New consumer duty – an old message?

The FCA issued a consultation paper (CP21/13) at the end of May setting out its proposals to introduce a new “consumer duty” with the intention of raising the bar in terms of its expectations of firms who deal with consumers. On the face of it, how different could it be from the current situation? Principle 6 (FCA’s Principles for Businesses) places a responsibility on firms to pay due regard to the interests of its customers and treat them fairly. The current expectation is that all must be able to show consistently that fair treatment of customers is at the heart of their business model. There are six consumer outcomes which underpin Principle 6 that firms need to achieve to ensure the fair treatment of its customers. These are:

• Outcome 1: Consumers can be confident they are dealing with firms where the fair treatment of customers is central to the corporate culture.
• Outcome 2: Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly.
• Outcome 3: Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale.
• Outcome 4: Where consumers receive advice, the advice is suitable and takes account of their circumstances.
• Outcome 5: Consumers are provided with products that perform as firms have led them to expect, and the associated service is of an acceptable standard and as they have been led to expect.
• Outcome 6: Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint.

The first of these consumer outcomes places importance on the culture of the firm as a key driver in securing positive outcomes for clients with a top down approach being key. The remaining outcomes following the life cycle of a product from the design and marketing stage through the sales and advisory process to post sales barriers. Firms should be able to demonstrate (if requested) how it incorporates the consumer outcomes at the core of its business. In short, firms are currently required to be able to demonstrate that they have taken proactive measures to treat their customers fairly.

However, the FCA obviously feels that the current Principle 6 requirement to treat customers fairly coupled with the consumer outcomes are not getting the right results so are looking to enforce the message but introducing new requirements. The new consumer duty will require firms to put the consumer at the heart of pretty much every decision that it makes and will need to demonstrate that it has done so. This is more of a subjective assessment of how the firm achieves the right outcome for each customer.

What does the new consumer duty look like?

The FCA is currently consulting on introducing the following:

• A Consumer Principle, which sets a clear tone and uses language that reflects the overall standards of behaviour the FCA expect from firms. There is a change in the focus on the requirement to treat customers fairly (which is quite broad and is an objective requirement), to impose an obligation on the firms to positively achieve the best outcome for each and every client. The FCA has suggestions for the wording of the consumer principle:
  • “A firm must act to deliver good outcomes for retail clients”. This wording places emphasis on the requirement for firms to consider not just the substance of their actions, but also the impact of their actions on retail consumers.
  • “A firm must act in the best interests of retail clients”. This formulation would require firms to ensure that their conduct could reasonably and objectively be said to be in consumers’ best interests.
• ‘Cross-cutting Rules’ which develop and clarify the Consumer Principle’s overarching expectations of firm conduct, and set out how it should apply in practice. The FCA intends to introduce three new Rules. The detail of these new Rules have not yet been provided, but in summary the Rules are intended to require firms to:
  • take all reasonable steps to avoid causing foreseeable harm to customers.
  • take all reasonable steps to enable customers to pursue their financial objectives.
  • act in good faith.
• ‘Four Outcomes’: a suite of rules and guidance that set more detailed expectations for firm conduct in relation to four specific outcomes for the key elements of the firm-customer relationship.
  • Outcome: communications equip consumers to make effective, timely and properly informed decisions about financial products and services.
  • Outcome: products and services are specifically designed to meet the needs of consumers, and sold to those whose needs they meet.
  • Outcome: 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.
  • Outcome: the price of products and services represents fair value for consumers.

Presumably the advantages of these new requirements are:

1. the FCA is able to re-emphasise an old message;
2. better articulate what it expects in the new cross-cutting rules;
3. make it easier to bring enforcement action when firms are found not to be compliant.

As a final point to note, currently breaches of certain regulatory rules can form the basis of a private cause of action brought by a customer. However, a claim cannot currently be brought on the basis of a breach of principle alone. Whilst the FCA is not currently consulting on whether this should change, it does however, explore the pros and cons of doing so. This is clearly something that the regulator is considering and whilst consumers will generally have the right to refer a complaint to the Financial Services Ombudsman, there are financial limitations on the amount of any award. The ability to bring a private cause of action against a firm directly for a higher amount would be a benefit to some consumers.

What should firms be doing now?

The FCA states that for many firms, the proposed changes will “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”. The FCA intends to publish a second consultation by 31 December 2021 and indicated that this new duty is likely to be imposed on firms from mid-2022. The FCA believes that firms will need to do a lot of work to get ready. Firms should start getting to grips with the new consumer duty sooner rather than later and should approach the planning process methodically, documenting key decisions taken. It’s not simply about introducing a “new consumer duty” policy, its’ about really understanding the business and its customers and placing consumers at the heart of its culture. The FCA wants to see how the firm is achieving better outcomes for its retail customers.

The FCA suggests asking ‘would I be happy to be treated in the way my firm treats its customers?’, or ‘would I recommend my firm’s products and services to my friends and family?’ to help in understand whether firms are on the right track. Firms need to go back to basics and in the first instance, examine the culture in the firm. Does the firm have the right culture? Who has overall responsibility for implementing the new consumer duty (the FCA wants to make senior management accountable for the new consumer duty)? Is senior management actively engaged? Is senior management sending the right messages down the chain? Do staff need training? What products does the firm sell and what are the associated risks with that particular product? What are the characteristics of its customers and how can the firm demonstrate that its customers’ needs are met? How can consumers be better protected? Do the firm’s policies and procedures need to be updated? What is the charging structure? Can it demonstrate that the pricing of its products represent fair value?

The list could go on and will need to be tailored to the individual business – there is no one size fits all approach, but the important point to note is that firms should not underestimate the amount of work they are likely to need to do and should get started as soon as possible. Firms found not to have taken steps to embed the new consumer duty into the core of their business could end up on the wrong end of enforcement action.

Please contact our financial services team for legal advice on the new consumer duty.