councils

The FCA considers that Consumer Principle imposes a higher standard of conduct than Principles 6 and 7 and that a breach of either principle would likely amount to a breach of the Consumer Duty.

FCA states that they may use the implementation period to review parts of the handbook that may need amendment in light of the Consumer Duty.

The cross-cutting rules

The FCA has decided to introduce the cross-cutting rules with some minor amendments. The cross-cutting rules at this stage are as follows:

act in good faith towards retail customers
avoid causing foreseeable harm to retail customers
enable and support retail customers to pursue their financial objectives

The second and third rules are slightly amended from the original consultation which required firms to ‘take all reasonable steps’ to follow the rules. This was changed on the basis that it would have created an overly burdensome and process driven standard.

Again, the FCA stresses that firms are not expected to protect customers from unforeseeable harm, all poor outcomes, or risks the customer reasonable understood and accepted.

The FCA states that the financial objective cross-cutting rule focuses on enabling consumers to make effective choices for themselves and ‘enjoy the use of the product and service they have purchased’.

The Outcomes

As part of the Consumer Duty Structure (pictured above) the FCA sets four outcomes i.e.

Products and services
Price and Value
Consumer understanding
Consumer Support

The products and services outcome

The FCA sets different requirements depending on their role in the distribution chain. Manufacturers are firms that create, develop, design, issue, operate or underwrite a product or service. Distributors are firms that offer sell, recommend, advise on, propose or provide or product or service. Most credit unions will likely fall into both categories depending on the product.

Manufacturer requirements:

develop an approval process for products or services
identify a target market for consumers for whose needs, characteristics and objectives the product or service is compatible
consider if there are any consumers with characteristics of vulnerability in the target market and take account of any additional or different needs of those consumers
test the product or service and ensure it is designed to meet the needs, characteristics and objectives of the target market
Select distribution channels that are appropriate for the target market and provide adequate information to distributors to enable them to understand the product or service and the target market
regularly review the product or service and its distribution, and take appropriate action to mitigate the situation if they identify circumstances that may adversely affect their customers

The FCA expects that firms apply these rules to any product or service before it is marketed or distributed to retail customers.

Distributor requirements:

develop distribution arrangements for each product or service distributed
get information from the manufacturer to understand the product or service, its target market and its intended distribution strategy, and
regularly review the distribution arrangements to ensure they are appropriate and, if they identify issues, takes appropriate action to mitigate the situation and prevent any further harm

Price and Value outcome

The FCA wants all consumers to receive fair value. The FCA will require manufacturers of products to consider the overall price and value of a product and this must include the consideration of at least:

the nature of the product or service, including the benefits that will be provided or that consumers may reasonably expect, and their quality.
any limitations that are part of the product/service
the expected total price customers will pay, and
any characteristics of vulnerability in the target market for the product or service

The consumer understanding outcome

FCA wishes to see firms communications support and enable consumers to make informed decisions about financial products and services. FCA wants consumers to be given the information they need, at the right time, and presented in a way they can understand.

The proposed FCA rules require firms to:

support retail consumer understanding so that their communications:
- meet the information needs of customers
- are likely to be understood by the average customer intended to receive the communication, and
- equip customers to make decisions that are effective, timely and properly informed
communicate information to retail customers in a way which is clear, fair and not misleading
tailor communications taking into account the characteristics of the retail customers intended to receive the communication (including any characteristics of vulnerability), the complexity of the product, the communication channel used, and the role of the firm
provide information to retail customers that is accurate, relevant and on a timely basis
tailor communications to meet the information needs of individual customers and check the customer understands the information, where appropriate, when a firm is interacting directly with a customer on a one-to-one basis, and
monitor, test and adapt communications to support understanding and good outcomes for retail customers

The consumer support outcome

The FCA wants firms to provide a level of support that meets consumers’ needs throughout their relationship with the firm. This means firms’ customer service should enable consumers to realise the benefits of the products and services they buy and ensure they are supported when they want to pursue their financial objective

Proposed requirements:

they provide an appropriate standard of support to retail customers such that is meets the needs of customers, including those with characteristics of vulnerability
retail customers can use products as reasonably anticipated
retail customers do not face unreasonable barriers (including unreasonable additional costs) when they want to pursue their financial objectives, and
regularly monitor whether they are providing an appropriate standard of support that meets the needs of – and does not disadvantage – retail customers, including those with characteristics of vulnerability

Consumers in vulnerable circumstances

The FCA expects firms to take account of the diverse needs of their customers. They should consider whether their actions are likely to disadvantage a customer or group of customers, whether this relates to:

- Customers that share protected characteristics under the Equality Act 2010
- discrimination under other anti-discrimination legislation
- the treatment of customers with characteristics, or in circumstances, which mean they are especially susceptible to harm, particularly when a firm is not acting with appropriate levels of care

It is not clear to what extent these rules advance on current vulnerability guidance. The FCA intends to provide further feedback and analysis in an upcoming consultation on advancing diversity and inclusion in the financial sector, due in Q2 2022.

A private right of action

In the previous consultation, a private right of action was proposed to enable individuals to take firms to court for breaches of regulatory requirements. ABCUL opposed this proposal and fortunately it has been dropped with the FCA accepting arguments that the Financial Ombudsman Service should be sufficient to deal with customer complaints.

The FCA believes that the Consumer Duty and some of the outcomes (such as customer support) strengthens the complaints process and will lead to considerable change, negating the need for a private right of action

Implementation timetable

In the original consultation, the FCA asked what a reasonable transition period to the Consumer Duty would be, considering the burden of other significant recent regulatory reforms such as SM&CR, vulnerability and dealing with the ongoing impact of Brexit.

The FCA has proposed that firms will have until 30 April 2023 to fully implement the Consumer Duty. This is the first time the FCA has put forward the full package of requirements and therefore we would be interested in your thoughts on the proposed implementation period.

The FCA does expect to engage with firms during the implementation period on the Consumer Duty to understand firms’ implementation plans and progress and answer questions and discuss issues. The FCA also expects to publish regular updates on its worth with firms and issue further guidance and case studies.

Monitoring and the FCA’s approach to the Consumer Duty

Under the Consumer Duty the FCA will expect firms to:

monitor and regularly review the outcomes that their customers are experiencing
ensure that the products and services they provide are delivering the outcomes that they expect in line with the Consumer Duty, and
Identify where they are leading to poor outcomes or harm to consumers

Through the monitoring of consumer outcomes, FCA also expects firms to

identify and manage any risks to good outcomes for consumers
spot where consumers are getting poor outcomes, and understand the root cause
have processes in place to adapt and change products/services or policies/practices to address any risks or issues as appropriate, and
to be able to demonstrate how they have identified and addressed issues leading to poor outcomes

The FCA does not intend to introduce specific metrics for firms to report on but they do expect that firms are able to demonstrate how they are monitoring outcomes for consumers.

Governance

FCA expects that the board will consider a report from the firm assessing whether it is acting to deliver good outcomes for its customers which are consistent with the Consumer Duty at least annually

Under the proposed rules the assessment should include:

the results of any monitoring that the firm has undertaken to assess whether their products and services are delivering the outcomes that they expected
new and emerging risks to good outcomes for consumers
Any evidence of consumers or groups of consumers who are not achieving good outcomes and an evaluation of the impact and the root cause
any evidence of consumers or groups of consumers who have characteristics of vulnerability and are not achieving good outcomes
actions taken to address any risks or issues, and
whether the firm’s future business strategy is consistent with it acting to deliver good outcomes under the Consumer Duty

The FCA states that firm should produce and review management information on consumer outcomes. This should be appropriate to the nature, scale and complexity of the business.

Whilst the FCA does not propose to require firms to regularly report information to the FCA on the Consumer Duty it nevertheless suggests types of data that firms may want to collect:

Analysis of customer retention records
Behavioural insights
Training and competence records
Customer file reviews
Customer feedback
Number of complaints and complaints analysis
Outcome reviews
Compliance reports
Testing customer experiences
Staff feedback
Policy & process reviews

FCA supervision

The FCA state that the Consumer Duty would be central and integral part of their regulatory toolkit and supervisory approach. As you might expect the FCA will:

Require firms that are applying for authorisation to demonstrate that they can meet the expectations of the Consumer Duty
Carry out firm and portfolio assessment models.
Challenge firms to demonstrate how their business model, actions, and culture are delivering good consumer outcomes
Carry out multi-firm and/or thematic work to understand how firms are embedding the Consumer Duty into their day-to-day activities
Where serious misconduct is identified, investigate and take action against firms.

Senior Managers’ Regime

The FCA proposes to amend the Senior Managers’ Regime conduct rules to reflect the higher standard of conduct by adding a new rule requiring all conduct rules staff within firms to ‘act to deliver good outcomes for retail customers’ where their firms’ activities fall within scope of the Consumer Duty

The new conduct rule would contain the following obligations for all staff:

act in good faith towards retail customers
avoid foreseeable harm to retail customers, and
enable and support retail customers to pursue their financial objectives

Summary

The Consumer Duty is arguably the largest change in regulatory requirements since FCA’s inception, particularly for member facing firms such as credit unions. There is strong political will to introduce the Consumer Duty along with strong support from consumer groups to the original consultation.

Whilst the introduction of the Consumer seems inevitable at this time there are more detailed questions for which the FCA is still requesting feedback. We would encourage our members to feedback on issues such as the scope, the transition period and the burden that some of the more prescriptive requirements of the Consumer Duty would place on you. Below is a list of the FCA’s questions

ABCUL – December 2021

List of questions

Do you have any comments on the proposed scope of the Consumer Duty?
Do you have any comments on the proposed application of the Consumer Duty through the distribution chain and on the related draft rules and non-Handbook guidance?
Do you have any comments on the proposed application of the Consumer Duty to existing products and services, and on the related draft rules and non-Handbook Guidance?
Are there any obstacles that would prevent firms from following our proposed approach to applying the Consumer Duty to existing products and services
Do you have any comments on the proposed Consumer Principle and the related draft rules and non-Handbook guidance?
Do you agree with our proposal to disapply Principles 6 & 7 where the Consumer Duty applies?
Do you agree with our proposal to retail Handbook and non-Handbook material related to Principles 6 and 7 should remain relevant to firms considering their obligations under the Consumer Duty?
Do you have any comments on our proposed cross-cutting rules and the related draft rules and non-Handbook guidance?
Do you have any comments on our proposed requirements under the products and services outcome?
Do you have any comments on our proposed requirements under the price and value outcome?
Do you have any comments on our proposed requirements under the consumer support
Do you have any comments on our proposed requirements under the consumer understanding outcome?
Do you think he draft rules and related non-Handbook guidance do enough to ensure firms consider the diverse needs of consumers?
Do you agree with our proposal not to attach a private right of action to any aspects of the Consumer Duty at this time?
Do you have any comments on our proposed implementation timetable?
Do you have any comments on our proposed approach to monitoring the Consumer Duty and the related draft rules and non-Handbook guidance?
Do you have any comments on our proposal to amend the individual conduct rules?
Do you have any other comments?