FCA launches its new Consumer Duty, with an initial milestone for firms in October 2022

What has happened?

In July 2022, the FCA confirmed in its publications PS 22/9 and FG 22/5 its plans to bring in a new Consumer Duty, which is intended to fundamentally improve how firms serve consumers. It aims to set higher and clearer standards of consumer protection across financial services and to require firms to put their customers’ needs first.

What are the key points of Consumer Duty?

The Duty is made up of an overarching consumer principle (Principle 12) that replaces Principles 6 and 7 where the Duty applies, and which requires firms to act to deliver good outcomes (relating to products and services being fit for purpose, price, and value, consumer understanding and consumer support) for retail customers, and the new rules firms will have to follow.

The cross‑cutting rules require firms to:

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

The FCA explains that these rules are intended to result in consumers receiving communications they can understand, products and services that meet their needs and offer fair value, and receiving the customer support they need when they need it.

The Duty will apply to all firms in the distribution chain (manufacturers and distributors) for products and services sold to customers (retail clients), including certain small and medium enterprises (SMEs), where those firms can influence material aspects of the design, target market or performance of a retail financial services product or service, even where they have no direct relationship with the retail customer.

FG 22/5 confirms that, unless there are regulatory requirements or contracts require it, firms are responsible and have liability only for their own activities and do not need to oversee the actions of other firms in the distribution chain. The Finalised Guidance sets out a proportionate approach to dealing with complex chains or if there are disagreements among firms in the chain.

The Duty will only apply to regulated activities and to unregulated activities which are ancillary to regulated activity. These are activities carried on in connection with a regulated activity or held out as being for the purposes of a regulated activity. It will apply to firms conducting regulated activities in the UK and to firms in Gibraltar selling into the UK and firms in the temporary permissions regime and financial services contract scheme following the UK’s withdrawal from the European Union.

The Duty is seen by the FCA as forming part of the FCA’s transformation to becoming a more assertive and data-led regulator. With firms assessing how they are meeting their customer’s needs, the FCA expects to be able to quickly identify practices that do not deliver the right outcomes for consumers and to take action before practices become entrenched as market norms.

The Duty will include requirements for firms to:

• end unfair charges and fees (firms will have to demonstrate that their exit charges are fair and reflective of their underlying costs for terminating a contract).
• make it as easy to switch or cancel products as it was to take them out in the first place,
• provide helpful and accessible customer support, ensuring that customers are not made to wait so long for an answer that they give up,
• provide timely and clear information that customers can understand about products and services so consumers can make good financial decisions, rather than burying key information in lengthy terms and conditions that few have the time to read,
• provide products and services that are right for their customers, and
• focus on the real and diverse needs of their customers, including those in vulnerable circumstances, at every stage and in each interaction

The FCA previously expected firms to implement the new rules by April 2023 at the latest. It is now giving firms twelve months to implement the new rules for all new and existing products and services that are currently on sale. The rules will be extended to closed book products twelve months later, to give firms more time to bring these older products, that are no longer on sale, up to the new standards. They will not have any retrospective effect.

The rules and guidance will come into force on a phased basis, as follows: 

• for new and existing products or services that are open to sale or renewal, they will come into force on 31 July 2023,
• for closed products or services, they will come into force on 31 July 2024

Policy Statement PS 22/9 sets out a clear expectation that:

• by the end of October 2022, firms’ boards (or the equivalent management body) should agree on implementation plans and maintain oversight of their delivery, to ensure the implementation work is sufficient to meet the Duty standards,
• firms should expect to be asked to share implementation plans, board papers, and minutes with supervisors and be challenged on their contents,
• manufacturers share key information with distributors three months ahead of the implementation deadline to enable all firms to comply in time,
• firms engage with the FCA if they are considering withdrawing any products or services due to the Duty, so that it can be identified whether there are any potentially significant impacts on consumers, and
• firms must alert the FCA if they believe that they will not be able to complete all work necessary to be compliant with the Duty before the implementation deadlines. The FCA expects firms to be compliant, but firms should also take a risk‑based approach and prioritise the implementation work that is likely to have the biggest impact on consumer outcomes (for instance, by reviewing the most complex or risky products and the most significant communications first)

In CP21/36, the FCA had set out its proposals for firms to monitor and regularly review the outcomes for their customers to ensure that they are consistent with the Duty, including whether any specific groups are getting worse outcomes. Also set out were

• the FCA’s expectation that a firm’s board or equivalent management body signs off an assessment of the firm’s monitoring and actions at least annually, and
• proposed changes to the Senior Managers and Certification Regime (SM&CR) rules to ensure clear accountability within firms (the SM&CR individual conduct rules in the Code of Conduct sourcebook (COCON) will reflect the higher standards of the Duty)

During the implementation period, the FCA will host a series of industry events (including regional events and webinars) to help firms prepare for the new rules. It will also monitor firms’ readiness and will feed back insights to the market. Once the Duty is in force, the FCA will use a range of tools to assess firms’ compliance and will also monitor how the market may change following the implementation of the rules.

The FCA is also proposing to undertake a post‑implementation review to understand how firms have implemented the Duty, whether it is having the intended effect and whether it is leading to any unintended consequences

Applicant firms will need to demonstrate that they could meet the standards of the Duty at the authorisation gateway. The FCA will only authorise firms that can demonstrate that they meet, and would continue to meet, these requirements. Firms will need to demonstrate how the Duty is embedded throughout their organisation.

How can we help you?

If you’d like to know more about how we can help you with your Consumer Duty or authorisation arrangements, or any other regulatory compliance issues, our specialist team is here to help.

Contact us today on 0207 436 0630 – or email info@thistleinitiatives.co.uk.