The Financial Conduct Authority (FCA) has concluded its review of the new Consumer Duty, which aims to improve consumer protection across financial services through higher standards and clearer regulatory expectations.
This article will summarise the Consumer Duty and the FCA’s rules, explaining how the duty applies, what the FCA’s rules dictate, and what this means for firms.
FCA’s Consumer Duty: The basics
Before we discuss how the Consumer Duty applies and which organisations are covered, here’s an outline of the basic tenets of the duty.
The duty is made up of the following elements:
- The “consumer principle”: The overall “standard of behaviour” for firms when they deal with retail customers
- The “cross-cutting rules”: Standards that put the “consumer principle” into practice.
- The “four outcomes”: A “suite of rules and guidance” that clarify how firms should act in four key areas:
- Products and services
- Price and value
- Consumer understanding
- Consumer support
The duty is underpinned by “reasonableness”, requiring firms to interpret the rules in a prudent and responsible way.
FCA’s Consumer Duty: Scope and application
The FCA’s Consumer Duty rules apply to all firms authorised under the following laws:
- Financial Services and Markets Act 2000 (FSMA)
- Payment Services Regulations 2017 (PSRs)
- Electronic Money Regulations 2011 (EMRs)
What types of activities are covered?
The duty applies in respect of any “products and services for prospective and actual retail customers”.
The meaning of a “retail customer” varies from sector to sector. For example, consumer credit providers must comply with the rules in respect of all their regulated credit-related activities.
Firms dealing with small and medium enterprises (SMEs) must comply with the rules whenever they are normally regulated by the FCA in respect of their dealings with SMEs.
The duty applies in relation to “prospective” retail customers, as well as “actual” retail customers. As such, the rules cover activities such as:
- Communications around financial promotions
- Dealing with prospective customer inquiries
- Applications by prospective customers for a product or service
This might include circumstances in which a prospective customer does not become an actual customer, e.g., when a credit application is declined.
How do the rules apply across the distribution chain?
The FCA’s Consumer Duty rules apply to “all firms involved in the manufacture, provision, sale and ongoing administration and management of a product or service to the end retail customer (the “distribution chain”)”.
- The design, operation, or pricing of retail products and services
- The distribution of retail products or services
- The preparation or approval of retail customer-facing communications
- The delivery of retail customer support services
The common factor across all covered activities is that they “determine or have a material influence over retail customer outcomes”.
However, the duty does not render firms liable for the activities of other firms in the distribution chain—and does not require a firm to monitor other firms’ activities “unless there are regulatory requirements or contracts require it”.
An example of a regulatory requirement that would supersede this rule is the UK General Data Protection Regulation (GDPR), which imposes liability on a “data controller” for most activities of any “data processors” working on its behalf.
Three elements of the consumer duty
Now let’s take an overview of the three overarching elements of the Consumer Duty.
The consumer principle
The “consumer principle” underpins the duty, requiring firms to “act to deliver good outcomes for retail customers”.
The FCA provides two examples of questions firms should ask themselves when dealing with retail customers:
- “Am I treating my customers as I would expect to be treated in their circumstances?”
- “Are my customers getting the outcomes from my products and services that they would expect?”
The FCA also considers the following considerations to flow from the consumer principle:
- Pro-actively delivering good outcomes for customers
- Putting the customer’s best interests “at the heart” of the firm’s activities
- Addressing inadequacies that lead to poorer customer outcomes.
- Basing activities on a good understanding of the nature of customers’ behaviour
The cross-cutting rules
The three “cross-cutting rules” develop the FCA’s expectations in relation to the consumer principle.
The cross-cutting rules are as follows:
- Act in good faith towards retail customers
- Avoid causing foreseeable harm to retail customers
- Enable and support retail customers to pursue their financial objectives
Firms must apply these rules when meeting the “four outcomes”, explained below.
The four outcomes
The “four outcomes” identify what firms must achieve in four areas:
- Products and services, for example:
- Designing products and services to meet the “needs, characteristics and objectives” of target customers.
- Distributing products and services in a manner that is appropriate for the targeted customers.
- Regularly reviewing the product or service to ensure that it continues to meet the needs, characteristics, and objectives of target customers.
- Price and value
- Price and value, for example:
- Identifying aspects of the pricing structure that could cause foreseeable harm.
- Assessing whether fees or charges are unreasonably high compared to other comparable products.
- Ensuring changes in benefits of a product are reflected in the product’s price, when appropriate.
- Reassessing pricing to reflect any changes in underlying assumptions about the product’s value.
- Consumer understanding, for example:
- Supporting customers’ understanding via clear and appropriate communications.
- Tailoring communications considering the characteristics of the recipient customers.
- Ensuring customers have all the information they need to make informed decisions.
- Testing, monitoring, and adapting communications.
- Consumer support, for example:
- Designing and delivering support that meets the needs of customers.
- Ensure customers can use their products as “reasonably anticipated” by them.
- Including appropriate “friction” in customer journeys to reduce harm and allow customers time to reflect on their choices.
- Reducing unreasonable barriers and costs during the product lifecycle.
- Monitoring the quality of customer support.
Firms should monitor the application of the consumer principle, the cross-cutting rules, and their progress towards the four outcomes, so they can demonstrate compliance with the Consumer Duty.
When do the rules take effect?
The Consumer Duty and the FCA’s rules take effect on two dates:
- 31 July 2023: For new and existing products or services that are “open to sale or renewal”.
- 31 July 2024: For closed (or “closed book”) products or services