On 14 May 2021, the Financial Conduct Authority (FCA) published its latest Consultation Paper CP21/13. The paper sets out the regulator’s proposal for a new 'Consumer Duty', that would set a higher level of consumer protection in retail financial markets and will sit alongside the Principles for Businesses in the FCA’s Handbook. The Consultation will be open for feedback until 31 July 2021, and we are aware that the FCA expects to consult again by 31 December 2021 before implementing new rules by the end of July 2022.
The Consumer Duty will apply to all regulated firms, including Authorised Payment and E-money Institutions and Account Information Service Providers (AISPs), and will have three key elements to which firms will need to adhere:
1. A NEW CONSUMER PRINCIPLE
To reflect the overall standards of behaviour the FCA expects from firms in retail financial markets. This enhanced level of care would strengthen the existing requirement in the FCA’s Principles, in particular Principle 6, that a firm must have due regard to the interests of it's customers and treat them fairly. It would be an objective standard that would require firms to consider the reasonable expectations of their customer base as a whole, rather than achieving the absolute best outcome for each and every customer.
2. THE CROSS-CUTTING RULES
The FCA proposes that the Consumer Duty’s Cross-cutting Rules would set out the key behaviours required by the Consumer Duty, and make clear that the Consumer Principle requires 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; and
- to act in good faith.
3. THE FOUR OUTCOMES
The Four Outcomes represent the key elements of the relationship between a firm and the customer, namely, how firms design, sell and service their products and services, and the key contact points along the customer journey. They are the outcomes that describe the conditions needed for consumers to be able to obtain fair value in the products and services they buy, and each could therefore affect whether consumers receive fair value:
Communications equip consumers to make effective, timely and properly informed decisions about financial products and services.
In line with Principle 7, which already requires a firm to communicate with clients in a clear, fair and not misleading way, the FCA expects that firms’ communications consistently support consumers to make informed decisions by providing the information they need, at the right time, and in a way which they can understand, so that they can evaluate:
the options available to them;
the costs, risks and benefits attached to those options;
which options offer fair value and would meet their needs.
Products and services are specifically designed to meet the needs of consumers, and sold to those whose needs they meet.
The FCA requires that the products and services sold to consumers be fit for purpose, designed to specifically meet their needs and targeted at the consumers whose needs they are designed to meet (it is also essential to assess the consumers’ vulnerabilities as part of this process). These are essential requirements for products and services to be able to represent fair value for consumers (which are combined with the expectations on the Price and Value 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.
The FCA expects firms to provide a level of customer service that meets the needs of consumers throughout their relationship. Customer service should enable consumers to realise the benefits of the products and services they buy and ensure they are not hindered from acting in their own interests.
The price of products and services represents fair value for consumers.
The Price and Value outcome proposal is designed to work together with the other three outcomes to deliver fair value, and support overall financial wellbeing. In this regard, firms should be able to demonstrate that the benefits of their products and services are reasonable relative to their price. The FCA expects firms to actively put consumers at the heart of their business and assess the price of products and services at the design stage, and through ongoing monitoring.
The FCA is also requesting views regarding the option of introducing a private right of action attached to the Principles that could act as a deterrent to breaching these and encourage firms to deliver good consumer outcomes from the outset.
The expectation is that the new Consumer Duty will drive a shift in the culture and behaviour of firms, so they ensure that consumers always get access to products and services that are fit for purpose, represent a fair value and are clearly communicated and understandable. As mentioned the Consultation will be open for feedback until 31 July 2021 when the FCA will take a view of the responses.