On 7 December 2021 published its second Consumer Duty Consultation Paper, 243 pages detailing proposals for its new raft of culture change measures. In order to assess its changes to the SMCR regime, a brief background to the new Duty is in order. The package is structured pyramidal fashion beginning with:
- a new Consumer Principle– “”A firm must act to deliver good outcomes for retail clients”. The Principle will “drive the culture and conduct changes” desired by the FCA. The Regulator believes that this new Principle for Businesses 12 sets a higher standard than existing Principles 6[1] and 7[2], which it disapplies for in-scope firms.
- Cross-cutting Rules– the Consumer Principle is supported by three new Handbook rules, to be applied across all conduct areas:
- Act in good faith towards retail customers
- Avoid causing foreseeable harm to retail customers
- Enable and support retail customers to pursue their financial objectives
The FCA recognises that compliance with the third rule will depend on the firm’s role i.e. it would apply less to an execution-only firm
- Outcomes– the Consumer Principle and Cross-cutting Rules are further underpinned by 4 outcomes:
- Product and Service governance. Existing product governance rules to be extended across all retail products. As per existing PROD, rules will be applied according to role i.e. manufacturers and distributors.
- Price and value. Firms must offer “fair value” to consumers. Price and value should be considered at the design and distribution stages, and also on an ongoing basis. The FCA is not prescriptive as to fair value metrics, requiring firms to assess ”in the round”.
- Consumer understanding. The FCA expects firms to focus more on consumer outcomes and understanding throughout the customer journey. As well as ensuring that individual communications are fair, clear, and not misleading, firms will need to consider their overall approach to communicating information to ensure they enable customers to make effective, timely, and properly informed decisions. Communications should be monitored on an ongoing basis as to their suitability.
- Consumer support. An appropriate standard of support must be provided so that customers can use products as reasonably anticipated, and without unreasonable barriers including additional costs. This outcome is intended to be applied in conjunction with existing rules on complaint handling and guidance for vulnerable consumers.
Scope of the new Consumer Duty
The Consumer Duty will only apply to retail consumers (prospective or existing), but it will apply wherever they are affected; not as simple as it sounds, since there is no uniform definition of “retail client”. The FCA proposes to use existing Handbook definitions in line with a firm’s role i.e. a frim undertaking activities subject to the COBS sourcebook will use that definition of “professional client” to delineate “retail client”. Firms will only be responsible for their own activities in a distribution chain, except when they are working with other firm(s) in design, manufacture or distribution of a product, in which case there should be an agreement evidencing their mutual responsibilities. Application is therefore potentially quite wide-ranging, an investment bank with no retail customers may be materially involved in the design of a financial product or service which is sold by other parties to retail clients, in this case the Consumer Duty would bite (at least proportionately). The Duty will apply firm-wide, including unregulated ancillary activities. Essentially, all firms that have any material effect on a retail consumer’s outcome will have to consider the Duty.
Expectations
The FCA does not intend the Consumer Duty to override or replace the “general principle that consumers should take responsibility for their decisions or impose an open-ended duty”. It does expect the new Consumer Duty to effect a fundamental cultural change in firms’ approach to consumers. For its own part it intends the Duty to be a central element in all its Regulatory approach and processes. It does not require specific metrics, but will require evidence of monitoring, testing and adaptation to suitable outcomes. Examples given include an annual board-level report on Consumer Duty delivery assessing data such as: customer retention, fees and charges, behavioural insights, customer feedback etc. Perhaps underlining its centrality, the Regulator expects compliance costs to be “large” on both an initial and ongoing basis.
Enforcement
The new Consumer Duty does not create a new fiduciary duty and (for the time being) will not give rise to any private right of action. Its application will require a degree of subjective judgement by firms; however, the FCA expects such judgement to conform to the tortious reasonable expectation of: a) a prudent firm undertaking the same activity in relation to the same product or service and b) with the necessary understanding of the needs and characteristics of its customers. The Consumer Duty will inform the Regulator across all its activities and it will use “assertive supervision” to intervene where necessary.
Changes to the SMCR
The FCA intends to amend the SMCR Code of Conduct sourcebook (COCON), with the addition of a new rule requiring all conduct rules staff to “act to deliver good outcomes for retail customers”, where their firms’ activities fall within scope of the Consumer Duty. This would supersede the existing individual conduct Rule 4 (pay due regard to the interests of customers and treat them fairly).While this may seem a relatively small change to the existing SMCR, it effectively brings in the whole new Consumer Duty. It is intended to be an underlying consumer code of conduct which will be effected by the SMCR. It will therefore be fundamental to all SMCR obligations that affect consumers. The FCA clarifies that the extent of the Duty application will depend on the scope of a person’s role and their seniority. The Regulator anticipates that firms will need to provide training for the new rules, under the obligations consistent with their seniority.
Next Steps
This is the second consultation paper, comments on CP21/36 are requested by 15 February 2022, and the FCA plans to publish a Policy Statement with final rules by the end of July 2022. This paper is a detailed advance on the previous high-level proposals and can be fairly regarded as in “final-ish” form. Given its lack of prescription, the FCA acknowledges the need for more interpretive guidance, and so is consulting on 70 pages of non-Handbook assistance. Firms will be expected to have fully implemented the requirements by 30 April 2023. Firms are expected to use the implementation period to review products and services, and to demonstrate compliance progress in the interim period.
[1] A firm must pay due regard to the interests of its customers and treat them fairly“
[2] “A firm must pay due regard to the information needs of its clients and communicate information to them in a way which is clear, fair and not misleading“
