The biggest change to retail regulation yet The Consumer Duty lands

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.

1. Proposed new rules and guidance

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):

• firms are required to act in good faith towards retail customers;
•  firms are required to avoid causing foreseeable harm to retail customers; and
•  firms are required to enable and support retail customers to pursue their financial objectives.

(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:

• Products and services: Different requirements will apply to firms depending on their role in the distribution chain, i.e.: manufacturers and distributors. These rules are similar to those set by the FCA's PROD sourcebook in relation to design, approval, marketing and management of product/services, but differ in that they apply across all retail markets. Where the FCA's PROD rules apply and a firm complies with the requirements set therein, this will tend to establish compliance with their obligations under the products and services outcome (but not necessarily the other outcomes).
• Price and value: Firms will be required to offer 'fair value' to consumers. Requirements will be placed on both manufacturers and distributors to assess the price of the products and services that they offer, at the design and sale phases and on an ongoing basis, to ensure that the benefits of the products and services are reasonable relative to their price. Firms will retain discretion on the factors they use in their value assessments, provided that this is done in a reasonable way.

• Consumer understanding (previously communications): The requirements under this outcome will go further than Principle 7, by requiring firms to focus more on consumer outcomes and understanding throughout the customer journey. As well as ensuring individual communications are fair, clear and not misleading, the FCA proposes that firms will need to consider their overall approach to communicating information to ensure they equip consumers to make effective, timely and properly informed decisions. In addition, firms will be required to monitor and, where appropriate, test and adapt their communications in compliance with this outcome.
• Consumer support (previously customer service): The FCA proposes to set an appropriate standard of support that all firms must provide, such that customers are able to use the products/services they buy as anticipated, without unreasonable barriers (including additional costs). The requirements under this outcome are to be read in conjunction with other FCA rules that cover servicing of customers, including the DISP complaints handling rules and guidance on the fair treatment of vulnerable customers.

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.

2. FCA responses following initial consultation

(a) Scope & application

Retail customers within scope of the Consumer Duty:

• Instead of a single standard 'retail client' definition, the FCA proposes to align the scope of the Consumer Duty with the existing scope of its sectoral sourcebooks. As an example, the scope of the Consumer Duty would follow the position in MCOB for mortgages. In relation to activities governed by the FCA's COBS sourcebook, or ancillary activities, a retail client for the purposes of the Consumer Duty will be any customer who is not categorised as a 'professional client' under COBS.
• The duty will apply to firms providing services/products to high net worth individuals, unless their status takes the firm's conduct outside of the FCA's regulatory perimeter (i.e. financial promotions, under the Financial Promotion Order 2005 expressly does not apply to high net worth individuals).
• The Consumer Duty will apply to both existing and prospective customers.

Firms within scope of the Consumer Duty:

• The Consumer Duty will apply to all firms engaging in regulated activities in the UK across the retail distribution chain, including where they do not have a direct customer relationship with the end-client. Notably, UK distributors of non-UK products/services will be within scope.
• The rules will apply to firms across the distribution chain proportionately, taking into consideration their role in relation to the product/service, the nature of the product/service and the characteristics of consumers. This means that firms with a direct relationship with the end-client will have the greatest responsibility under the Consumer Duty.
• With respect to firms operating exclusively in wholesale markets, the Consumer Duty will only apply where they are deemed to have 'material influence' over the design, distribution or operation of the retail products/services, including the communications that are issued to retail clients.

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:

• carrying on the same activity in relation to the same product/service; and
• with the necessary understanding of the needs and characteristics of its customers.

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.

3. FCA's expectations under the Consumer Duty; what should firms be doing?

• Once the Consumer Duty is in force, the FCA expects firms to monitor and review the outcomes that customers are experiencing and identify where products and services are leading to poor outcomes or harm.
• The FCA also expects a firm's board (or equivalent) to consider an annual report on the firm's delivery of good outcomes under the Consumer Duty.
• The FCA gives an indication of the types of data that firms should be looking at, including business persistence (i.e. customer retention records), distribution of legacy products, pricing and fees and charges, behavioural insights, and customers feedback and complaints, amongst others.
• Finally, the FCA sets out how it intends the Consumer Duty to form a central part of its regulatory processes, including through the authorisation process, firm supervision and (of course) enforcement.

4. What's next?

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