Regulatory Insights
Expert analysis on the latest regulatory insights in the UK.
CP21/13 outlines a framework that will have a far-reaching impact across the financial services sector, despite the FCA not outlining any of the granular rules at this stage.
The proposed Consumer Duty is a significant step by the FCA towards its operational objective to secure an appropriate degree of protection for consumers as well as a further move towards an outcomes-focused approach to regulation. The Consumer Duty is not an entirely new concept, it builds on the existing concepts of Treating Customers Fairly, the six consumer outcomes and the conduct rules to push firms towards a change in culture by putting the customer at the heart of their business.
Firms should view this consultation as a clear and detailed insight into the regulator's expectations on conduct and culture. Firms should look to undertake an exercise to review their current policies and practices to gain an understanding of the likely impact of the expectations in CP21/13 on their customer's journeys, feeding back any observations or issues into the FCA consultation process.
The proposals would require firms to:
The proposals apply to regulated firms, including electronic money and payment institutions, in relation to products and services that they manufacture or offer to ‘retail clients’ – even if there is no direct relationship with the end customer.
Retail clients is a broad term and the FCA has clarified that this term relates to all clients apart from:
The provision of financial services to SMEs would be covered under the proposed Consumer Duty. However, customers in wholesale or professional client markets will not be subject to the Consumer Duty but will remain protected under the existing principles that the FCA currently has in place.
The FCA has highlighted that a consumer’s ability to make good decisions can be impaired because of their weaker bargaining position, asymmetries of information, lack of understanding or behavioural biases. Firms can exploit these factors and cause harm through an array of practices such as:
Consumers may suffer harm because of the practices outlined above. The specific type of harm could include:
The new Consumer Duty aims to create an environment where all firms extend their focus on delivering good outcomes for customers in addition to maintaining compliance with specific FCA rules. It is designed to ensure the practices and harms detailed above do not occur.
The Consumer Duty would be implemented by the addition of a new principle within the PRIN Sourcebook and complemented by a suite of new rules and guidance to set higher standards of conduct for firms. The FCA believes this will present a clear statement of expectations that goes beyond existing Principles and rules to provide a framework for the ongoing development of retail markets.
CP 21/13 does not detail the specific rules or regulations that will form part of the Consumer Duty. However, the consultation paper provides an overview of the likely structure of those rules. It is expected to comprise of three elements:
The proposed Consumer Principle is designed to drive change in the culture and conduct of firms. The FCA recognises that this principle, along with other existing principles must allow for a degree of flexibility so that it remains relevant as market, products and services change and evolve over time leading to consumers facing potential new risks and harms. The standard the FCA wants to set for firms goes beyond “paying due regards to the interests of its customers” in Principle 6. The intention is to make it clearer to firms that they must play a more positive and proactive role in placing consumers at the heart of their business in order to drive good outcomes.
The FCA has proposed two options for the wording of the new Consumer Principle:
Option 1: ‘A firm must act to deliver good outcomes for retail clients’
Option 2: ‘A firm must act in the best interests of retail clients’
The meaning and intention of the principle will be further amplified and clarified through the other two elements of the consumer duty, the cross-cutting rules and the four outcomes.
It is important to note that the FCA recognises that consumers remain responsible for the decisions they make. The expectation on firms is to use their judgment in a fair and reasonable way to consider the impact of their actions in respect of the consumers’ needs and circumstances.
CP21/13 acknowledges the potential overlap between the proposed Consumer Principle and the existing Principles 6 and 7. The FCA alludes to the possibility of disapplying Principles 6 and 7 at some point in the future to avoid this overlap where the Consumer Duty would apply.
The proposed Cross-Cutting Rules and guidance would require three key behaviours from firms:
1. Take all reasonable steps to avoid causing foreseeable harm to customers
The expectation is for firms to take proactive steps to avoid causing harm to customers through their conduct, products, or services. Firms should not exploit customers’ vulnerabilities, behavioural biases, or lack of knowledge. Benefits and risks related to a firm’s products and services should be fairly described and not disguised through misleading framing or omission.
The FCA acknowledges that harm may sometimes occur due to unforeseeable circumstances, or in cases where there are no reasonable steps for firms to take to avoid it. Certain financial products involve risk/external factors and firms are not expected to protect consumers from risks they reasonably believed the customer understood and accepted.
2. Take all reasonable steps to enable customers to pursue their financial objectives
The FCA does not want firms to make financial decisions for consumers but wants firms to take responsibility for establishing an environment in which consumers are empowered to act in their own interests. Harms may arise when firms fail to appropriately consider customers vulnerabilities or behavioural biases. The FCA expects firms to use their knowledge of customer behaviours to support them in making good informed decisions.
3. Act in good faith
Firms are expected to deal with their customers with honesty by dealing fairly, openly and with consistency to the reasonable expectations of the consumer.
Reasonableness is a concept that the FCA will seek to embed across all elements of the Consumer Duty in order to clarify the standard of conduct that firms would need to meet. They have done this by setting out factors that influence what is reasonable, such as:
The FCA proposes to set expectations for each of the four outcomes in a suite of rules and guidance. The four outcomes themselves represent the key elements of the consumer’s relationship with the firm encompassing all various touchpoints across the design, sale and service phases of the customer journey:
The consultation paper requests feedback on the proposals and questions by 31 July 2021. The FCA is then expected to release a follow up Consultation Paper by 31 December 2021 with more of the proposed wording of the specific rules and guidance in relation to the Consumer Duty. The new rules are expected to be in place by 31 July 2022 leaving firms with little time to ensure they are able to uphold their new Consumer Duty.
This website uses cookies.
Some of these cookies are necessary, while others help us analyse our traffic, serve advertising and deliver customised experiences for you.
For more information on the cookies we use, please refer to our Privacy Policy.
This website cannot function properly without these cookies.
Analytical cookies help us enhance our website by collecting information on its usage.
We use marketing cookies to increase the relevancy of our advertising campaigns.