As I have mentioned in my article of 8 July last year (What is a Consumer?), whenever FCA guidance refers to dealing with consumers, it is always a good idea to check what the FCA mean by “Consumer” in that context. This is particularly important given that they are looking to introduce their new Consumer Duty rules by 31 July this year. This article will look at all the ramifications of the new duty rules and highlight changes that firms will need to factor in for the introduction of these new requirements.
In CP21/13 the FCA’s definition looked to include all clients other than professional clients and eligible counterparties. Following some pushback in the responses, the FCA has amended its proposal to align the scope of the Consumer Duty with the existing scope of the sectoral sourcebooks. This is helpful in providing some commonality in regulation, but regulated firms should not be under any misapprehension that the Consumer Duty can be brushed aside, or that it will not require significant effort by firms to be compliant with these new requirements. Indeed, as the FCA points out, it is a significant change and a unique regulatory intervention which affects all retail firms, products and services.
It is important to note that the FCA are proposing the introduction of a Three Level Consumer Duty Structure, comprising of a new consumer principle along with cross-cutting rules and four expected outcomes. As always with principles, this will give the FCA greater flexibility in enforcement than rules alone, and the proposed outcomes will provide detailed expectations.
The Principle is stated as being:
"A firm must act to deliver good outcomes for retail customers"
The Cross-cutting rules as:
- Act in good faith toward retail customers
- Avoid foreseeable harm to retail customers
- Enable and support retail customers to pursue their financial objective
And the outcome as:
- Products and services
- Price and value
- Consumer understanding
- Consumer support
There is also, tellingly, a new Senior Manager individual conduct rule:
“You must act to deliver good outcomes for retail customers”
All of this might seem reasonably straightforward, but the consultation paper is 243 pages long, including 51 pages of changes and additions to the FCA Handbook, along with 71 pages of non-Handbook guidance, so clearly it is a bit more complicated than might be assumed.
The FCA say that the Consumer Duty will not be retrospective, but it will be applicable to all and any products that a firm is operating or selling at the point when the new regime is implemented. The effect of this is that firms will be required to assess all of their regulated products to see whether they offer fair value to consumers. The FCA say that this must, as a minimum, include consideration of:
The nature of the product or service, including the benefits that will be provided or that consumers may reasonably expect, and their quality
Any limitations that are part of the product/service
The expected total price customers will pay; and
Any characteristics of vulnerability in the target market for the product or service
This exercise will need to be undertaken at the outset of the duty and at least annually thereafter (as well as undertaking a value assessment each time a new product is introduced, or a material change is made to a product).
For those firms offering unregulated products in addition to their regulated products, Principles 6 & 7 (treating customers fairly and being clear, fair and not misleading) will still apply to those products. There is, of course, no prohibition on undertaking a value assessment on the whole product range, regulated and unregulated, if the firm so wishes.
Anyone who has read any of my previous articles or heard me speak at a conference or webinar will not be surprised to see my stress the importance of evidencing that this exercise has been carried out. The FCA will, at any time, be able to demand to see the assessment and, as people will doubtless be fed up of hearing me say, as far as the FCA are concerned, if it’s not written down, it didn’t happen.
What firms must consider
Counterintuitively, even products which are nominally “free” will be required to be value assessed. This will require taking into account other non-financial costs such as use of personal data, or indeed use of funds held in the customer’s account, as against any profits or benefits accruing to the firm from the customer’s use of the product.
In looking at value assessment, the question arises “how much profit is too much?” and the answer, as always, is that it depends. PRIN2A.4.1R says "The relationship between the amount paid by the retail customer for the product and the benefits they can reasonably expect to get from the product. A product provides fair value where the amount paid for the product is reasonable relative to the benefits of the product". You will note the words "reasonably" and "reasonable" there. Essentially, it is a judgment call for the firm to make, but what will be vital is that the justification for that judgment is fully detailed and recorded, in case of later challenge by the FCA.
Firms also need to consider where they sit in the distribution chain, because the definition of retail customer now includes “the end retail customer in the distribution chain whether or not they are a direct client”. So you can be caught by the duty even if it’s not your customer. Mapping the distribution chain and your firm’s impact on the end customer will therefore be important in making your assessments. You may also need to revisit contractual relationships with suppliers, platforms and providers. Wholesale firms in the distribution chain can be caught if they have “material influence” over the design or operation of the product. This may impact some of the firms in the payments space offering “white label” products.
The Consumer Duty includes an obligation to monitor products throughout their lifecycle. The FCA say “"We do not propose to require firms to report on specific metrics, but firms need to ensure that they can 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".
At this point, I should remind readers that the FCA say they are a “data-led regulator”, so it is vital that firms collect appropriate data. In order to do so, firms need to guard against subjective outcomes and false expectations, to have some sort of behavioural insights into why the firm’s customers act as they do and have in place a suitable reporting and root cause analysis structure, going right up to Board/Senior Management level. As a reminder, Senior managers “must act to deliver good outcomes for retail customers” so failure to put in place appropriate structures could have personal consequences.
All of the above indicates that firms need to be thinking hard about this new Duty and putting in place the structures and resources to enable them to comply. The FCA are suggesting that firms should have until 30 April 2023 to fully implement the Consumer Duty. With everything else that is going on, that is not too far away.
Related resourcesAll resources
Payment Services Regulatory Compliance Forum 2023
Payments Newsletter - November 2023
A guide to effective fraud management – for Payment and E-money Firms
Proposed changes to HNW and sophisticated investors’ financial promotions exemptions watered down