The FCA’s new Consumer Duty rules – an overview of its impact on firms

On 27 July 2022, the FCA released its Policy Statement on the new Consumer Duty, which includes its final rules. These proposals represent one of the largest pieces of regulatory reform in the retail sector for over a decade. The deadline for the implementation period for these reforms is only a year away for most of the final rules, with the FCA expecting firms to take some steps by the end of October 2022.

Why has the Consumer Duty been introduced?

The FCA’s new Consumer Duty is intended to introduce a higher level of consumer protection across retail financial markets, which is part of its broader push to ensure that firms are proactively doing the ‘right thing’ for retail customers. The new Consumer Duty is a wide ranging and comprehensive package of measures which represents a fundamentally new and different approach to the regulation of all firms engaged in the provision of financial services and products to retail customers.

It is intended that the package of measures, focused on ‘outcomes’ for retail customers, will challenge firms to reorient their business to act to deliver good outcomes for retail customers. It is worth bearing in mind that this is a package of reforms with some history of its own, which is important to understand when assessing the proposals. The FCA’s proposals for a new Consumer Duty actually fulfil a legislative requirement set out in the Financial Services Act 2021; and the question of a ‘new duty of care’ has been discussed for several years now.

What impact will the new Consumer Duty have on firms?

The new Consumer Duty is expected to have a sizeable impact on the retail sector; the FCA’s own estimate for one-off implementation costs across the sector is up to £2.4bn. It is unlikely that there will be many parts of any firm in the retail sector that are not impacted by these reforms, and this view is shared by the FCA, which has emphasised that it expects the new Consumer Duty proposals to be embedded by firms throughout their business.

There will, for example, be a need for firms to understand which of their products and services fall within scope of the new Consumer Duty proposals, particularly in relation to the phased implementation dates. Firms will also then need to map out the end-to-end customer journeys for these products and services in order to understand the uplift that may be required in order to implement the FCA’s final rules.

There are likely to be fundamental organisational challenges too for firms, as the FCA’s proposals include a number of requirements relating to how firms approve new products and review their existing products and services. Firms will also need to revise customer-facing communications and contracts in many cases, as well as reviewing and potentially amending distribution arrangements and arrangements with third parties, all of which will take time to negotiate and effect.

The new Consumer Duty will also require some firms to reassess fundamental aspects of their business model: for example, their customer acquisition strategies, and indeed the ways in which retail customers can exit products and services. The FCA expects firms to consider behavioural biases and information asymmetries that are prevalent in some areas of the retail sector, to assess the extent to which their communications strategies enable and support retail customers to pursue their financial objectives. The new Consumer Duty represents a shift towards a more dynamic, holistic approach to customer communications which involves not only an assessment of the communication itself, but also of the ways in which the target customer recipients are likely to (and then do in fact) engage with it. In some ways, the new Consumer Duty asks firms to stand in their customers’ shoes and consider how the customer might respond to their actions. This is a helpful way to consider the impact of the new rules. To do this, it is necessary to monitor and test the outcomes that are being delivered for customers.

Another key area that many firms will need to grapple with following the release of the Policy Statement is the ‘price and value outcome’, which is a key plank of the new Consumer Duty. This is likely to be a new concept to most of the market and so firms will need to consider the institutional architecture that they will need in order to meet these new requirements. It will be important for firms to have clear assessments of the intended customer benefits of a product or service as the bedrock of the fair value assessment. Taking this on, firms will need to take a holistic view of costs when assessing value, which will need to include an assessment of potential non-financial costs. If customers are unable to effectively access information about product features, or about contingent fees and charges, then these could amount to barriers which prevent them from pursuing their financial objectives.

The different aspects of the new Consumer Duty are intended to knit together, and whilst firms should really be considering the impact assessment for their business on a ‘line by line’ basis against the final rules in the Policy Statement, importantly, firms should also be thinking holistically about the cultural change which the FCA expects the new Consumer Duty to bring, and what that means for governance and organisational arrangements.

The FCA recognises that the benefits of the new Consumer Duty will only be delivered by firms that make enduring changes to their culture, behaviour and processes. To this end, the FCA has embedded good governance and a strong culture in its proposals by requiring that the new Consumer Duty should be reflected in firms’ strategies, governance, leadership and people policies, which includes an obligation on senior management to attest to the firm’s compliance with the new Consumer Duty annually. Firms will also need to provide training to staff on the new Consumer Duty rules.

It will be critical for firms to maintain evidence of their implementation plans and approach to compliance with the new Consumer Duty rules in order to be able to demonstrate how they have met the FCA’s regulatory expectations.

When does the new Consumer Duty come into force?

The new Consumer Duty implementation deadline for new and existing products and services has been moved back three months by the FCA from its original consultation paper to 31 July 2023. The FCA has provided further time for firms to review their closed/back-book products and services, as the deadline for firms in respect of these products and services is one year later, on 31 July 2024.

However, the FCA has set out a number of key interim milestones which it expects firms to comply in implementing the new Consumer Duty, and this includes a deadline of 31 October 2022 for firms to approve their implementation plan. Manufacturers must also ensure that they complete their review process for all their products and services by 30 April 2023, in order to allow sufficient time to distributors to complete their processes for the same products/services ahead of the implementation deadline.

Firms will therefore need to quickly get to grips with the final rules for the new Consumer Duty in order to ensure that their implementation projects can be delivered in time. Further information on the new Consumer Duty can be found in our Global Regulation Tomorrow Plus podcast series.

This briefing was first published on Thomson Reuters Regulatory Intelligence on 29 July 2022