The FCA proposes the new consumer duty
In May 2021, the FCA published a consultation paper (CP21/13) on a “New Consumer Duty” in an attempt to stop consumers from being provided with misleading information, being provided with unsatisfactory support or buying products that are inappropriate or harmful. In its initial consultation, the FCA highlighted:
“We want to see a higher level of consumer protection in retail financial markets, where firms compete vigorously in the interests of consumers. We are proposing to introduce a new “Consumer Duty“ that would set higher expectations for the standard of care that firms provide to consumers. For many firms this would require a significant shift in culture and behaviour, where they consistently focus on consumer outcomes, and put customers in a position where they can act and make decisions in their interests.”
After receiving input from a population of the 235 stakeholders, the FCA issued a second consultation paper (CP21/36) in December 2021, detailing the initial proposals as well as the proposed draft rules to enforce a new Consumer Duty. With some 190 pages, the FCA plan, that is subject to consultation until the 15th of February 2022, outlines the background of its expectations and draft handbook guidance for new rules, likely to be finalised by the end of July 2022. The FCA intends on proposing an implementation by all financial institutes services the retail clients no later than the 30 April 2023 to fully adopt the Consumer Duty.
The FCA argues that one of the main reasons for having the new rules is that firms “are not consistently and sufficiently prioritising good consumer outcomes” which in essence is stemming from a lack of understanding the duty of care for consumers and thus leading to consumer harm. The FCA believes that the duty provides a higher level of consumer protection where firms compete against each other in the best interests of their consumers, thus enabling them to make informed choices about products and services deemed fit for purpose, provide fair value and that they understand their use.
The new Consumer Duty comprises of 3 elements:
- A Consumer Principle that a firm must act upon to deliver good outcomes for retail customers;
- The overarching cross cutting rules (essentially the content of the Consumer Principle, i.e., how firms should act) that require firms to:
- act in good faith toward retail consumers;
- avoid foreseeable harm to retail consumers; and
- enable and support consumers to pursue their financial objectives.
- Four outcomes, the detailed suite of rules and guidance setting more detailed expectation for a firm’s conduct are:
- Products and services (designed to meet consumers’ needs);
- Consumer understanding (communications tailored in helping consumers making informed decisions);
- Customer services (ongoing support throughout customer relationship); and
- Price and value (giving fair value to consumers).
Who is within the scope of these requirements and what are the overall associated costs?
The new requirements would be applicable to regulated entities including banks, electronic money institutions, payment service providers, broker dealers and asset managers. In addition, these would also apply proportionally to firms throughout the distribution/supply chain. The consultation paper suggests that a one-off direct cost to comply will be around £688m to £2.4bn, whilst the annual on-going costs will be in the range of £74m to £176m.
Some pre-assessments before accepting consumer responsibility
- How effective are your firm’s existing controls, oversight, internal and external assurances and does your firm’s conduct risk framework capture consumer outcomes effectively?
- Does your firm’s product governance framework cater for the challenges in the regulation and current processes and procedures pose any consumer detriment?
- What is the extent of your engagement with retail consumers and do you improve your processes based on information from a complaints database?
Given the Consumer Duty would be an “outcome-based” regulation, firms are expected to act beyond complying with the letter of the law, by ensuring the consumer gets the outcome of their choice; however the sophistry in the consultation paper is such that the meanings can be construed as having broad and aggressive goals, thus having a significant impact on the provision of financial services and or products to the retail consumers.
To conclude, although as of now the FCA’s consultation do not clearly define the specific rules of engagement as there is still a great deal for the firms to start analysing about how to better service consumers beyond April 2023. Overall, there is mixed perception for the regulation as it is likely to place some substantial obligation on the financial service providers, resulting in an increase in the overall costs of providing consumer financial services as well as a possible rise in risks associated with moral hazards and consumer fraud. At the same time there is also doubt as to whether this new Consumer Duty will result in any additional benefit as there is already an obligation to “treat customers fairly” and a multiplicity of other rules are already in place. Financial Services have always ranked atop the industry violation tracker but will it be prudent to say that the stronger the redress the lesser financial institutions will misbehave?