The FCA is consulting for a second time on its wide-ranging regulatory overhaul and evolution of outcomes-based regulation. In their further consultation and feedback to CP21/13, the regulator sets out a clearer picture of what the new proposed duty will look like.
Through the new duty, which has been reported as one of the biggest advancements for consumers in more than 20 years, the FCA aims to “set a higher standard of consumer protection in retail financial markets, where firms compete vigorously in the interests of consumers.”
The FCA also wants to “drive a healthy and successful financial services system in which firms can thrive and consumers can make informed choices about financial products and services,” as outlined in CP21/36: A new Consumer Duty: feedback to CP21/13 and further consultation.
What are the proposals aiming to do?
In short, the regulator wants firms to get it right in the first place. Consumers continue to suffer harm and they also report a lack of trust in the financial services industry.
The Consumer Duty aims to bring about a fairer, more consumer-focused and level playing field to the industry, which should result in less need for the FCA to intervene after things go wrong - reducing the extent to which consumers suffer harm.
In the FCA’s 2020 Financial Lives survey, only 10% of consumers ‘strongly agreed’ that they had confidence in the UK financial services industry with a further 32% ‘slightly agreeing’. Only 35% of respondents agreed that firms are honest and transparent in their dealing with them.
If the proposals go ahead, the regulator will be measuring whether consumers experience improvements across the following 4 outcomes:
products and services
The proposed Consumer Duty comprises a new principle, new rules and supporting guidance. The new Consumer Principle will replace Principles 6 and 7 for retail business and require firms to act to deliver good outcomes for retail customers. The new cross-cutting rules will set out how firms should act to deliver good outcomes and therefore provide greater clarity on how to meet the new Principle. The cross-cutting rules require firms to:
act in good faith
avoid foreseeable harm, and
enable and support retail customers to pursue their financial objectives
There will also be Rules relating to the 4 outcomes that the FCA wants to see under the Consumer Duty, which they believe are instrumental in helping to drive good outcomes for customers. These outcomes relate to:
the governance of products and services
price and value
consumer understanding, and
In brief, under these proposals, firms will have a duty to make sure their customers are receiving fair value and fair products, and that they understand how to use their products/services and receive the support they need to do so. Firms will also have to consider the needs of their customers – including those in vulnerable circumstances – and how they behave, at every stage of the product/service life cycle, extending their focus beyond ensuring narrow compliance with specific rules, to also focus on delivering good outcomes for customers.
The regulator states that the new rules will be backed up by assertive supervisory and enforcement action and that the Consumer Duty will be an integral part of their regulatory approach and mindset, from authorisation to supervision and enforcement.
Sheldon Mills, Executive Director of Consumers and Competition, at the FCA said: “…we expect firms to step up and put consumers at the heart of what they do and we’ll be holding senior managers accountable if they do not. The duty will also help create an environment for healthy competition between firms, encouraging them to be innovative in developing products and services that meet consumers’ needs.” Senior managers will need to ensure that they are producing good outcomes and that they have taken reasonable steps to meet the proposals.
What's in place now?
There are a range of measures already in place with the aim of delivering good consumer outcomes, for example, the Principles for Businesses, Conduct Rules, the 6 Treating Customers Fairly outcomes and the regulator’s approach to delivering healthy cultures, and diversity and inclusion in firms, to name a few.
The new Consumer Duty will build on these and the FCA’s previous interventions. And, whilst the FCA reports seeing a range of good practice by firms in retail sectors, they also see that firms are not consistently and sufficiently prioritising good consumer outcomes, resulting in consumer harm and a lack of consumer trust.
The findings reported in the Financial Lives survey, together with the consumer harm that the FCA continues to see, lead the regulator to conclude that retail financial services market does not always work well for all consumers. Hence the need for a higher standard of consumer protection which is also backed by Parliamentarians, who’ve also called strongly for change.
What are the key considerations for firms?
As reported by the FCA, for many firms, this will require a significant shift in both culture and behaviour. Firms will need to consistently focus on consumer outcomes and put customers in a position where they can make effective decisions. They will also need to assess the extent to which, and how, they are acting to deliver good outcomes both now, and in the future, across the 4 outcomes.
This will include the needs for the senior managers in firms to evidence these and the steps they have taken to meet the proposed requirements and cross-cutting rules.
The focus on pricing and value is particularly complex for example, but much can be taken from the FCA's recent work into GI values measures. Firms should revisit their product governance processes to incorporate pricing and value measures into product design and sign off processes.
Firms should also be prepared to demonstrate that they will be able to meet the new outcomes by considering key quantitative and qualitative metrics within organisations and also consider how such records are kept, in particular, with respect to digital and online records, to demonstrate compliance.
We would encourage firms to be prepared for closer scrutiny and challenge on these issues. The FCA expects to confirm the final rules by the end of July 2022.
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