The FCA has published a package of proposals to extend the duties owed by firms who provide services to retail clients.
The regulator has said that the new “Consumer Duty”, will require a significant shift in culture and behaviour for many firms, to enable them to consistently focus on consumer outcomes, and put customers in a position where they can act and make decisions in their interests.
In this briefing we set out the background to the proposal, set out in CP 21/13, and provide an outline of the expected new rules. We also consider what these new measures will mean for retail firms.
Who will the Consumer Duty apply to?
These new rules will be applicable to all regulated firms which provide services to retail clients, including authorised firms with part 4A permissions, as well as electronic money institutions, payment institutions and registered account information service providers.
What is the Consumer Duty?
The proposed Consumer Duty will take the form of additional rules and guidance in the FCA handbook. It will have the following three elements:
1. A new Consumer Principle in PRIN which reflects the overall standards of behaviour the FCA expects from firms servicing retail clients.
The FCA is consulting on the wording of this new principle. It has set out two options in the consultation paper and is asking stakeholders to comment on this. Currently the options being considered are: "A firm must act to deliver good outcomes for retail clients" or "A firm must act in the best interests of retail clients".
The FCA is clear that the first option, which places an emphasis on ensuring good outcomes, will represent an extended regulatory duty when compared with firms’ existing duties under Principle 6 which requires firms to pay due regard to the interests of its customers and treat them fairly.
The second option may not seem like a huge change for firms providing investment services, insurance or mortgages to retail clients, as these firms have long been subject to act in accordance with the best interests of their clients, pursuant to rules in COBS, ICOBS and MCOB. However, the FCA has suggested phrasing the new consumer principle in this way would place additional emphasis on these rules. It would also extend the duty to other firms operating in retail markets.
2. Cross cutting rules
Also contained within PRIN, which will provide detail as to the FCA’s expectations. These rules will not be limited by the sector / types of regulated activity that an authorised firm engages in. They are intended to “develop and amplify” the standards of conduct that the FCA expects under the new Consumer Principle.
The proposed cross-cutting rules will require three key behaviours from firms, including:
- Taking all reasonable steps to avoid causing foreseeable harm to customers.
- Taking all reasonable steps to enable customers to pursue their financial objectives.
- To act in good faith.
3. The Four Outcomes
In addition, the FCA is proposing a new suite of rules and guidance for the Consumer Duty which it has termed "The Four Outcomes". The FCA intends these outcomes to represent the key elements of the firm-consumer relationship: including how firms design, sell and service products and services, and the key contact points along the customer journey. The Four Outcomes are grouped in the following areas, and the consultation paper contains detailed guidance on each area.
- Communications – these should equip consumers to make effective, timely and properly informed decisions about financial products and services.
- Products and services – these should be specifically designed to meet the needs of consumers, and sold to those whose needs they meet.
- Customer service – this must meet the needs of consumers, enabling them to realise the benefits of products and services and act in their interests without undue hindrance.
- Price and value – the price of products and services represents fair value for consumers.
What is the background to these proposals?
The question of whether firms should have a an explicit "duty of care" towards retail clients has been in discussion for a number of years. In July 2018 the FCA set out initial points for consideration in DP18/05. This was then followed up in April 2019 by feedback statement FS19/02. Most respondents considered that change was needed to better protect consumers, but opinions varied widely on options for change. These new proposals represent the next stage in the FCA’s thinking and takes into account previous feedback, as well as the debate in Parliament during the passage of the Financial Services Act 2021 about a duty of care and the level of care firms provide consumers.
The FCA has indicated that the proposals will enable it to tackle the way that some firms use consumers’ behavioural biases and so-called “sludge practices” to prevent consumers from making decisions in their interests. “Sludge practices” are those which introduce an excessive friction that hinders consumers from making such decisions. For example, not clearly signposting product cancellation rights or making it harder for consumers to switch.
The FCA has said that the proposals aim to require firms to act in good faith, to avoid causing harm, to empower consumers by placing them in a position where they are able to make effective decisions, so that consumers can take responsibility for their actions and decisions.
What will this mean for firms?
In essence, the FCA has said it wants firms to be putting themselves in their customers shoes at every point in the customer journey and asking "would I be happy to be treated in the way I treat my customers?".
At the heart of the Consumer Duty there is a requirement for firms to ask themselves what outcomes consumers should be able to expect from their products and services. Firms must then act to enable rather than hinder these outcomes and must also continually assess the effectiveness of their actions.
Whilst this is a significant shift in regulatory tone, the FCA points out that it is looking to embed a concept of "reasonableness" into the Consumer Duty. It plans to apply "reasonableness" to all elements of the Consumer Duty, including the Consumer Principle and it intends to set out factors to influence what would be a reasonable expectation of firms under the Consumer Duty. Put simply: where a product or service is higher risk or more complex, firms can reasonably be expected to take additional care to ensure consumers needs are being met.
The FCA has commented that, in future, it would be more likely to make use of the Consumer Duty, and its more developed rules, in preference to existing Principles 6 and 7. As part of the consultation it has asked firms whether Principle 6 (customers’ interests) and Principle 7 (communication with clients) should be disapplied where a firm is subject to the Consumer Duty. There is much existing Handbook and non-Handbook guidance on Principles 6 and 7, a lot of which would be relevant for conduct within the scope of the Consumer Duty. The status and applicability of this guidance to the new Consumer Duty could be unclear. Firms are being asked to comment on their preferred approach.
The Consumer Duty is intended to sit hand-in-hand with other recent FCA work. In particular, further to the FCA’s recent finalised guidance on the fair treatment of vulnerable customers. The new proposals make explicit reference to the need for firms to provide an additional level of care to ensure the needs of vulnerable clients are being met. In addition, the "Products and Services" outcome links in with the work undertaken in the recent MiFID II product governance review: both will be relevant for providers designing products and services for the retail market.
Will the Private Right of Action be extended?
For many of the FCA’s rules, individuals can bring a private action where a firm’s breach of a rule causes them loss. This is known as the Private Right of Action. However, this does not currently apply to the FCA Principles for Businesses.
As part of this consultation, the FCA is asking whether the Private Right of Action should be extended to all the Principles, including the new Consumer Principle. The FCA has not confirmed whether they will seek to extend the Private Right of Action but they have indicated that this may be added in the second consultation paper.
What are the next steps for the Consumer Duty?
The FCA is inviting feedback from all stakeholders. The window for comments will close on 31 July 2021. Following this, the FCA will aim to publish a second consultation paper, including draft rules, by the end of the year. The FCA anticipates that the new rules will be in force by 31 July 2022.
If you require further information about anything covered in this briefing, please contact Grania Baird, Jessica Reed, or your usual contact at the firm on +44 (0)20 3375 7000.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, May 2021