If the FCA checked on your firm today, would your 'Implementation Plan' fit their criteria?
Will your firm be affected by the new Consumer Duty rules? If so, to what extent?
In this newsletter, Yhan Roger Rizet, trainee compliance associate at FinTech Compliance, explores the expectations your firm faces, what and who are exempt, and the measures you should have in place before the October deadline.
What is Consumer Duty?
Consumer Duty – often simply called “the Duty” – is a new set of rules from the Financial Conduct Authority (FCA) that came into force on 31 July 2023.
These rules seek to set a higher standard of consumer protection in the financial services and FinTech industries by:
Protecting consumers from current, new and emerging drivers of harm
Giving firms more certainty of the FCA’s expectations to support innovation, competition, and new ways of serving customers
The FCA’s expectations for Consumer Duty will apply differently to new products, services and business models as they continue to emerge and develop in an ever-changing and increasingly digital environment.
What does Consumer Duty involve?
Consumer Duty is made up of three components: Principle 12, the cross-cutting rules and the four outcomes.
Principle 12
The FCA’s new Principle for Business, Principle 12, states that: “A firm must act to deliver good outcomes for retail customers”. It sets a higher standard than principles 6 and 7.
The cross-cutting rules
These rules develop the FCA’s expectations for behaviour through three overarching requirements that explain how firms should act to deliver good outcomes for retail customers.
The cross-cutting rules require firms to:
Act in good faith towards retail customers
Avoid causing foreseeable harm to retail customers
Enable and support retail customers to pursue their financial objectives
The four outcomes
The four outcomes are a suite of rules and guidance setting more detailed expectations for firm conduct.
They cover four specific areas that represent key elements of the firm-consumer relationship:
The governance of products and services: Firms must:
Ensure the design of the product or service meets the needs, characteristics and objectives of customers in the identified target market
Ensure the intended distribution strategy for the product or service is appropriate for the target market
Carry out regular reviews to ensure that the product or service continues to meet the needs, characteristics and objectives of the target market
Price and value: Fair value is about more than just price. Consumer Duty aims to tackle factors that can result in products or services that are unfair or of poor value. This could include unsuitable features that can lead to foreseeable harm or frustrate the customer’s use of the product or service, or poor communications and consumer support.
Consumer understanding: Consumers can only be expected to take responsibility where firms’ communications enable them to understand their products and services, their features and risks, and the implications of any decisions they must make (regards to principle 7).
Consumer support: The FCA expects firms to provide support that meets customers’ needs. This support should enable consumers to realise the benefits of the products and services they buy, pursue their financial objectives and act in their own interests.
Do the new Consumer Duty rules apply to your firm?
Consumer Duty applies to firms that can determine or materially influence retail customer outcomes.
For example, it applies to firms that impact:
The design or operation of retail products or services, including their price and value
The distribution of retail products or services
The preparation and approval of communications that are to be issued to retail customers
Customer support for retail customers
A firm that’s remote from the retail customer, with no direct client relationship, may have more limited obligations.
For example, a fund manager working with the board of an investment trust may have a material influence over product design and other matters. However, the ultimate decisions may be taken by the board.
The firm should, where reasonably practicable, comply with the Duty within the context of its role. This could include discussing any concerns with the board.
To give you an idea, an investment bank that designs a structured product for sale to retail customers would be subject to the Duty. On the other hand, an investment bank providing wholesale instruments that a third-party firm independently uses as component parts of a retail product wouldn’t be.
Does Consumer Duty also apply to your unregulated activities?
The FCA also proposed that Consumer Duty would apply to unregulated activities that are ancillary to a regulated activity.
Ancillary activities are those carried on in connection with a regulated activity or held out as being for the purposes of a regulated activity. They include unregulated activities necessary for the completion of a regulated activity.
For example, the design of a product or service, and ongoing customer support services aren’t themselves regulated activities. They are, however, necessary activities linked to regulated activities.
Therefore, selling a separate non-financial services product while a regulated activity is performed, where the latter’s completion doesn’t depend on the sale of the unregulated product, wouldn’t be considered an ancillary service.
Is your firm exempt from Consumer Duty?
Consumer Duty doesn’t apply to firms whose role is limited to activities such as:
Operating within a mandate determined by another firm in the chain. This could include a portfolio manager who solely manages assets under a mandate determined by an entirely independent professional client. This might be the case where a portfolio manager is managing part of the portfolio of a defined benefit pension scheme. It’s unlikely to be the case where the portfolio manager is managing the assets of an investment company and, while technically independent, has a material influence on the design, branding and promotion of the product.
Providing information to support the work of another firm in the chain
Providing IT systems. Moreover, the Duty doesn’t apply to the distribution of group insurance policies or the extension of the policy to new members.
Issuing credit ratings where these are the opinions of an agency using an established and defined ranking system to assess the creditworthiness of:
An entity, a debt or financial obligation, debt security, preferred share, or other financial instrument
An issuer of such a debt or financial obligation, debt security, preferred share, or other financial instrument
Those conducted by institutions such as recognised investment exchanges, recognised clearing houses, settlement systems and trade repositories where they’re not authorised persons subject to the FCA’s regulation
The FCA confirmed that the Duty doesn’t apply to activities where an exclusion exists, either in the Handbook or in legislation. They have updated the rule on which we consulted to make this clear.
To give an example, for mortgages, the Duty follows the position in the Mortgage Conduct of Business (MCOB) rules and doesn’t apply to unregulated buy-to-let contracts or large business customers.
How does Consumer Duty apply to your firm?
The FCA proposed that most elements of Consumer Duty would apply on a forward-looking basis to existing products or services that are either:
Still being sold to customers
Closed products or services that aren’t being sold or renewed
In addition, the FCA proposed to disapply aspects of the product and service outcomes rules that couldn’t be easily applied to closed products and services.
For example, they said that manufacturers wouldn’t need to identify a target market or develop a distribution strategy.
What sanctions can your firm face if you’re not compliant with Consumer Duty?
The FCA has decided to continue with the proposed approach and isn’t attaching a private right of action (PROA) to any aspect of Consumer Duty at this time.
As set out in CP21/36, the FCA sees benefit in giving firms time to implement the significant changes that the Duty entails without the threat of private action being taken.
Any future review of the case for a PROA could consider, for example, whether there was a stronger case for attaching it to the rules under the FCA’s ‘four outcomes’, but not to Principle 12 or the cross-cutting rules.
Any decision to attach a PROA to the Duty would be subject to further consultation.
What can your firm do to be compliant with Consumer Duty?
Since each firm provides different products and services, it’s difficult to give general advice for complying with Consumer Duty.
That being the case, the best thing to do is to think about and answer the types of questions the FCA might ask your firm after the October deadline.
This will help you put measures in place to ensure you satisfy the Duty and ensure high levels of consumer protection.
Types of questions the FCA might ask your firm include:
Has the firm specified the target market of its products and services to the level of granularity necessary?
How has the firm satisfied itself that its products and services are well-designed to meet the needs of consumers in the target market, and perform as expected?
What testing has been conducted?
Has the firm satisfied itself that the quality of any post-sale support is as good as the pre-sale support?
How is the firm ensuring that its remuneration and incentive structures drive good outcomes for customers?
What actions is the firm taking to improve these outcomes?
Who’s accountable for this work, what will improvement look like and when will it happen?
As long as your firm is acting in respect of Principle 12, the cross-cutting rules and the four outcomes, and is able to comfortably answer the questions provided above, you can consider it compliant with the Duty!
Written By
Yhan Roger Rizet
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