The biggest change to retail regulation yet The Consumer Duty lands
09 December 2021
09 December 2021
On 7 December 2021, the FCA delivered an early Christmas gift (?!) to all firms with "retail clients", in the form of the highly anticipated further consultation paper (CP21/36). The consultation paper sets out the FCA's revised proposals for the new Consumer Duty and its responses to feedback it received on the back of the initial May 2021 consultation, in which the package of measures was first proposed (CP21/13) (see our briefing here).
Despite some industry pushback on the need for a new package of measures, the new Consumer Duty is here to stay, with the FCA stating that they cannot meet their objective of setting a higher expectation for the standard of care that firms give consumers without new rules. So, to cut a 243-page story short, here are our key takeaways for what you can expect.
At a high level, the structure of the Consumer Duty has not changed from the initial consultation, but we now have the benefit of further detail in the form of the draft rules and non-Handbook guidance. The Consumer Duty is proposed to be set out as follows:
(a) A Consumer Principle
Two options were previously considered under the previous consultation. Following feedback from CP21/13, the FCA is set to adopt Option 1: "A firm must act to deliver good outcomes for retail clients", in the spirit of placing the emphasis on consumer outcomes. They rejected the alternative Option 2, "A firm must act in the best interests of retail clients".
The Consumer Principle is intended to 'drive the culture and conduct changes' the FCA wishes to see in firms, and will be a new Principle for Businesses 12 that would, where the Consumer Duty is applicable to firms, disapply Principles 6 ("A firm must pay due regard to the interests of its customers and treat them fairly") and 7 ("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") by imposing a higher standard of conduct. For the avoidance of doubt, Principles 6 and 7 will continue to apply to any conduct that is outside the scope of the new Consumer Duty, i.e. with respect to certain SMEs and the wholesale business.
(b) 3 cross-cutting Rules
The FCA has proposed adding the following (slightly amended) "cross-cutting" Handbook rules into the PRIN sourcebook, to be applied across all areas of firm conduct and to help firms interpret the 4 outcomes (see (c) below):
(c) 4 outcomes
The FCA's outcomes, which provide more detail on the FCA's expectations for the 'key elements of the firm-consumer relationship', will be:
The outcomes-based rules are not intended to be an exhaustive list of how firms should act in all instances. Rather, the FCA's intention is to set expectations that can be applied 'flexibly', to new products, services and business models. In doing this, the FCA plans on providing regular updates on firm conduct following the implementation of the Consumer Duty (including its views on compliant vs non-compliant conduct), to provide further clarity on the application of the rules and guidance.
(a) Scope & application
Retail customers within scope of the Consumer Duty:
Firms within scope of the Consumer Duty:
Products & services
The FCA will require firms to comply with the Consumer Duty in full for any products/services sold or renewed after the Consumer Duty comes into effect. Whilst the Consumer Duty is not retrospective, firms will need to comply (from the end of the implementation period) with its rules on a "forward-looking" basis for customers with existing contracts.
(b) What is reasonable?
The FCA has emphasised that the Consumer Duty should not replace the "general principle that consumers should take responsibility for their decisions or impose an open-ended duty". Rather, the Consumer Duty and each of its elements will be underpinned by the concept of 'reasonableness'. In connection with this, the FCA has relaxed the "all reasonable steps" standard – instead, it proposes that reasonableness be determined through the use of an 'objective test'. This will be based on the tortious concept of how a reasonable prudent firm would act:
It will be interesting to see how this works out in practice, as we are aware of contradictions between the FCA's assurances within the CP and the FCA's draft non-Handbook guidance, which states that "regulators cannot set a universal requirement of the degree of responsibility a consumer can be expected to take” and that firms must nevertheless "take account of behavioural biases and the impact characteristics of vulnerability can have on consumer needs and decisions".
(c) Impact on the SMCR
The FCA is proposing to amend its SMCR Code of Conduct sourcebook (COCON), by adding a new rule requiring all conduct rules staff within firms to 'act to deliver good outcomes for retail customers', where their firms' activities fall within scope of the Consumer Duty. For the avoidance of doubt, where this COCON rule applies, the existing individual conduct Rule 4 (pay due regard to the interests of customers and treat them fairly) would not apply.
(d) Fate of the private right of action (PROA)
At this stage, the FCA is not proposing to provide a PROA for breaches of the Consumer Duty – though it will keep the possibility of a PROA under review, pending firms' implementation and compliance with the Consumer Duty.
Firms have until 15 February 2022 to respond to the consultation, with the FCA inviting feedback on the impact of its proposals and on the substance of its draft rules and non-Handbook guidance. The FCA expects to make the new rules by 31 July 2022, with an implementation period starting from the date of publications of the final rules, ending on 30 April 2023. During the implementation period, firms will be expected to review their existing and incoming products and services (including making updates to any customer-facing documents such as T&Cs) and take actions to fully implement the Consumer Duty.
Author: Emily Lemaire
The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
Readers should take legal advice before applying it to specific issues or transactions.
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