The Financial Conduct Authority’s (FCA) consultation on its proposed new Consumer Duty has now closed.
The regulator and politicians hope it will drive a significant shift in the culture and behaviour of firms across the whole retail financial services industry. It will certainly be a key reputational risk issue for firms in the months and years ahead.
With a tight implementation deadline, embedding the new requirements will be very challenging. It can be expected to dominate firms’ compliance functions and take up a significant amount of senior management time for the next twelve months and beyond.
The new duty marks a major gear change on the Treating Customers Fairly (TCF) regime introduced some 15 years ago. It will be a core tool underpinning the FCA’s self-declared ambition to be more assertive, proactive and interventionist.
The scope covers all of retail financial services, including firms who don’t have a direct relationship with the end consumer.
If you’re not already familiar, the new duty comprises three elements:
- a ‘Consumer Principle’ to set the overarching standard of behaviour expected from firms. This would require firms to “act to deliver good outcomes for retail clients”;
- cross-cutting rules to set out how the new principle should apply in practice; and
- rules and guidance with more detailed expectations for the conduct of firms in relation to four new outcomes: communications; products and services; customer service; and price and value.
While it builds on existing principles and rules, the new outcomes will have a big impact on most firms serving the retail market.
All firms will have to be able to evidence that their communications are not only compliant but are “understandable and can facilitate informed consumer decisions”.
All products and services will need a clear target market definition – effectively building on and embedding the investment and advice sector Product Intervention and Product Governance Sourcebook (PROD) rules across all retail products. Firms will also need to be able to show that their customer service “meets consumers reasonable needs and expectations”.
Most significant, though, are the requirements around price and value. To prevent future problems like PPI and payday loan rip-offs, firms will have to conduct value for money assessments, similar to those that asset managers have had to do in recent years.
They will need to be able to demonstrate that the benefits of their products and services are reasonable relative to their price and provide fair value – both at the product design stage and through ongoing monitoring.
All of this points to significant research, evidencing and auditing on an enhanced scale and a big compliance challenge. The FCA can ask for value statements and other documentation on demand. Senior management will be held responsible for the proper implementation of the new regime.
The rules are expected to be in place by the end of July with a proposed nine-month implementation period. Industry groups think that timescale is unrealistic and are calling for two years. The FCA will argue much of what is required should already be in place through existing TCF and product rules.
Firms are understandably concerned about the level of subjectivity around central concepts such as “good faith,” “foreseeable harm” and “value”. They worry that a lack of clarity leaves open regulatory, legal and ombudsman related risks, although they’ll be relieved that the idea of a “private right of action” in relation to the new principle has been shelved, at least for the time being.
This significant evolution in the regulatory landscape of course stems from mis-selling and other poor practices across the industry over the years, leading to politicians requiring the regulator to act.
The House of Lords voted to introduce a statutory duty of care in March 2021. As a compromise with the Government, Parliament ultimately agreed to require the FCA to consult on whether it should introduce a duty of care, and the consumer duty is its response.
The lesson is that ultimately politics drives regulation. Parliament has never been more pro-consumer in its outlook. Even under the new regulatory framework currently being developed – where the FCA will have more freedom to develop policy – politics will continue to shape its approach and priorities.
Influencing the regulatory landscape therefore inevitably requires engaging in political and public policy debates.
Paul Montague-Smith, senior counsel – public affairs, MRM