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As we approach implementation, read our guide to find out what you need to do, what the details of the Consumer Duty are and what the consequences are for not complying.
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 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:
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:
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:
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
Price and value
Consumer understanding
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.
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:
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 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.
Top-down assessment: what do “good outcomes” look like for the firm? |
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Gap analysis – planning |
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Existing products and services |
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Existing controls and frameworks |
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Fair value |
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Evidencing and monitoring the duty |
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Raising awareness |
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Culture change and governance |
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Customer engagement/outreach |
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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:
Flexible Portfolio Firms |
For each portfolio, the FCA will develop a strategy to embed the Duty and tackle the key areas of harm it expects the Duty to address. Over the implementation period the FCA plans the following supervisory work: • an initial communication to firms later in 2022 on its expectations for implementation of the Duty in their portfolio, with priority issues clearly identified • outreach activities engaging the sector and industry bodies, including roundtables and webinars for both large and small firms • a follow‑up communication in the second half of the implementation period highlighting some of the good and poor practice the FCA has seen in firms’ implementation plans, to further help firms in delivering on our expectations • multi‑firm work focused on high priority portfolios/issues. • development of a series of metrics to measure progress.
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Fixed Portfolio Firms |
For fixed firms, which have a dedicated supervision team, the FCA will request and regularly review implementation plans and use proactive engagement and annual strategy meetings to assess progress with implementation.
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To ensure that the products and services they provide are delivering the good outcomes required under the Consumer Duty, firms are expected to:
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:
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.
Information |
Collected for Consumer Duty?
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Collected for Fair treatment of vulnerable customers? |
Business persistence analysis of customer retention records – eg claims and cancellation rates and details of why customers leave. This may flag where poor treatment is contributing to high turnover of customers.
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Yes |
Yes |
Distribution of legacy products/pricing and fees and charges review of whether these consumers (including vulnerable customers) are more likely to pay particular fees and charges or are getting outcomes that are worse than other customers.
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Yes |
Yes |
Behavioural insights consumer interactions and drop off rates; use of different communication channels including digital; consumer testing of financial promotions. This may flag where firms need to improve policies, processes and systems (eg where there are barriers to consumer engagement or understanding).
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Yes |
Yes |
Additional support contact rates with vulnerability teams, referrals to and feedback from specialist services. |
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Yes |
Training and competence records analysis of records of staff training, including remedial actions where staff knowledge or actions are found to be below expectations.
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Yes |
Yes |
File reviews reviewing customer files and monitoring calls to check for errors and assess if customers received good outcomes (this is particularly useful for sales processes).
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Yes |
Yes |
Customer feedback using formal and informal feedback from customers to identify trends and areas for improvement (eg complaints and comments made to the firm but also comments and complaints on social media).
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Yes |
Yes |
Numbers of complaints trends in numbers of complaints involving poor consumer outcomes through the consumer-firm relationship.
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Yes |
Yes |
Complaints data (together with ensuring it is easy for consumers to make complaints, and that they can make complaints through multiple channels).
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Yes |
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Complaint root cause analysis investigating complaints fully to understand the cause of customer complaints, not just dealing with the symptoms.
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Yes |
Yes |
Compliance reports review compliance reports to check if standards are being met.
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Yes |
Yes |
Outcome reviews the four outcomes include requirements for firms to review standards over time. The results of these reviews, together with any action taken would be relevant for consideration of whether the outcomes are being followed.
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Yes |
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Testing customer experiences through processes such as mystery shopping, auditing, focus groups and deep dives.
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Yes |
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Staff feedback allowing staff to feedback honestly when they think processes could be improved.
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Yes |
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Processes and policies review reviewing whether processes and policies are effective in delivering good outcomes for consumers.
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Yes |
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Source: |
Source: FCA FG 21/1
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Authorisation |
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Supervision |
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Enforcement |
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Date published
01 September 2022
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