The FCA’s Consumer Duty – the continued evolution of outcomes-based regulation

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We are all familiar with the concept of ‘Treating Customers Fairly’ or TCF – which has been a cornerstone of financial services regulation for over 15 years. The six outcomes, at the time, were a step change and combined with the Principles for Businesses, pivoted distinctly from previous rules-based regimes.

What is clear now with the new FCA proposal (CP21/13) is that the regulator believes its current principles are simply not working as effectively as they could to protect consumers. The regulator is now consulting with the industry ahead of looking to publish its second and final consultation paper in late 2021. But what does this mean for firms?

The final stop for outcomes-based regulation?

The new duty is a package of measures that consists of a new principle, rules, and guidance. There are three key elements which underpin the proposed duty, which are as follows:

1. The consumer principle: this is designed to improve overall standards of behaviour and the current wording which is under consultation is as follows: ‘a firm must act in the best interests of retail clients’ or ‘a firm must act to deliver good outcomes for retail clients’.

2. Evidencing specific behaviours: The regulator wishes to see three key behaviours from firms:

a. taking all reasonable steps to avoid foreseeable harm to customers

b. taking all reasonable steps to enable customers to pursue their financial objectives

c. and to act in good faith;

3. Focus on four outcomes: The duty is expected to set more detailed expectations around four specific outcomes: communications, products and services, customer service and price and value.

What can firms do to prepare?

Whilst some firms may already be meeting some or all of the expectations above, a key challenge for many firms ahead of any rules being finalised will be how to evidence the steps taken. The broad nature of the consumer principle alongside a requirement to evidence ‘reasonable steps’ aligned to decision-making will put further emphasis on the firm’s culture, governance (with a particular focus on product governance), management information, recording keeping and outcomes testing.

Firms now have a plethora of data at their fingertips. One major transition from the TCF era to today is the use of technology as part of the sales process. With the majority of retail transactions now taking place digitally, there will be an expectation that firms use available data to ensure their ‘digital conduct’ is providing good customer outcomes.

Is the consumer duty introducing price regulation by stealth?

A key concern for firms is the continued inclusion of ‘price and value’ terminology within the paper. Whilst the regulator is not a de-facto price regulator, based on the interventions we have seen within the insurance and consumer credit markets, firms should rightly expect that their business models will be scrutinised as part of the new consumer duty.

Price and value should be key determinants of any product governance framework. Key metrics that demonstrate pricing and value should be carefully considered – firms whose pricing models are predicated on fees/charges or exploiting customer inertia and vulnerability should think carefully about how they will meet the consumer principle.

What are the next steps?

Although the FCA’s initial consultation has now closed in relation to CP21-13, this is only the start of the journey for both the regulator and the industry. The regulator is currently reviewing its proposed text for any new rules and guidance to implement within a subsequent consultation.

The regulator expects to publish its second consultation by 31 December 2021 and will make any new rules by 31 July 2022.

The FCA has made the direction of travel explicit. Although the industry eagerly awaits further information in terms of detailed rules and guidance, firms are already starting to undertake a gap analysis of how they are likely to be impacted.

Read our latest whitepaper here for further information.

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