The FCA first published their duty of care paper in July 2018. Two years on it is now consulting on introducing a new consumer duty. This consultation ties in with the new FCA ‘outcomes’ focused principles based framework and is open until 31st July 2021 and following section 29 of the financial service act 2021, should be introduced by 1st August 2022.
The Consumer Duty is intended to set a higher standard of care and expectation beyond the current set of Principles and Rules. The Consumer Duty will have three key elements:
- Consumer Principle, which sets a clear tone and uses language that reflects the overall standards of behaviour the FCA expect from firms.
- ‘Cross-cutting Rules’, which develop and clarify the Consumer Principle’s overarching expectations of firm conduct and set out how it should apply in practice.
- The ‘Four outcomes’, a suite of rules and guidance that set more detailed expectations for firm conduct in relation to four specific outcomes for the key elements of the firm-customer relationship – Communications, Products and Services, Customer Service and Price and Value.
The Consumer Principle
The FCA has put forward two options for the Consumer Principle:
- 'A firm must act to deliver good outcomes for retail clients.'
The FCA acknowledges that the concept of a ‘good outcome’ does not have an established legal meaning – the rules and guidance would give greater clarity on what good looks like but would not be exhaustive.
- 'A firm must act in the best interests of retail clients.'
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.
The Cross-cutting Rules
The Cross‑cutting Rules would set out the three 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 consumers
The FCA says that this means firms not causing harm to customers through their conduct, products or services and taking proactive steps to avoid it (where it is within the firm’s control to do so). They should not seek to exploit customers’ vulnerabilities, behavioural biases or lack of knowledge and should be fair in describing the benefits and risks of their products and services, not disguise these through misleading framing, omission, or burying key terms in documents they know customers won’t read.
- take all reasonable steps to enable consumers to pursue their financial objectives
The FCA states that consumers best understand their own circumstances and financial needs and objectives. They should be empowered to make choices for themselves and remain ultimately responsible for their decisions and actions. Firms should take responsibility for establishing an environment in which consumers can act in their own interests. Firms should take reasonable steps to understand behavioural biases and the impact of vulnerabilities and use their knowledge of how consumers behave to enable and support them to make good decisions.
- to act in good faith
This is a standard of conduct characterised by honesty, fair and open dealing and consistency with the reasonable expectations of consumers.
These behaviours will need to be enshrined in all of a firm’s activities – from high-level strategic planning to individual customer interactions.
The Four Outcomes
The FCA states that the Four Outcomes represent the key elements of the firm-customer relationship: how firms design, sell and service products and services, and the key contact points along the customer journey. The behaviour and actions of firms in relation to each of these outcomes are instrumental in enabling consumers to meet their financial needs and improve their financial wellbeing.
- Communications
The FCA would require firms to communicate in a way that is reasonably likely to be understood and that facilitates decision‑making and also to take proportionate steps to review and, where appropriate, test and adapt their communications to ensure they are likely to be understood by the target consumers. The proposal reinforces and builds on the existing Principle 7, which requires a firm to pay due regard to the information needs of clients, and communicate information in a way which is clear, fair and not misleading.
- Products and Services
The FCA are proposing to introduce overarching requirements that will mean products and services sold to consumers have been designed to benefit them and perform as would reasonably be expected. The Product Intervention and Product Governance Sourcebook (PROD) already sets substantially similar requirements on the design, approval, marketing and management of certain products and services throughout their lifecycle, but PROD does not have general application across all retail markets that the FCA regulate.
- Customer Service
The FCA are proposing to set requirements for firms’ customer service arrangements that enable consumers to realise the benefits of products/services without undue hindrance, enable consumers to act in their own interests without undue hindrance and do not lead consumers to incur unreasonable additional costs. For example, it should be at least as easy to exit a product or service as it is to purchase it in the first place.
- Price and Value
The FCA are proposing to introduce a requirement that firms set prices so that they represent fair value for their target customers. Firms would not be providing fair value if the price consumers pay for a product/service is not reasonable relative to its expected benefits. The FCA would not require firms to offer products at or below a set price. Nor do the FCA intend to use the proposed rule itself to introduce market interventions, such as price caps or other price interventions.
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