The FCA's proposed new 'Consumer Duty' – what does it mean?

The FCA has published its long-awaited consultation on 'duty of care' which has morphed into a proposed package of measures intended to deliver better outcomes for consumers – together a new 'Consumer Duty'.

The consultation, which is open until 31 July 2021, proposes:

• a new Consumer Principle that provides an overarching standard of conduct; and
• a set of Cross‑cutting Rules and four Outcomes that support the Consumer Principle.

The proposals apply to regulated products and services sold to 'retail clients' which would include SMEs.

The case for change

In the Consultation Paper, the FCA acknowledges that many firms are already delivering the right outcomes for consumers but highlights the following poor practices:

• firms providing information which is misleadingly presented or difficult for consumers to understand, hindering their ability to properly assess products/ services;
• products and services that are not fit for purpose in delivering the benefits that consumers reasonably expect, or are not appropriate for the consumers they are being targeted at and sold to;
• products and services that do not represent fair value, where the benefits consumers receive are not reasonable relative to the price they pay;
• poor customer service that hinders consumers from taking timely action to manage their financial affairs and making use of products and services, or increases their costs in doing so; and
• other practices which hinder consumers’ ability to act, or which exploit information asymmetries, consumer inertia, behavioural biases or vulnerabilities.

It is clear that the case for change is driven by consumer behaviour and biases and the FCA's increased knowledge and experience in this field, not just as a result of deliberate poor conduct by retail firms.

The proposed changes

Consumer Principle

In the Consultation Paper, the FCA says that it wants the Consumer Principle to set a higher standard than the existing requirement of Principle 6 for a firm to ‘pay due regard to the interests of its customers and treat them fairly’.

The FCA sets out two options:

Option 1: ‘A firm must act to deliver good outcomes for retail clients’

Option 2: ‘A firm must act in the best interests of retail clients’

Option 1 aligns with the focus on outcomes and the impact of firms' actions on consumers.  The 'best interests' concept in Option 2 is one that already exists in the FCA's rules in relation to a number of products.  The FCA specifically says that, consistent with how it is used in the Handbook already, there would not be an intention for this Option 2 to give rise to a fiduciary relationship.

Cross-cutting Rules

A set of cross‑cutting Handbook rules and guidance are proposed to develop and amplify the standards of conduct expected under the Consumer Principle. These Rules would require three key behaviours from firms, requiring them to:

• Take all reasonable steps to avoid causing foreseeable harm to customers.
• Take all reasonable steps to enable customers to pursue their financial objectives.
• Act in good faith

The Four Outcomes

The FCA proposes to set expectations for each of Four Outcomes (Communications; Products and Services; Customer Service; and Price and Value, which are said to represent the key elements of the firm-customer relationship) in a suite of rules and guidance. The expectations are intended to build on the Consumer Principle and the Cross‑cutting Rules.

At a high level, the proposed expected outcomes are as follows:

What does all this mean for firms?

The Paper says that, for many firms, these changes will require 'a significant shift in culture and behaviour, where they consistently focus on consumer outcomes, and put customers in a position where they can act and make decisions in their interests.'

In our experience, most firms already strive to ensure they are meeting the expectations of the Regulator, through careful application of Principle 6 (TCF), the FCA's existing TCF Outcomes (some of which are similar to the Four Outcomes) and the other Principles for Businesses.   It is commonplace for firms and their senior management to ask themselves 'should we', not just 'can we'.  In that regard, they are already putting themselves, as the FCA puts it, in their customers' shoes.

Nonetheless, there are 3 areas that will merit careful consideration:

1. The application of the Rules and Four Outcomes

The FCA acknowledges that firms will, in many cases, 'need to exercise more judgement in determining how their behaviours, policies and processes act' in achieving the outcomes.

The cross cutting rules in particular put onus on firms, for example, to have identified foreseeable harm in order to take reasonable steps to avoid it – this will require a clear understanding of customers' behavioural biases and then monitoring what happens in practice. Firms will need to understand what the FCA's expectations are around 'reasonableness' in order to decide what practical steps to take.

2. Fair value

This is an extension of existing work by the FCA on fair value, such as looking at 'price discrimination' and 'inertia pricing', which the FCA has identified disadvantages some consumers significantly, and has led to interventions on pricing in some markets.

Accordingly the FCA has included ‘price and value’ as a separate outcome because it wants to stress the importance of price in determining whether a product or service is fit for purpose and offers fair value.

This means firms will need to be able to demonstrate that the benefits of their products and services are reasonable relative to their price.  In practice, this will require firms (and responsible senior management) to carefully document price assessments so that they could demonstrate to the FCA why they considered the price reasonable relative to the benefits of the product or service. Such assessments would take place at the design stage, but also need to be refreshed as a result of ongoing monitoring.

3. Testing

Firms will need to be able to demonstrate that they have complied with the Consumer Principle and the cross cutting rules through continual self-assessment. However, the self-assessment and testing will need to extend beyond ensuring narrow compliance with the specific principles and rules, as the FCA wants firms to also focus on delivering good outcomes for consumers.

In this regard, firms would need to monitor, test and (where necessary) adapt their practices and processes on an ongoing basis, to satisfy themselves that they are delivering the expected outcomes. Firms would need to be in a position to provide information and data to the FCA, to evidence the outcomes of their monitoring and testing activity.

Related issues

Private right of action

The FCA wants the consultation to focus on its proposals for the Consumer Duty, and ensure that they would deliver the right outcomes for consumers. As such, the FCA has not made any specific proposals on a private right of action. It has, however, said that it would welcome stakeholders’ further views on how a private right of action could support or hinder the success of the proposals and their intended impact on firms, consumers and markets.

It is good to see that a private right of action for Principles breaches is not the focus of the Consultation Paper. In this regard, it is questionable whether a private right of action for Principles breaches would be of real benefit to consumers who already have access to the Financial Ombudsman Service (FOS), which is better suited to dealing with claims from a speed and cost perspective.

Protecting vulnerable consumers

Protecting vulnerable consumers is a key focus for the FCA and there is a continued focus on protecting vulnerable consumers in the Consultation Paper. The FCA highlights that firms should take additional care to ensure vulnerable consumers achieve outcomes that are as good as those of other consumers. This reflects the FCA's recently published guidance on the fair treatment of vulnerable consumers (our podcast on FCA's vulnerability guidance can be found here).

Summary

The proposals from the FCA will add to the range of regulatory tools to address the poor customer outcomes it has identified in retail markets.

They would therefore give the FCA a greater ability to hold firms and senior management to account if poor outcomes are identified in the future. In turn, this would place an emphasis on firms demonstrating the reasonable steps taken to comply with the proposed Consumer Principle in their interaction with retail customers.

Although this would create a further burden on firms, there would also be greater clarity for them on the FCA's expectations of the outcomes that should be achieved. In addition, it is not proposed that the new Principle or any associated rules would apply retrospectively.

This greater clarity for firms is reflected in the FCA's focus on them 'getting it right in the first place'. Such an outcome would clearly be beneficial for customers, but it would also benefit firms if there were fewer interventions in markets and less need to remediate poor outcomes.

That said, it will be interesting to see the cost benefit analysis in the next stage of the consultation. In particular, the FCA has asked for responses to 'what unintended consequences might arise from the introduction of a Consumer Duty?' Such unintended consequences could include a smaller range of products for customers (for example, if some could not represent 'fair value' for a sufficient number of customers) or higher upfront costs for certain products or service (which would be clearer for customers, but may mean some end up paying more).

At this stage the FCA is not consulting on the drafting of new rules, other than the wording of the  Consumer Principle. There will be a further consultation paper due by the end of December 2021; in this consultation, the FCA will consult on the drafting of new rules, with a view to these being in place by 31 July 2022.

Given the FCA first consulted on a potential new duty of care in July 2018, it is good to now have greater clarity of the likely direction of travel on this subject. In particular, the likely wider use of outcomes to assess conduct and practices in the retail market, which had been foreshadowed in FCA's speeches, including Charles Randell's 'Outcomes-focussed regulation: a measure of success?' and the FCA's Transformation Programme.