Guide to the Consumer Duty

Parliament has given the FCA a single strategic objective – to ensure that relevant markets function well – and 3 operational objectives, one of which is securing appropriate protection for consumers.

The FCA’s statutory consumer protection objective is set out in section 1C of the Financial Services and Markets Act 2000 (‘FSMA’)) and requires it to have regard to factors such as:

• the differing degrees of risk involved in different kinds of investment or other transaction;
• the differing degrees of experience and expertise that different consumers may have;
• the needs that consumers may have for the timely provision of information and advice that is accurate and fit for purpose;
• the general principle that consumers should take responsibility for their decisions;
• the general principle that those providing regulated financial services should be expected to provide consumers with a level of care that is appropriate having regard to the degree of risk involved in relation to the investment or other transaction and the capabilities of the consumers in question;
• the differing expectations that consumers may have in relation to different kinds of investment or other transaction.

The FCA’s regulatory rules in its Handbook have been designed to meet its consumer protection objective and in particular its overarching Principles for Businesses include obligations on firms to treat customers fairly (Principle 6) and ensure their communications meet customers’ information needs (Principle 7).

So, the regulatory and legal framework recognises that different consumers may have different degrees of experience and expertise and that the level of care provided by firms should be appropriate for their capabilities, and there is a general principle that customers should take responsibility for their own decisions. The FCA has a suite of powers and tools to ensure its rules and Principles are met. This includes the FCA’s Senior Managers & Certification Regime (‘SM&CR’), which requires firms to follow good business practice.

Despite this, many stakeholders including consumer representatives have argued that financial services firms should have a formal duty of care towards their customers to reduce longstanding consumer harm such as conflicts of interest or exploitation of behavioural bias, and to drive the necessary culture change in firms that the existing framework had not succeeded in delivering. In particular some have argued that the concept of treating customers fairly in Principle 6 has not been effective in improving consumer outcomes because the concept of ‘fairness’ is too vague, and because the FCA’s approach to applying Principle 6 has not been robust enough.

Recognising these concerns, the journey towards the FCA’s Consumer Duty proposals has involved the following key steps:

• FCA opened a discussion in 2018 (in DP 18/5: A duty of care and potential alternative approaches) to explore the need for a duty and what form it might take if introduced, including the potential merits of introducing a statutory duty of care.
• In a Feedback Statement in 2019 (FS 19/2: A duty of care and potential alternative approaches – summary and responses and next steps) the FCA noted the responses, ruled out a statutory basis for a duty and committed to further work.
• As well as Private Members’ Bills that were not ultimately enacted, arguments were put forward during the development of the post-Brexit Financial Services Act 2021 for it to include a statutory duty of care. Ultimately, the Act (in section 29) required the FCA to consult on whether it should make rules providing that authorised persons owe a duty of care to consumers. The Act obliged the FCA to publish its analysis of the responses to this consultation before 1 January 2022 and make final rules before 1 August 2022.
• The FCA’s first consultation on its proposed Consumer Duty was published in May 2021 (CP 21/13: A new Consumer Duty).
• This was followed by a second consultation in December 2021 (FG22/5: Final non-Handbook Guidance for firms on the Consumer Duty fca.org.uk) proposing draft rules, and draft non-handbook guidance, with a view to finalised policy by the end of July 2022 and a nine-month implementation period with the regime entering into force at the end of April 2023.
• The FCA published its finalised policy and feedback on the consultation responses on 26 July 2022. Implementation will now be on a phased basis, with
• The Finalised Policy, rules and non-handbook Guidance for the Consumer Duty have been set out in:
  • PS22/9: A new Consumer Duty
  • Legal Instrument 2022/31: Consumer Duty Instrument 2022
  • FG22/5 Final non-Handbook Guidance for firms on the Consumer Duty

A driver of culture shift in FCA-regulated firms

The FCA views the introduction of the Consumer Duty as an opportunity to support innovation, to raise standards, and improve consumer outcomes and trust in financial services.

The Consumer Duty will be outcomes-based, which the FCA sees as introducing a significant shift in what it expects from firms and how it regulates. The FCA wants to drive a financial services system in which firms can thrive and consumers are empowered to make informed choices and decisions.

Previous supervisory interventions have tackled practices by individual firms and across markets that have caused harm. These harms may have been caused through products or services that weren’t fit for purpose or which presented poor value, or poor customer support, or which exploited consumers’ behavioural biases, for example in the way choices or information were presented to them.

By introducing an outcomes-based Consumer Duty the FCA hopes to drive culture and behaviour shift in firms by setting out clearly and explicitly a higher standard of care, extending rules on product governance and fair value (beyond the sectors they currently apply in). There will be a greater focus on harmful market practice such as sludge practices that interfere in consumer decision making.

The Consumer Duty demands that firms consistently place their customers at the centre of their businesses and consider customer needs (including vulnerable customers) at every stage of the customer journey and product/service lifecycle. The purpose of firms will need to be consistent with the Duty and firms will need to ensure their strategies, governance, leadership and people policies (including incentives at all levels) are aligned towards achieving good customer outcomes.

Outcomes-monitoring obligations

A crucial aspect of the Consumer Duty is its requirements on firms to assess the outcomes their customers actually experience and to be able to demonstrate that they’re achieving good consumer outcomes. Firms need to be able to be ready to evidence how they’re embedding the Consumer Duty, how customer outcomes are being achieved and how firms are assuring themselves of that.

For many firms, this will mean enhancements to internal processes, to data collection and to board and senior management reporting.

Agile, assertive supervision

The FCA’s own transformation programme is underway to allow it to transition itself to a more data led, agile, assertive, innovative regulator. It has made changes to its interventions governance to allow swifter interventions. As well as seeking more information from firms, the FCA is increasing its use of data analytics, and using this to adapt to evolving business practices and intervene quickly to deter harmful practice before it entrenches as a market norm.

The FCA does not propose any specific supervision and enforcement changes to support the Consumer Duty. Instead the nature of supervision will change to be focused more on consumer outcomes and firms’ ability to demonstrate and evidence they are acting to deliver good outcomes at all times, including resolving issues when they arise.

Competition and innovation

Previous FCA interventions have revealed market practices where competition hasn’t been working as it should. The FCA sees the Consumer Duty as ensuring competition works effectively in consumers’ interests as firms compete to attract and retain customers based on high standards and customer satisfaction. Firms will have the opportunity and incentive to innovate and find new ways to serve their customers through new technologies and with the benefit of greater clarity on FCA expectations.

The Consumer Duty is a package comprising three elements:

Principle 12: The Consumer Principle

• A new Principle 12 will be added to the FCA’s 11 existing Principles for Businesses. This will provide an overarching standard of conduct for firms, to ‘Act to deliver good outcomes for retail customers.
• The FCA considers that the Consumer Principle sets a higher standard than the existing Principles 6 and 7, and so it proposes that where the Consumer Principle applies, Principles 6 and 7 will no longer apply.

Cross-cutting rules

Underpinning the Consumer Principle is a set of cross-cutting rules that expand on Principle 12 and explain how firms should be acting act to deliver the good outcomes Principle 12 requires. The cross-cutting rules will require firms to:

• Act in good faith towards retail customers;
• Avoid causing foreseeable harm to retail customers; and
• Enable and support retail customers to pursue their financial objectives - The FCA acknowledges that how firms comply with this requirement will depend on their role (so, for example, the regulator would expect more of firms that provide advised services than those that provide execution-only services).

The "four outcomes"

This is a suite of other rules and guidance linked to four particular outcomes that represent the key elements across the whole firm-consumer relationship.

The outcomes are:

The governance of products and services

• This outcome involves extending product governance requirements (in the PROD sourcebook of the FCA Handbook) across all retail products, with different rules for manufacturers and distributors.
• So, for example, manufacturers have to undertake a product approval process, identify a target market, and ensure the distribution strategy is right for their products.

Price and value

•  This outcome focuses on the relationship between the price the consumer pays and the overall benefits they can reasonably expect from a product.
• Firms need to consider Price and value at the design and distribution stages, and also on an ongoing basis.
• The FCA does not set out detailed requirements for how firms assess fair value, but they say that value needs to be considered in the round — and that low prices do not always mean fair value.

Consumer understanding

• The FCA is going to expect firms to focus much more on consumer outcomes and understanding throughout the customer journey.
• So, as well as ensuring that individual communications are fair, clear, and not misleading, firms will need to look at their overall approach to communicating information
• They’ll need to make sure their communications actually equip customers to make properly informed decisions.
• Firms will need to tailor their communications appropriately as well as monitor, test, and adapt their communications on an ongoing basis to ensure that the communications are suitable.

Consumer support

This outcome focuses on firms providing an appropriate standard of support to customers, so that customers can use products as reasonably anticipated, and do not face unreasonable barriers in doing so.

Interaction between the elements of the Duty

The diagram above demonstrates how the different components of the Consumer Duty are designed to support, inform and interact with each other.

Reasonableness and proportionality

The Consumer Principle and supporting rules and outcomes are underpinned by the concept of reasonableness. Firms must meet an objective standard of conduct that could reasonably be expected of a prudent firm:

• carrying on the same activity in relation to the same product or service; and
• with the necessary understanding of the needs and characteristics of its customers based on the needs and characteristics of an average customer.

Depending on business models, product and service lines, and firms’ roles in the distribution chain, what is 'reasonable' will vary from firm-to-firm. The FCA highlights the following (non-exhaustive) factors that a firm should consider to assess whether it is meeting a reasonable standard of conduct with respect to particular products or services:

• the nature of the firm's role and relationship with customers;
• the potential of particular products or services to harm consumers;
• the complexity of the product or service;
• the firm's role in the distribution chain for a product or services and its ability to influence the end-customer's outcome;
• what a reasonable customer would expect from a particular product or service (for example a 'no-frills' product or a 'premium' service); and
• the diverse needs of a firm's customer base and potential customers, especially where these are associated with characteristics of vulnerability, or with protected characteristics.

The table below sets out likely implementation steps most firms will need to consider. Embedding the Consumer Duty will mean different things for different firms and sectors.

The degree and cost of implementation work will depend considerably on where firms are with their current business models and practices, the roles they play and the rules that already exist in their sectors. For example, for some sectors such as insurance or asset management, the requirement to meet the Price and Value outcome will not be new due to existing sector rules. But for all firms the Consumer Duty’s monitoring and testing obligations to evidence good consumer outcomes are likely to be onerous.

All firms will need to retrain staff and senior management on the requirements of the new duty. All firms must finalise their Consumer Duty implementation plans by 31 October 2022.

At a high level, most firms will need to conduct some or all the following to implement the Duty:

• board/governing body and senior management training on their responsibilities under the Consumer Duty;
• scoping analysis, which will need to encompass all products and services provided to retail customers to ensure that everything in scope is properly captured;
• review of the impact of the Consumer Duty on the firm’s in-scope products and services
• review of customer documentation and communications, including letters, websites and third-party communications;
• analysis of product development, design, approval, origination, servicing and redemption;
• embedding of the Consumer Duty into staff training, including induction and annual training as well as any individual departmental training and briefing sessions;
• IT system changes for gaps and enhancements identified from the above and to facilitate process changes;
• reviewing key performance and risk indicators;
• analysing and enhancing where necessary the management information that will need to be created for monitoring delivery of the Consumer Outcomes; and
• integration and interdependencies managed with other change initiatives that need to be delivered.

To ensure that the products and services they provide are delivering the good outcomes required under the Consumer Duty, firms are expected to:

• monitor and regularly review the outcomes that their customers are experiencing;
• identify where the firm’s products or services are leading to poor outcomes or harm to consumers (including groups of customers with characteristics of vulnerability or protected characteristics) and the root causes;
• have the processes in place to adapt and change products/services or policies/practices to address any risks or issues as appropriate;
• be able to demonstrate effectively how they are monitoring the outcomes that their customers receive, identifying harm or risk of harm and addressing the issues that they identify.

The firm’s board must sign off on an assessment at least annually confirming that the firm is delivering the consumer outcomes. This assessment should include:

• the results of any monitoring that the firm has undertaken to assess whether their products and services are delivering the outcomes that they expected;
• new and emerging risks to good outcomes for consumers;
• any evidence of consumers or groups of consumers who are not achieving good outcomes and an evaluation of the impact and the root cause;
• any evidence of consumers or groups of consumers who have characteristics of vulnerability and are not achieving good outcomes;
• actions taken to address any risks or issues; and
• whether the firm’s future business strategy is consistent with it acting to deliver good outcomes under the Consumer Duty.

To meet these ongoing requirements for review, testing, adaptation, and board sign-off, firms will need to make sure they identify sources of data to enable them to assess whether the outcomes that their customers are receiving comply with the firm’s obligations under the Consumer Duty.

The type of information firms must collect will vary depending on the firm’s size, its client base, and the types of products or services it offers. The FCA recommends that firms tailor their approach to reflect these factors, ensuring that they have sufficient information to be able to identify whether they are delivering good consumer outcomes. Firms that have adopted the FCA’s Guidance on the fair treatment of vulnerable customers will already be creating management information MI that captures outcomes for identified vulnerable customers, making sure that information is discussed regularly at an appropriate level, and escalated and acted on where necessary.

The information the FCA suggests firms consider collecting to assess consumer outcomes overlaps in many respects with information firms may already be collecting for vulnerable customers, as set out in the table below.