The Consumer Duty (Duty) is a regulatory initiative from the Financial Conduct Authority (FCA) which sets higher standards for consumer protection across the financial services sector. It represents a significant increase in the FCA’s expectations of FCA-regulated firms. The FCA has made clear that the Duty will be accompanied by a more assertive approach to supervision and enforcement.
The deadline for Boards to agree implementation plans in respect of the Duty is 31 October 2022. However, many firms will still have much work to do if they are to meet the remaining deadlines and ensure that they are fully compliant with their obligations under the Duty.
In this note, we answer four key questions:
- In essence, what is the Duty?
- Does the Duty apply to your firm?
- Isn’t the Duty just Treating Customer Fairly (TCF) repackaged?
- In practical terms, what should your firm be doing now?
In essence, what is the Duty?
The Duty consists of the following three principal components:
- a new Principle for Businesses (Principle 12 – The Consumer Principle);
- three cross-cutting rules; and
- four desired outcomes.
Where it applies, Principle 12 requires that “a firm must act to deliver good outcomes for retail customers”. Principle 12 reflects the overall standard of behaviour which the FCA expects firms to meet.
The cross-cutting rules have been designed to provide greater clarity regarding the FCA’s expectations under the Principle 12. The
cross-cutting rules require firms:
- to act in good faith;
- to avoid causing foreseeable harm; and
- to enable and support retail customers to pursue their financial objectives.
The four outcomes represent key elements of the firm-consumer relationship which are instrumental in helping to drive good outcomes for customers. It is these outcomes which will be the focus of the FCA’s assessment of firms’ compliance. The
outcomes relate to:
- the governance of products and services;
- price and value;
- consumer understanding; and
- consumer support.
The FCA has published detailed Finalised Guidance (FG22/5) which, inter alia, sets out examples of good and bad practice in relation to these outcomes.
Just as the Senior Managers and Certification Regime is, in part, about documenting good corporate governance, so an important element of the Duty is about documenting the ways in which good outcomes for retail customers are achieved.
Does the Duty apply to your firm?
In broad terms, the Duty applies to the regulated and ancillary activities of all firms which are authorised under:
- the Financial Services and Markets Act 2000;
- the Payment Services Regulations 2017; and
- the E-money Regulations 2011,
and which can have a material influence over various outcomes in relation to retail customers.
The exact definition of “retail customer” will vary depending on the given product/service but will be found in the relevant section of the FCA Handbook. In relation to investments, the Duty does not apply to customers who elect to be treated as professional clients under the FCA’s Conduct of Business Sourcebook (COBS) (although it does apply to the process a firm uses to opt-up a client). For payment service or e-money providers, the Duty applies to business conducted with consumers, micro-enterprises and small charities.
Within scope “ancillary activities” are unregulated activities in connection with, or held out for the purposes of, regulated activities, or in connection with the provision of payment services or the issuing of e-money.
The Duty applies to all firms that determine, or have a material influence over, retail customer outcomes across the distribution chain. This means that the Duty applies to firms that can determine, or influence material aspects of:
- the design or operation of retail products or services, including their price and value;
- the distribution of retail products or services;
- the preparation and approval of communications that are to be issued to retail customers; and/or
- the customer support provided to retail customers.
In consequence, a firm can be subject to the Duty even when it does not have a direct customer relationship with a retail client. While it may often be obvious that a particular firm can (or cannot) determine or have material influence over retail customer outcomes, the point may be more difficult to determine in complicated supply chains and could give rise to the need for co-manufacturers agreements outlining respective responsibilities. Taking a distribution chain in the payments sector as an example, the FCA suggests that the credit institution which safeguards funds for the relevant payments firm could itself be subject to the Duty.
The Duty will also apply in full to closed products and services. However, the products and services outcome does not apply in the same way as for new products and services. For example, as there would be no further sales, there are no requirements for firms to have a target market or distribution strategy for the product or service.
Various exclusions mean that the Duty will not apply in certain specified circumstances. These exclusions include, for instance, activities relating to insurance contracts of large risks for commercial customers or where the risk is located outside the UK.
Isn’t the Duty just TCF repackaged?
Some firms may be tempted to think that the Duty is simply a reheated version of existing requirements (ie TCF repackaged). This would be a mistake.
While many firms will already comply with similar requirements in the FCA Handbook (such as in COBS and in the Product Intervention and Product Governance Sourcebook), the FCA has been clear that it is using the Duty to set higher standards. This may be seen in the FCA’s discussion of the relationship between Principle 12 and Principles 6 and 7. The Code of Conduct individual rule 6 has also been amended to reflect the Duty.
Principles 6 and 7 do not apply where Principle 12 applies. However, in Finalised Guidance 22/5 Final non-Handbook Guidance for firms on the Consumer Duty, the FCA says that “Principle 12 imposes a higher and more exacting standard of conduct than Principles 6 and 7”. The FCA further says that “Principle 12 also has a broader application than Principles 6 and 7 in relation to a firm’s retail market business with a greater focus on consumer protection outcomes for retail customers, irrespective of whether they stand in a client relationship with the firm”.
Importantly the FCA adds that “where a firm is acting in accordance with guidance on Principles 6 and 7, this alone should not be relied upon in considering how to comply with Principle 12”. As such, firms should be in no doubt that the Duty represents the imposition of a higher standard, rather than the restating of an existing one.
In its Policy Statement 22/9: A new Consumer Duty Feedback to CP21/36 and final rules, the FCA has also signalled a more assertive approach to supervision which will include an emphasis on obtaining detailed information regarding firms’ plans for complying with the Duty. In relation to this, the FCA says “Under the Duty, firms will need to assess and evidence the extent to which and how they are acting to deliver good outcomes. Combined with our more data‑led approach, this should enable us to more quickly identify practices that negatively affect those outcomes and to intervene before practices become widespread”. Clearly, the FCA is focused on firms being able to evidence compliance.
In practical terms, what should your firm be doing now?
Agree implementation plans and prepare for the next deadlines
The deadline for Boards to agree implementation plans in respect of the Duty, and be able to evidence that they have “scrutinised and challenged” those plans, is 31 October 2022.
The next deadlines are as follows:
- 30 April 2023: manufacturers to have completed all the reviews necessary to meet the outcome rules for their existing open products and services so they can share with distributors to meet their obligations under the Duty, and identify where changes need to be made;
- 31 July 2023: implementation deadline for new and existing products or services that are open to sale or renewal; and
- 31 July 2024: implementation deadline for closed products or services.
Review the entirety of the service/product lifecycle
The FCA says that firms should “consistently consider the needs of their customers, and how they behave, at every stage of the product/service lifecycle”.
With this in mind, a firm should consider whether it is applying the same standard and effort to delivering good customer outcomes as it is to generating sales and revenue in comparable areas. This might mean assessing whether, for instance, the communications which focus on supporting customers are as clear as those which focus on selling the product. It might also mean asking whether the quality of post-sale support as good as the pre-sale support.
Particular care will be required in assessing the “value” of products and services as this will involve many, sometimes subjective, elements which go beyond just price. A documented rationale should be in place for a firm’s charging structure. Firms may need to go to additional lengths to justify differential pricing.
Firms should remember that the Duty applies when dealing with prospective as well as actual customers. Products and services must be designed to meet the target market’s needs, characteristics and objectives. Firms might also consider how they handle the process of declining to provide a product or service to a particular individual.
Many firms may be able to identify improvements which can be made to less commercially critical elements of the service/product, where such improvements could deliver better outcomes and demonstrate compliance.
Review the firm’s culture and operations (including in relation to outsourced functions)
The FCA says that firms should “ensure that the interests of their customers are central to their culture and purpose and embedded throughout the organisation”.
Firms should put customer interests at the heart of their business model and culture. Firms should also embed a focus on the delivery of good outcomes in each of their business functions. This ranges from high-level strategic planning to individual customer interactions, as well as product and service development, sales and servicing, distribution, support, and risk and control functions.
Firms will be aware that they remain responsible for regulatory compliance even where they outsource particular functions and
activities to third parties. The Duty should therefore be considered when selecting, and monitoring the performance of, third party service providers.
As above, many firms may be able to find areas for improvement which align with, or at least do not negatively impact, commercial objectives.
Establish a process for monitoring customer outcomes
The FCA says that firms should “monitor and regularly review the outcomes that their customers are experiencing in practice and take action to address any risks to good customer outcomes”. The Duty is firmly focussed on outcomes. Any policy for complying with the Duty should include a plan for careful monitoring of outcomes.
Firms should ensure both that they have effective systems for monitoring customer outcomes, and that these systems can provide the necessary data in relation to compliance with the Duty. This might include:
- analysis of customer retention records (such as claims and cancellation rates and details of why customers leave); and
- research into customer experiences (such as by mystery shopping, auditing customer journeys, focus groups, or working with consumer organisations to gain insight into the needs and experiences of consumers).
Each firm’s complaints assessment process should include consideration of the Duty. Handling of complaints should not be limited to addressing the symptoms; it should also include analysis of the causes. If a particular complaint suggests that the Duty is not being met, then that relevant information should be promptly escalated. Where issues are discovered, firms should look to correct them promptly.
More broadly, firms should regularly review regulatory developments, competitors’ approaches and the wider circumstances of its customer base. With regard to the latter point, firms may wish to consider, for instance, whether cost-of-living challenges should affect how products and services are sold.
Ensure Board engagement
The FCA says that firms should “ensure that their board or equivalent governing body takes full responsibility for ensuring that the Duty is properly embedded within the firm”.
The Duty should form a regular part of the Board’s discussions. The Board should ensure that it receives Duty-specific management information. This should include, inter alia, information about Duty-related initiatives across the firm, details or relevant complaints, training etc.
More particularly, the FCA’s expectation is that firms will appoint a “champion” at Board (or equivalent governing body) level who, along with the Chair and the CEO, will ensure that the Duty is being discussed regularly and raised in all relevant discussions. The champion should be an independent non-executive director, where possible.
Importantly, Boards should consider the Duty in broad terms and ensure that compliance does not degenerate into a “tick box” exercise. With that in mind, Board members should regularly ask themselves the “big picture” questions which the FCA suggests in the context of the Duty:
- “Am I treating my customers as I would expect to be treated in their circumstances?”; and
- “Are my customers getting the outcomes from my products and services that they would expect?”.
Record evidence of the firms’ compliance
Boards are supposed to have agreed their implementation plans by 31 October 2022. The FCA says that Boards should also “be able to evidence they have scrutinised and challenged the plans to ensure they are deliverable and robust to meet the new standards”. The FCA adds that firms “should expect to be asked to share implementation plans, board papers and minutes with supervisors and be challenged on their contents”.
As noted, above, the FCA will be taking a “a data-led approach” and there is a clear emphasis on the need for firms to be able to provide “evidence” of compliance.
One of the difficulties inherent in applying a concept as wide as the Duty on a cross-firm basis is that some of the relevant activity may go unrecorded. Firms would be well-advised to designate one person or team to be responsible for collecting and maintaining evidence of all Duty-related activity in the Firm. That person should regularly consider the questions which the FCA might be expected to ask and ensure that the firm has answers and evidence ready to go.
Given the breadth of the exercise and the likely amount of regulatory scrutiny, those individuals charged with leading preparations at their firm may wish to instruct external lawyers to assist with the preparation and/or testing of plans and Board presentations.
Please let us know if you would like to discuss your firm’s plans in respect of the Duty.