The FCA published a consultation paper on 14/05/2021 wherein it proposes to introduce ‘higher levels of consumer protection’ for firms whose regulated products or services are sold to ‘retail clients’ the FCA define this as all clients other than ‘professional clients’ who are large corporate entities and government bodies, this means SMEs are included within the Consumer Duty rules. The most significant proposal within this consultation includes the FCA seeking to implement an established duty of care between retail clients and regulated firms.

The duty of care comes with the expectation that many firms will need to shift their culture and behaviour, focusing on consumer outcomes and making decisions in their interests. Throughout the FCA’s consultation paper and within this article customer and consumer are considered as retail clients.

What is the Consumer Duty?                               

The Consumer Duty refers to the package of proposals within the consultation paper which includes the Consumer Principle, Overarching Cross-cutting Rules, and the Four Outcomes. While the FCA is consulting on the precise meaning of the Consumer Principle, the proposals suggest it will be a Consumer Principle of equal significance to the existing principles of business (PRIN). Unlike the current principles (which apply to all regulated firms), this new principle will only apply to firms who engage with retail clients. The Cross-cutting Rules and the Four Outcomes are derived from the Consumer Principle and guide firms to be compliant with the principle.

A new principle

The principle has been narrowed to two potential definitions; Option 1: ‘A firm must act to deliver good outcomes for retail clients’ or Option 2: ‘A firm must act in the best interests of retail clients’. Within the consultation, the FCA seeks input from firms to establish which definition best encapsulates the new concept of the Consumer Principle. The FCA is open to further definitions but is seeking feedback on the two definitions outlined within the consultation.

The FCA has proposed to include this new rule as part of PRIN. The new principle will hold firms to greater account to ensure good customer outcomes. Within the consultation paper, the FCA encourages firms to question, ‘Am I treating my customers as I would expect to be treated?’ and ‘Are my customers getting the outcomes from my products and services that I would expect to be treated?’ The FCA is calling firms to place themselves in the position of the consumer, considering the outcomes they would reasonably expect themselves when engaging with a regulated firm.

The introduction of this proposed principle does question how it would fit amongst existing principles. PRIN 6 Treating Customer’s Fairly and PRIN 7 communications must be clear, fair, and not misleading do imply significant crossover with the proposed Consumer Principle. The FCA acknowledges the overlap and accepts that if a firm is not meeting PRIN 6 or 7, it is likely it would not meet the Consumer Principle either. As this proposal is at the consultation stage, the FCA also is seeking input on this subject. The FCA does not wish to remove PRIN 6 and 7 but has not fully committed to retaining them either. Moreover, the FCA consider it likely the ‘Consumer Duty, and its more developed rules’ may be used ‘in preference to the existing Principles 6 and 7’.

The Consumer Duty by design

In addition to the Consumer Principle, which is the overall guiding rule, there is the FCA’s ‘Overarching Cross-cutting Rules’. These rules are designed to amplify the standard the FCA expects firms to achieve as part of the proposals.

The rules are ‘cross-cutting’ as they apply to all FCA handbooks.

There are three behaviours the FCA want as a result of these rules:

  1. Take all reasonable steps to avoid causing foreseeable harm to customers’ this rule seeks to prevent firms exploiting customer behavioural biases or vulnerabilities, including how risks and benefits are disclosed to customers. Note, the FCA is not expecting firms to protect fully against bad outcomes only those which are ‘foreseeable’ to the firm at the time.
  2. Take all reasonable steps to enable customers to pursue their financial objectives’, this rule encourages firms to empower customers to make their own informed decisions. Firms must facilitate an environment which enables customers to act in their interests and meet desired outcomes of the product or service.
  3. ‘Act in good faith’, the rule encourages firms to act in an honest, fair, and open way with customers. The FCA recognises the imbalance between customers and firms when it comes to bargaining, therefore, the FCA will only accept consumers taking responsibility for their choices if the firm has acted openly and honestly with the customer.

Further to these cross-cutting rules are The Four Outcomes (similar to the 6 TCF outcomes) are the objectives of the Consumer Duty. They are as follows:

  • Communications: all communications from firm to a customer should be supportive and facilitating informed customer choices.
  • Products and Services: products and services should be fit for purpose and appropriate to the customer’s needs.
  • Customer Service: customer service which demonstrates the benefit of the products and services as well as ensuring that the firm does not hinder the customer’s ability to act in their interests.
  • The Price and Fair Value: a product/service’s price meets a fair value of the product/rendered.

The FCA consider these four outcomes as the conditions needed to fulfil the rules placed on firms to meet the proposed Consumer Duty. The FCA goes into greater detail on each outcome within its consultation paper.

The scope of the Consumer Duty

The Consumer Duty does not seek to remove customer agency, the FCA still recognises customers who are given appropriate levels of respect and care by firms can still make decisions that result in bad outcomes. Furthermore, the FCA does not seek to regiment the financial services sector, it acknowledges not all customers want or expect the same outcome as each other. The Consumer Duty will also not be retrospective, decisions and actions taken in the past by firms will not apply to the proposed Consumer Duty rules.

Private Right of Action for breach of FCA Principles

Ancillary but related to the overall discussion, the FCA have reflected on previous feedback as to whether private individuals can seek redress from a PRIN breach. The FCA consider this as another mechanism to hold firms to account yet does accept the views are strong on both sides of the debate. The redress would be available for any PRIN breach including the proposed Consumer Principle, thus the FCA is seeking feedback on how the Private Right to Action would fit within the proposals of the Consumer Duty.

What firms should do next

Firms should read the full consultation found here and to respond to the consultation with some feedback firms should click here. The consultation period will last until the 31st of July 2021 so firms have ample time to review the paper and formulate opinions. Additionally, a webinar is available on the 10th of June at 1pm for firms to ask questions and hear the rationale from the FCA directly. To sign up or view a recording of the webinar please see here.

Furthermore, if your firm seeks questions or needs assistance with the incoming proposals Scott Robert can be on hand and available to assist.

The FCA is expected to produce a second consultation paper by 31st December 2021 and the rule changes to be implemented by 31st July 2022 firms should use this time to prepare and amend documentation, systems and controls, and its customer engagement methods in light of these proposals.