A new Consumer Duty: 6 key takeaways around FCA's proposals

Introduction

The FCA's recent consultation paper (CP21/13) A new Consumer Duty, encapsulates a concept that has been rumbling for some time. But with this publication we start to see the flesh around the bones to the FCA's proposals, along with greater clarity on where these proposals overlap with existing rules and regulations. Importantly for anyone who might be tempted to skip over this one, there is – tucked away right at the back of the paper in Chapter 5 – a key discussion around a private right of action ("PROA") which, if effected, would allow private persons to bring private action for breaches of the FCA's Principles, including the Consumer Principle and Consumer Duty. Given the breadth of scope of application of the Consumer Duty, a private right of action could have a far ranging impact. This is the hook with which the FCA has got your attention. And now you are sitting up straight, here's a quick recap on what is set out in the proposals.

1. What is the Consumer Duty?

The Consumer Duty comprises three elements:

• A consumer principle which sets out the tone and language to reflect the overall standard of behaviour that the FCA wants to see from firms;
• Cross-cutting rules which develop overarching expectations for common themes that apply across all areas of firm conduct; and
• Four Outcomes which set out the key elements of the firm-consumer relationship.

We look at each of these in more detail below.

This is what the regulator wants to underpin and drive the culture and conduct changes it is looking for. In the CP, there are two options suggested.

• Option 1: a firm must act to deliver good outcomes for retail clients
  
  This wording places emphases on consumer outcomes and firms' obligations to be proactive in delivering those outcomes.
• Option 2: a firm must act in the best interests of retail clients
  
  The term "best interests" already exists in a number of existing rules but the regulator's expectation would be that this would extend those rules into more retail markets. Firms would need to satisfy themselves that their conduct could reasonably and objectively be said to be in the consumer's best interest and equip them to be able to make decisions in their best interests.
  
  The consultation seeks views on which wording works best.

3. What are cross cutting rules?

The FCA believes that the Cross-cutting Handbook rules and guidance would develop and amplify the standards of conduct that the FCA expects under the Consumer Principle. The FCA has set out three key behaviours:

• Firms should take all reasonable steps to avoid causing foreseeable harm to customers
  
  • This means not causing harm to customers through your conduct, products or services.
  • This also means taking proactive steps to avoid it (where it is within your control).
  • This does not mean that consumers will be protected from all bad outcomes (e.g. Risk).

• Firms should take all reasonable steps to enable customers to pursue their financial objectives
  
  • The regulator believes that customers best understand their own position and they should be empowered to make choices for themselves.
  • Firms should take responsibility for establishing an environment in which consumers can act in their own interests.

• Firms should act in good faith
  
  • This is the standard of conduct characterised by honesty, fair and open dealing and consistency with the reasonable expectations of consumers.

Each of these cross cutting rules is subject to the concept of reasonableness. Here, that means considering reasonableness factors i.e. nature of the product or service (firm’s role, potential harm, complexity), the role of the firm in the distribution chain, the reasonable expectations of consumers, the specific characteristics of customers, including characteristics of vulnerability. Firms will be expected to identify when a particular group of customers receive systematically poorer outcomes and firms are expected to undertake root cause analysis.

4. What are the Four Outcomes?

The Four Outcomes represent the key elements of the firm-consumer relationship and the FCA believes that the behaviour and actions of firms for each of these outcomes are instrumental in enabling consumers to meet their financial needs. The regulator gives useful indicators around what it expects under each of these headings.

Communications

The FCA believes that firms’ communications should support consumers by enabling them to make informed decisions about financial products and services. The Outcome here is:

Communications equip consumers to make effective, timely and properly informed decisions about financial products and services

The FCA wants firms to think about what is presented, when is it presented and how is it presented. This links to existing rules and requirements on financial promotions and product disclosures, as well as Principle 6.

Products and services

The FCA believes that products and services sold to consumers should be fit for purpose, designed to meet consumers' needs and targeted at the consumer whose needs they are designed to meet.

Products and services are specifically designed to meet the needs of consumers, and sold to those whose needs they meet

This will heavily impact product providers, product distributors and obligations throughout the distribution chain. Monitoring will be key to show compliance.

Customer service

The FCA considers that firms should provide a level of customer service that meets consumers needs throughout their relationship with the firm.

Customer service meets the needs of consumers, enabling them to realise the benefits of products and services and act in their interests without undue hindrance

Here, the FCA will be focused on the standards of customer service required and the reduction of friction points for the consumer.

Price and Value

The FCA believes that products and services should be fit for purpose and represent a fair value, not just because they meet consumers' needs and objectives but also because their price represents a fair value.

The price of products represents a fair value for consumers

The key question for the market is how the FCA will interpret the concept of "fair value"

5. Who is in scope?

The Consumer Duty covers regulated activities that authorised firms are involved in (and this extends to EMIs, PIs, and AISPs). The Consumer Duty will apply where there are products or services sold to retail customers. This is a wide term that includes all clients other than "professional clients" and "eligible counterparties". This means that it is potentially wider than expected and will capture products sold to SMEs, for example. It also captures those entities in the distribution chain where a firm can, through its regulated activities, influence material aspects of the design, target market or performance of a product or services that will be used by consumers. This means it will capture firms in wholesale markets as part of a retail distribution chain.

6. So what is the private right of action proposals?

The FCA considers the PROA as a measure which can make firms accountable for their breaches of the FCA rules and provide consumers with redress.

Section 138D FSMA allows the FCA to determine for each of its rules whether individuals have a right of action for damages for loss caused by a breach of that rule. This right applies to most of the FCA rules but does not currently apply to Principles. This could be amended through a change to the FCA’s Handbook and would allow for a PROA in relation to a breach of those Principles and the Consumer Duty.

A PROA would shift firms’ focus to deliver better outcomes for their customers and that the risk of being taken to court and liable to pay damages would have a greater impact on firms’ behaviour. If established, it is hinted that there could be an industry wide redress scheme established which may operate well if there is a significant market failure. There are also benefits to be seen in relation to FSCS coverage for consumers.

It is also acknowledged that private action can be very costly, particularly if you lose and therefore it would be rare that a PROA would be pursued. Alternatively, this could give rise to a bonanza for Claims Management Companies who could use this as an opportunity.

The FCA does not make any specific proposals in relation to a PROA but seeks views on the PROA that are specific to the proposals for the Consumer Duty.

What next?

Firms have until 31 July 2021 to respond and it is expected that the FCA will publish a second consultation on the text of any new rules and further consideration of a PROA by 31 December 2021. The FCA expects to make new rules by 31 July 2022. Firms should consider the likely impact and whether they want to respond. Ashurst will circulate some more in-depth thoughts on the proposals set out in this CP shortly.