FCA’s Consumer Duty Proposals: A look at the measures and their potential impacts

17 June 2021

On 14 May the FCA published its Consultation Paper on a new Consumer Duty (CP21/13). This idea has had a long incubation period with the FCA first publishing a discussion paper on the issue of firms’ ‘duty of care’ with respect to consumers in 2018 (DP18/05). This CP outlines plans to create a higher level of consumer protection in retail financial services through a new over-arching Consumer Principle and a set of cross-cutting rules and outcomes to support that principle.

The proposed rules would require three key behaviours from firms:

  • To take all reasonable steps to avoid foreseeable harm to customers
  • To take all reasonable steps to enable customers to pursue their financial objectives
  • To act in good faith.

The CP then includes specific measures in relation to the four key elements of the firm-consumer relationship: communications; products and services; customer service; and price and value.

The CP positions this suite of measures as a continuation of the regulators recent work to prevent consumer harm, including guidance on the fair treatment of vulnerable customers, the High-Cost Credit Review, the FCA’s work on contracts for difference, Enforcement outcomes and the General Insurance Pricing Practices Market Study. The CP notes that the Consumer Duty will overlap with existing Principles, particularly 6 and 7, as well as the TCF Outcomes.

The consultation period will close on 31 July 2021. There will be a further consultation on or before 31 December 2021 which will set out any detailed Handbook changes as well as the FCA’s approach to supervising and embedding the Consumer Duty. Any new rules will come into force by 31 July 2022.

Points to note:

  • The measures will include a concept of reasonableness, clarifying the objective standard of conduct that firms would need to meet. The factors influencing reasonableness include the nature of a firm’s role (e.g. advisory vs. execution); the potential harm of a product or service; the complexity of the product or service, and the specific characteristics of the customer (e.g. vulnerability)
  • We expect that most firms will need to revisit their existing product governance frameworks to ensure that the process has sufficient focus on customers’ best interests and outcomes, going beyond a narrow focus on compliance with the rules
  • There is a new emphasis, across each of the four outcomes, on monitoring and testing. The FCA will likely require firms to provide evidence of the information and data used to inform this testing. Furthermore, firms will be expected to identify if particular groups of customers receive systematically poorer outcomes, and to take action if this is found. Gathering customer feedback and undertaking customer and market research will be key and most firms will need to develop the appropriate mechanisms to do this
  • The CP proposes the introduction of a private right of action for breaches of the Principles. This would enable a consumer, or group of consumers, who have suffered harm due to poor firm conduct to pursue an alternative redress route, through the courts. The CP sets out some interesting advantages and potential unintended consequences of this proposed change
  • The proposals extend to firms that are involved in the manufacture and supply of products and services to retail clients, even if they do not have a direct relationship with the end customer. The measures will therefore have an impact on firms operating across the value chain
  • The CP stresses the importance of price in determining whether a product or service is fit for purpose and offers fair value. There are lessons to be taken from the FCA’s work in the General Insurance and Funeral Plans sectors, as well as the value assessment reporting undertaken by funds.

This proposal represents a paradigm shift for firms’ obligations with respect to consumer protection. Firms should consider their current governance and SMF arrangements; product governance processes; and customer service and aftercare offering in the context of these measures. BDO has a wealth of experience supporting firms in parsing and implementing regulatory change initiatives. If you would like to discuss how these proposals could impact your firm’s business model and how you can begin positioning your firm to meet these requirements, don’t hesitate to contact Richard Barnwell or Nicola Ball