On 7 December 2021, the FCA published Consultation Paper 21/36 ‘A new Consumer Duty – Feedback to CP21/13 and further consultation' (“CP21/36”).
CP21/36 follows Consultation Paper 21/13 ‘A new Consumer Duty’ (“CP21/13”) which the FCA published in May1 last year. In CP21/13 the FCA set out a package of proposals for a proposed new ‘Consumer Duty’ that the FCA expects will drive a change in culture in firms. The expectation is that when the new duty is finalised firms will step up and put consumers at the heart of what they do. The components of the new Consumer Duty, as set out in CP21/13, consisted of:
- a new Consumer Principle, which sets an overall standard of behaviour that the FCA wants from firms;
- cross-cutting rules that develop the FCA’s overarching expectations for common themes that apply across all areas of firm conduct; and
- a suite of rules and guidance setting more detailed expectations for firm conduct for four specific outcomes representing the key elements of the firm-consumer relationship.
In CP21/36 the FCA sets out:
- the responses it received to CP21/13 and its analysis of them;
- revised proposals for a new Consumer Duty Principle; and
- the proposed draft rules, and Handbook and non-Handbook guidance to help provide examples of behaviour that could lead to outcomes which would be likely or unlikely to satisfy the Consumer Duty.
The overall structure of the new Consumer Duty, as outlined in CP21/13 has not been changed in CP21/36.
The FCA’s initial thinking in CP21/13 was that the Consumer Duty Principle would apply to all business conducted by firms with ‘retail clients’. The FCA had defined 'retail clients' to include all clients other than professional clients (such as large corporate entities and government bodies) and eligible counterparties.
However, the FCA has now recognised that this may extend the Consumer Duty Principle further than intended and bring in scope SME’s that were not previously within scope of Principle 6 and 7. As such, the FCA has decided to align the scope of the Consumer Duty Principle with the existing scope of the sectoral sourcebooks within the FCA Handbook. The FCA has provided examples of how it expects this approach to work “For example, for insurance, the scope of the Consumer Duty will follow the position in the Insurance Conduct of Business Sourcebook (ICOBS). For mortgages, the Consumer Duty would follow the position in the Mortgage Conduct Business Sourcebook (MCOB).” The draft rules in CP21/36 set this out in more detail.
The FCA has stated that the Consumer Duty Principle will apply to firms dealing with high net worth (“HNW”) individuals unless that status takes conduct outside of the FCA’s regulatory perimeter. For example, under The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, the financial promotion restriction in the Financial Services and Markets Act 2000 does not apply to certain promotions communicated to certified HNW individuals. Equally, the FCA has helpfully confirmed that the Consumer Duty Principle will not apply to unregulated business, and it is not expected to change the existing scope of the regulatory perimeter (i.e. if Principles 6 and 7 do not currently apply to a firm’s business, then the Consumer Duty Principle will also not apply).
The FCA notes that Principles 6 and 7 will continue to apply to firms dealing with wholesale or retail customers outside the scope of the Consumer Duty.
One of the areas that is likely to cause most concerns for firms is the FCA’s proposals in relation to the scope of the Consumer Duty to firms within the distribution chain of products/services that may ultimately be provided to retail clients. The FCA has proposed that the Consumer Duty would apply to all firms in the distribution chain that can influence material aspects of the design, target market or performance of a retail financial services product or service. The FCA has provided further commentary on how it expects this to be interpreted by firms.
While it is obvious that firms which have the end direct relationship with a retail customer will be subject to the Consumer Duty (due to their ability to materially influence the service provided to the retail customer), it is less clear cut for wholesale firms. Notwithstanding this, the FCA has confirmed it expects that the Consumer Duty Principle would apply to wholesale firms that have a material influence over:
- the design or operation of retail products or services, including their price and value;
- the distribution of retail products or services;
- preparing and approving communications that are to be issued to retail clients; or
- direct contact with retail clients on behalf of another firm, such as firms involved in debt collection or mortgage administration.
By way of example, the FCA note that “an investment bank that designs a structured product for sale to retail customers would be subject to the Consumer Duty but investment banks providing wholesale instruments as component parts of a product created by a third-party firm would not”.
The FCA has also confirmed that firms are responsible for their own activities under the Consumer Duty Principle, and that they cannot transfer regulatory responsibilities to other third parties (i.e. such as other entities within the distribution chain). The FCA expects that firms may wish to set out their relevant regulatory obligations within any agreements between such parties – as will be required under the products and services outcome for co-manufacturers of any products or services falling within scope of the Consumer Duty Principle (see below for further detail).
The FCA notes that they are only responsible for the regulation of activities that fall within scope of their regulatory remit – i.e. activities that occur within the UK. As such, where firms which distribute or manufacture products/services are based outside of the UK/the FCA’s supervisory remit, the FCA is proposing to place a burden on the relevant UK firms in that distribution chain to take ‘all reasonable steps’ to comply with the Consumer Duty Principle requirements. As discussed further below, the FCA have more broadly dropped the requirement on firms to take ‘all’ reasonable steps to just ‘reasonable steps’ for the Consumer Duty requirements, and so it will be interesting to see whether this standard is also revised in the final Policy Statement expected to be published later this year.
Application to existing products and services
Although the FCA states in CP21/36 that its new rules and guidance for the Consumer Duty will not be applied retrospectively, it is important to note that they will apply to both new and existing products and services (including both on-sale and off-sale products). As such, although the obligation on firms to review these products and services will only apply from 30 April 2023 (the currently proposed implementation date), firms will need to implement processes going forwards and will need to undertake a review of their back book of products to ensure that these are also compliant with the Consumer Duty proposals.
As an initial comment on this application of the Consumer Duty, it means that for closed products and services, firms would be expected to identify whether there are aspects of the design of the product or service which mean they are not meeting the cross-cutting rules. Where a firm is taking action to comply with the Consumer Duty in respect of any product or service with existing contracts, the FCA would not expect firms to give up any contractual rights they had a firm expectation of being able to enjoy, although they would be free to do so. Firms would instead need to consider alternate ways to prevent harm for existing customers. Further details on the practical impacts that the scope of application of the Consumer Duty Principle may have for firms is set out below in consideration of the cross-cutting rules and the four outcomes.
New Consumer Duty Principle
The FCA had put forward two alternatives for the Consumer Duty Principle (to be set out as the new Principle 12 in the FCA Handbook) in CP21/13, namely:
- option 1 – A firm must act to deliver good outcomes for retail clients; or
- option 2 – A firm must act in the best interests of retail clients.
The FCA confirms in CP21/36 that it has decided to go for option 1 on the basis that it better reflects the shift that it wants to see and the expectation for firms to consistently focus on consumer outcomes and putting consumers in a position where they can act and make decisions in their own interests.
As such, where applicable firms will be expected to comply with the new Consumer Duty Principle as set out in Principle 12 (and the related rules and guidance in PRIN 2A – as explored in further detail below through the cross-cutting rules and four outcomes), instead of Principles 6 and 7.
It is important to note that when compared with Principles 6 and 7, the Consumer Duty Principle places a higher standard of conduct on firms. Although the FCA recognises that existing guidance on Principles 6 and 7 will remain relevant to firms, firms should note that compliance with such guidance may not necessarily mean that they are compliant with the Consumer Duty Principle.
Accordingly, for most firms, the initial issue will be in understanding their current approach to compliance with Principles 6 and 7, and then where the Consumer Duty Principle will apply, whether there is a gap between their current approach and these new enhanced expectations from the FCA. From an audit trail perspective, we expect that firms will need to document their decision making for such a review, even where they may ultimately conclude that their existing arrangements are already compliant with the Consumer Duty Principle.
The FCA has introduced cross-cutting Handbook rules to develop and strengthen the standards of conduct that they expect from firms in order to comply with its expectations for the Consumer Duty Principle.
The FCA has set out three cross-cutting rules, namely for firms to:
- act in good faith towards retail customers;
- take reasonable steps to avoid causing foreseeable harm to retail customers; and
- take reasonable steps to enable and support retail customers to pursue their financial objectives.
The FCA has changed the nature of these cross-cutting rules since their initial consultation in CP21/13, and has provided helpful commentary on their scope. The FCA considers that firms should take account of these cross-cutting rules at each step of the customer journey.
Act in good faith
Following CP21/13, there were concerns that this new rule may create some form of fiduciary relationship between a firm and its retail customer (i.e. where none had previously existed). However, the FCA has confirmed in CP21/36 that it does not consider that this would be the case, but it does not set out the legal basis on which it has reached this conclusion. Therefore, whilst the FCA’s commentary is helpful in terms of setting their expectations on the scope of the Consumer Duty, it would be helpful to understand in the final Policy Statement the basis upon which the FCA reached this position.
In terms of the actual scope of this cross-cutting rule, the FCA consider that it is a standard of conduct that is “characterised by honesty, fair, and open dealing, and acting consistently with the reasonable expectations of retail customers”. The FCA expect firms to consider these points and act in good faith throughout the customer journey.
The FCA’s draft rules provide fairly straightforward examples of compliance with this cross-cutting rule (e.g. do not mislead customers, take advantage of their circumstances – i.e. vulnerability, or ignore the customer’s legitimate interests when providing them with services/information). The FCA’s draft non-Handbook guidance in Appendix 2 of CP21/36 provides further detail on the scope of this role, and how firms may need to incorporate this into each step of the customer journey. For example, the FCA consider that a firm would act in good faith by ensuring that its products (and customer communications):
- do not exploit behavioural biases in customers;
- that any algorithms do not lead to outcomes that may disadvantage one group of customers over another;
- that variations to products do not make them more difficult to compare with competitors’ products; and
- by ensuring that costs are presented in a way that is easy for the customer to understand the total cost for the product/service.
In order to show that they have acted in good faith across the entire lifecycle of a product or service and throughout the customer journey, firms will need to review and modify their governance frameworks, product design processes and customer communication/support functions. As an example, for firms offering credit to retail customers, they will need to be able to evidence that they have considered these factors in the product design process and in monitoring of the product’s distribution – i.e. that the firm’s credit underwriting algorithm is not prejudicing or otherwise causing harm to particular types of customers, in order to be able to demonstrate to the FCA that they have acted in ‘good faith’.
Take reasonable steps to…
Before considering the core nature of the next two cross-cutting rules, it is appropriate to consider the standard that is being placed on firms for those rules – namely, “to take reasonable steps”.
Significantly this is a change from the previous “all reasonable steps” standard that the FCA had initially put forward in CP21/13. As recognised by the FCA, “all reasonable steps” is a very high standard for firms to comply with, and would potentially have led to regulatory arbitrage with the Senior Managers and Certification Regime (“SMCR”). For example, a firm could have breached the rules by failure to take ‘all’ reasonable steps, but the relevant senior management function holder for that area would not be in breach if they could demonstrate that they had taken just “reasonable steps” in respect of the same matter.
In determining what is a “reasonable step” for the purposes of compliance with these cross-cutting rules, the FCA consider that this should be measured against the tortious concept of how a reasonably prudent firm would act in the relevant circumstances. Although we agree that the concept of ‘reasonableness’ is fairly developed in tort under English law, given that these are new requirements and expectations on firms, it is unclear exactly how this concept would be interpreted by a court in practice. Nevertheless, decisions on the scope of ‘reasonable steps’ in the context of the SMCR are likely to prove useful for firms as an initial point of reference.
Avoid causing foreseeable harm to retail customers
The focus of this cross-cutting rule is on firms not causing harm to customers through their conduct, products or services and acting to avoid it. As noted by the FCA in CP21/36, a firm will not be in breach of this cross-cutting rule per se simply because the customer has suffered harm, as long as they have appropriately highlighted the risk of the foreseeable harm to the customer and they reasonably believe that the customer has understood and accepted such risks.
For example, a customer may suffer a foreseeable harm if they fail to make their mortgage payments and their home is repossessed. However, in order for a firm to be compliant with this cross-cutting rule, they would need to ensure that they had:
- considered whether the product was appropriate for the relevant target market (and distribution method) during the design process, and considered whether the pricing represented fair value and was appropriate for that type of customer (e.g. the firm is not offering mortgages to customers that it understands would not be able to afford them);
- adequately disclosed and highlighted the risk of repossession to the customer throughout the customer journey. Although firms will need to continue to comply with product/service specific requirements (i.e. MCOB disclosures for mortgages), they may need to reassess whether the risks for the customer are adequately highlighted to customers in those disclosures;
- on the basis of the information that the firm holds on the customer (and taking account of the product design elements flagged above), reasonably believe that the customer understood that their property could be repossessed if they failed to meet their mortgage payments. As this is subject to the information held by the firm, there will be greater onus on advisory/management relationships to take full account of the information that they hold on their customer in coming to this determination (and in making the disclosures above); and
- provided sufficient information to the customer to explain the repossession process.
Firms will need to be able to take proactive and reactive steps, throughout the customer journey, where necessary to demonstrate that they have taken reasonable steps to avoid foreseeable harm to retail customers. From a practical perspective, we expect that one of the biggest challenges for firms in complying with this requirement will be in scoping out all ‘foreseeable harms’ for their products/services (noting that this obligation applies to both on-sale and off-sale products/services).
From an audit trail perspective, we expect that firms will need to evidence that they have reviewed each of their products/services to understand whether they have already captured all foreseeable harms for retail customers, and then what steps they have taken to mitigate such harms at each stage of the customer journey. As noted above, for the good faith rule, following the initial review for implementation, firms will need to embed this exercise into each of its governance framework, product design process, customer support and communications processes and management information/reporting dashboards.
Enable retail customers to pursue their financial objectives
This cross-cutting rule is concerned with the financial objectives of the consumer in relation to the financial product or service and applies throughout the customer journey and life cycle of the product. The actions a firm might need to take to enable and support customers to pursue their financial objectives would be determined by what is within a firm’s control, based on their role and knowledge of consumers.
As such, the scope of this cross-cutting role will be dependent on both:
- the nature of the relationship between the firm and the retail customer (i.e. providing purely non-advised/execution only services vs advisory or discretionary management services); and
- the relevant product/service provided to the retail customer.
For non-advised/execution only services, the FCA has stated that firms providing such services can assume that the customer’s financial objectives are purely the enjoyment and use of the product and service they have purchased (and any wider interests). The one key caveat to this position is where the relevant firm has a wider relationship with the customer, and therefore be able to understand from that information whether the purchase of that product/service is consistent with their financial objectives. As such, firms may need to consider how information on a customer is held when that customer accesses services across a variety of different business divisions within the institution (i.e. retail banking, wealth management, etc).
Although the FCA recognise that the customer still remains responsible for their decision to purchase a product/service, firms need to ensure that the customer is sufficiently informed to make that decision. Accordingly, taking the point above on a wider firm relationship, even in an execution only setting, if the firm understood more broadly from its advisory relationship that the customer was looking to retire soon, it may seek to highlight or provide further information to the customer on the relevant risks if the customer is seeking to buy a complex high-risk product with a long maturity date.
This approach feeds into the broader thrust of the Consumer Duty Principle, in seeking to tailor the services provided by firms to retail customers as much as possible – where firms are able to do so.
For firms with advisory or discretionary management relationships, they will need to consider whether the customer has any specific financial objectives – and, if so, assist the customer in working towards those (i.e. retire by a particular age, save for a deposit, etc). In addition to this, firms with this type of relationship will also need to obtain from the customer updated information if they reasonably believe that their existing information is inaccurate or out-of-date. It is likely that the frequency of any request for information will be informed by the nature of the relevant services being provided to the customer.
Like the other cross-cutting rules, the FCA expects firms to comply with this cross-cutting rule at each stage of the customer journey (e.g. from product design until post-sale customer support).
In our view, there are likely to be two key challenges for firms in complying with this cross-cutting rule:
- firms will need to ensure that they have appropriate systems and controls to adequately capture and record information provided by customers on their financial objectives (and to check whether this remains accurate and up-to-date).
Firms will then need to understand how their systems and controls can be modified to account for behaviour from the customer that may not be aligned with this information (i.e. to raise red flags for firms to interact with customers/highlight the risks involved); and
- firms will need to more broadly examine their customer journey to assess whether the processes provide customers with sufficient information on the relevant risks/potential harms – such that the firm can be comfortable in taking the view that they have a reasonable belief that the customer has been suitably informed and is able to pursue their own financial objectives.
This point also feeds into the FCA’s guidance on the desire for firms to review their customer journey flows in order to eliminate sludge practices, etc.
Consumer outcomes: Governance of products and services
The FCA have sought to introduce a specific products and services outcome as part of the Consumer Duty as a result of the harms that they have identified with poorly designed or distributed products and services. The specific rules and guidance for this outcome are set out in Appendices 1 and 2 of CP21/36.
In summary, the products and services outcome includes requirements on firms to:
- ensure that the design of the product or service meets the needs, characteristics and objectives of consumers in the identified target market;
- ensure that the intended distribution strategy for the product or service is appropriate for the target market; and
- carry out regular reviews to ensure that the product or service continues to meet the needs, characteristics and objectives of the target market.
For many firms that operate in the retail investment space, these concepts will sound and feel familiar given their similarity to the product governance requirements that were introduced by the revised Markets in Financial Instruments Directive (“MiFID II”) in 2018.
Before turning to the nature of the requirements themselves, in the first instance, firms will need to understand whether they are ‘manufacturers’ or ‘distributors’ of products or services for retail customers (bearing in mind the points previously raised on the application of these rules to ‘retail customers’). It is worth noting that the definition of ‘manufacturer’ is broader than that used in MIFID II – in addition to firms that create, develop, design and issue products/services, this outcome will also capture firms that operate or underwrite a product or service.
Where firms have established that they are a manufacturer, they will be required to undertake a product approval process which establishes the target market and intended distribution strategy for the product/service. In line with the nature of this requirement and the harms it is intended to address, these rules have an increased focus on matters specific to retail customers (such as how firms will account for vulnerable customers in the product design process). Equally, firms will need to consider how these rules for this outcome are applied in line with the cross-cutting rules touched on earlier.
Where more than one firm is a manufacturer of a product/service, they will need to enter into a ‘co-manufacturer’ agreement with the other manufacturer. Although firms cannot contract out of their regulatory requirements, this agreement is intended to set out the apportionment of responsibilities as ‘manufacturers’ of the product. As such, firms will need to review their existing arrangements with third parties to understand whether these are fit for purpose, and what amendments may be needed in light of these new requirements (i.e. what further information they may need from third parties, whether they need more frequent MI from the third party, etc).
These requirements also apply to distributors, who will be required to get information from the manufacturer on the target market and distribution strategy, develop distribution arrangements that are appropriate for such services or products and regularly review these.
Accordingly, both manufacturers and distributors will need to review their existing distribution arrangements – particularly where there is a chain of several distributors - to understand if they need further information from other parties in order to feed into their annual review of products (e.g. to understand if they are working as intended or if they are causing any customer harms).
Finally, the FCA have stated that they expect distributors – where they are distributing a product or service for an out-of-scope manufacturer – to take ‘all’ reasonable steps to comply with these obligations. As noted in the section on cross-cutting rules above, this is a very high standard and is no longer compatible with the revised mere ‘reasonable steps’ standard that the FCA has used for those cross-cutting rules. It is therefore an open question as to whether the FCA will amend this point to align with the remainder of the Consumer Duty in their Policy Statement later this year.
Interaction between MIFID II product governance requirements and the product and services outcome
In the first instance, it is worth noting that it is not just MiFID II that sets out product governance requirements, there are also some further rules that already apply to firms in the context of other specific services/products – as set out in chapters 6 and 7 of the Product Intervention and Product Governance Sourcebook (PROD 6 and 7) .
In terms of how these will interact with the product and services outcome, the FCA have taken the approach that where more than one set of ‘product governance’ style requirements apply to a product/service (i.e. where both this outcome and MiFID II apply – for example, for an investment service provided to retail customers), the FCA has outlined that firms complying with their existing requirements – MiFID II in this example – will “tend to establish” compliance with the key elements of the products and services outcome.
On the face of it, this may appear as an opportunity for firms to stick with their existing product governance regime for their retail investment business, but it is worth noting that in the context of the enhanced expectations under the Consumer Duty, the cross-cutting rules covered above, and the additional retail specific focus of this outcome, that firms may find it difficult to evidence compliance with the broader principle in taking this approach.
Accordingly, in practice, firms in this situation may well find that although their existing product governance frameworks provide a helpful springboard for developing their Consumer Duty specific product governance framework, they will ultimately need to migrate their existing retail investment business over to their new more bespoke Consumer Duty product governance framework in due course.
Consumer outcomes: Price and value
In summary, the price and value outcome amounts to a new set of rules and guidance located in 2A.4 of the Principles for Businesses, which will require firms across the distribution chain to ensure that the product provides ‘fair value’ to retail customers. From our experience, this new price and value outcome has attracted some of the keenest interest and perhaps raised the most questions amongst industry so far.
Firstly, it is worth considering what the FCA means by ‘fair value’?
In CP21/36 the FCA describes some of the identified harms which the new Consumer Duty is intended to address. This context is very helpful in understanding the FCA’s expectations of firms, not just through technical compliance with new requirements around value assessments, but critically in terms of customer outcomes. The FCA identifies harms where firms are selling products and services which do not represent fair value, in the sense that the benefits consumers receive are not reasonable relative to the price they pay. In this context, it is illuminating that the FCA highlights one example from the general insurance sector, in which customers ‘paid potentially high prices due to parties in the chain receiving remuneration which appeared to significantly exceed the costs incurred in distributing the products’. As such, we expect that remuneration, costs and charges in intermediated business models will be a key focus for the regulator when reviewing compliance with the Consumer Duty Principle.
Drawing on some of its earlier work, and indeed the admittedly limited precedent elsewhere in the Handbook, the FCA defines value as the relationship between the amount paid by a retail customer for the product and the benefits which they can reasonably expect to receive. From this, it is expected that the FCA considers that a product will provide ‘fair value’ where the amount paid for the product is reasonable relative to its benefits, but what does it mean in practice?
We expect that the fair value assessment will become an integral part of product governance processes going forwards. The new rules and guidance will effectively require firms to very clearly articulate, during design, the benefits which the product is intended to deliver for retail customers in the target market. Any fair value assessment must take account of any limitations that are a part of the product or service; as well as the expected total price customers will pay, including all applicable fees and charges over the lifetime of the product.
Designing and operating a fair value framework within the firm, which delivers not only on the technical requirements of the rules but, critically achieves the expected outcomes for customers will, in our view be a central component of the FCA’s work with firms over the implementation journey. It seems to us that firms will need to ensure that in addition to the very clear articulations of customer benefits at a product level, there is a sufficient body of evidence, drawn from real world experience, to support the conclusions reached.
The further guidance provided by the FCA in Appendix 2 of CP21/36 clearly lays out that the price which is charged to customers is obviously a fundamental component of the fair value assessment. It will be important for firms to work through the guidance on this, which is more expansive than might be anticipated. For example, firms will be required to consider non-financial costs within the matrix, which (drawing on the framework used by the regulator through its work to understand competition within sectors), would include the time and effort taken by a retail customer to access, assess and act to buy, amend or switch or cancel a product.
Effectively, firms which manufacture products for sale to retail customers will be required to carry out a new fair value assessment. Importantly, the manufacturer must be satisfied that the product will provide fair value for a ‘reasonably foreseeable period’.
In a similar way to the products and services outcome described above, the rules distinguish between product manufacturers and distributors so that product manufacturers must ensure that their products provide ‘fair value’ to retail customers in the target market for those products, and must carry out a value assessment of its products accordingly; whilst distributors will be under an obligation to ensure they do not distribute a product unless its distribution arrangements are consistent with the product providing fair value to retail customers.
Closed and existing products
One of the key aspects of the new outcome relates to the application of the Consumer Duty to off-sale products. It’s worth noting that the definition of a ‘manufacturer’ for the purposes of the four outcomes extends to those firms who created, developed, designed or issued closed products or who operate or underwrite the product. In some ways, we therefore expect that the task ahead for firms to deliver on the fair value outcome for existing or off-sale products could represent a greater challenge than for new or on-sale products.
One of the reasons for this is that, when seeking to identify the ‘target market’ for whom the fair value assessment should be conducted, firms conducting this assessment for closed products will be required to treat the target market as comprised of retail customers who are customers of the closed product. This will effectively require manufacturers to conduct a review of all off-sale but active products, and to assess whether they achieve ‘fair value’ for all customers to whom they are currently provided. The FCA has, however, confirmed in draft guidance that the assessment should be forward-looking only.
But the logical question for most firms will be, what happens if we conclude that a closed or existing product no longer provides fair value for our retail customers? What should we do then, and what are the implications for revenue, for example? Well, from our understanding of the proposed rules, firms will be expected to take appropriate action to mitigate, and where appropriate, remediate any harm caused to retail customers, and prevent harm to new retail customers. In practical terms, firms will be required to develop customer benefit / customer harms matrixes for all closed and existing products provided to retail customers as defined.
In addition to taking such steps, firms will also need to carefully consider the proposed new rule and guidance surrounding the retention of vested contractual rights. These provisions explain that, provided a firm does not, in its review of fair value for closed or existing products, identify an historic rule breach, the ‘appropriate action’ does not require a firm to waive any vested contractual rights. This will require a careful analysis of historic product terms, as well as wider communications and interactions between a firm and its customers, to identify whether the firm enjoyed any such vested contractual rights. Where a firm wishes to continue to enjoy such rights, we consider that it remains open to question as to the evidence which will be required to support that decision, in terms of compliance with historic rules and guidance. This could prove potentially challenging in some cases, if this necessitates confirmation that, whilst a product does not meet the new ‘fair value outcome’ it did meet historic obligations under Principles 6 and 7.
In respect of new products, i.e. those which are not closed products or existing products, firms which ‘manufacture’ retail products, i.e. those who design, develop or issue such products, will be required to regularly review the value assessment across the product lifecycle and take appropriate action if it identifies that a closed or existing product no longer provides fair value. This will include steps to mitigate, and where appropriate, remediate any harm caused to retail customers, and to prevent harm to new retail customers.
Consumer outcomes: Consumer understanding
In CP21/13 the FCA called this outcome the ‘communication’ outcome. However, in CP21/36 the FCA have renamed it the ‘consumer understanding’ outcome on the basis that it feels that this better reflects their expectation that firms need to consider this outcome more holistically, rather than just when making communications to retail customers.
In the first instance, it is important to recognise that the FCA in the context of the consumer understanding outcome, has stated in CP21/36 that it considers that consumers can only be expected to take responsibility where firms’ communications enable consumers to understand:
- the firm’s products and services;
- the relevant features and risks of those products and services; and
- the implications of any decisions they must make.
The consumer understanding outcome sets out rules and guidance for firms that are designed to ensure that consumers are able to make these type of informed decisions – and therefore take responsibility for their decisions.
The FCA have clarified that this outcome is not intended to undermine or act as a substitute to existing legislative or regulatory disclosure requirements – i.e. under the Consumer Credit Act 1974 (“CCA”) or MCOB in the FCA Handbook. However, the FCA still expect firms to consider more widely the purpose of their communications to customers – for example, in the context of the CCA or MCOB disclosures, the FCA wants firms to consider if the technical terms in these communications are suitably explained to customers, or whether key terms/risks are appropriately highlighted to customers upfront or with sufficient signposting to further detail set out elsewhere.
In our view, the key driver for firms in seeking to comply with this outcome is whether the firm has considered if its communications as a whole would reasonably be understood by the customer, and therefore whether the firm is comfortable in taking the view that it has a reasonable belief the customer is suitably informed of the decision they are about to make (e.g. to invest in a particular product or service).
In addition to this, the FCA’s expectations for these rules will also require firms to consider whether communications will need to be tailored to account for the particular characteristics of the customer, the product, the communication channel used and the role of the firm – for example, whether arrears’ communications should be tailored to account for the increased likelihood of vulnerability for that cohort of customers. This is in line with the wider drive to tailor and personalise the provision of services to retail customers as part of the new Consumer Duty.
On the basis of the FCA’s proposals, and their previous work on customer communications, going forwards, firms may well need to consider engaging with behavioural psychologists in preparing their customer communications to ensure that the communications are appropriately tailored for the recipients. Firms will also be required to monitor, test and adapt their communications to ensure that they are achieving outcomes for customers that are consistent with these rules.
As a practical example, this may require firms to re-examine their terms and conditions, in order to fully understand whether these documents meet the Consumer Duty – for example, should the terms include a front page which highlights more onerous/important terms for that product, or should the terms and conditions be re-formatted to take account of the average type of retail customer for that product/service – i.e. if it is a purely online service, a firm may wish to ensure that the presentation of its terms and conditions is clearly readable and understandable to the customer, through online flows or click-through functions to the relevant terms, rather than via a large pdf document that may be difficult to view on a mobile device.
These rules are also likely to have an impact on the proactive roles taken by firms in customer communications. We expect that most firms already update customers where they vary the relevant terms and conditions for a product/service, but it is important to note that the FCA have stated in their consultation that they also expect firms to contact customers where there is a variation or significant change to the feature of the product/service – for example, where introductory rates come to an end. As such, firms will need to review their existing products – both on-sale and off-sale – to consider whether they have adequately captured such potential events, and to then ensure that they have communication programmes in place to deal with this.
Consumer outcomes: Consumer support
This outcome has been reworded from “customer service” to “consumer support” with the intention of focussing firms’ minds on what they need to deliver when complying with the Consumer Duty. In particular, the FCA noted that the use of “customer service” may give an incorrect assumption that this relates only to after-sales service or the activities of customer service teams within an organisation. However, the FCA’s intention with re-wording this outcome as “consumer support” is to ensure it is clear that its application spans the whole consumer journey and that firms provide a level of support that meets consumers’ needs throughout their relationship with a firm.
The consumer support outcome aims to set an appropriate standard of support that all firms must provide, so that consumers can use the products and services they buy as anticipated and act in their interests without unreasonable barriers. The “unreasonable barriers” terminology also differs from that originally used in CP21/13, which referred to “undue hindrance”. This change has been made to align to the concept of “reasonableness”, which is used throughout CP21/36.
Under the consumer support outcome, the FCA requires that:
- the steps in a customer journey must have a purpose that is aligned to the Consumer Duty. An example it cites is that positive friction may be permissible under the Consumer Duty where the break or pause in a process is clearly explained to a customer, such as an announcement to warn a customer of a particular risk in taking an action and getting them to actively confirm they have acknowledged this before proceeding. The clarity of the communication to a customer to explain the reason for positive friction will be very important and businesses will need to have regard to the consumer understanding outcome in explaining this clearly to customers. What won’t be permissible is an unreasonable barrier which frustrates a customer’s use of a product or service without reasonable explanation. Similarly, at the other end of the spectrum, it is possible that a digital customer journey which plays on behavioural or cognitive biases to facilitate seamless product purchases may benefit from a degree of positive friction being built into it. Striking the right balance between seamless process and a degree of positive friction will be an important consideration for firms as they review their existing product suite prior to the implementation date and develop new products going forward;
- in general it should be at least as easy to exit a product as it is to enter. This is a really important point for firms to bear in mind as they aim to achieve compliance with the Consumer Duty. Firms may wish to review their entry and exit processes to ensure customers do not have to undertake unreasonable additional steps to exit a product compared with taking it out;
- the channels through which a product or service is provided are appropriate to deliver support to customers with particular regard given to the needs of customers in vulnerable circumstances; and
- firms should regularly monitor through management information/reporting, outcomes testing and other means that it is consistently providing an appropriate standard of support that meets the needs of customers including those with vulnerability.
Private right of action
The FCA recognise that the Private Right of Action (“PROA”) issue is a polarising issue. As expected, the FCA reported that most consumer representatives strongly supported it whilst most industry respondents warned against it.
Ultimately, the FCA have stated in CP21/36 that they are not proposing to introduce a PROA for the Consumer Duty at this time, but have noted that they intend to keep this position under review.
In reaching this decision, the FCA has stated that it considers that the existing redress framework is likely to be a more appropriate route for almost all consumers to seek redress (as opposed to the PROA). The FCA considers that the existing redress framework is designed to make it straightforward for consumers to pursue complaints at no additional cost to them, and without the need for representation. This will therefore allow consumers to pursue redress in a way that is low cost and consumer friendly.
Firms are expected to have until 30 April 2023 to fully implement the Consumer Duty – which given the breadth and depth of the proposals may be a challenging timeframe for some firms in the market. Whilst the requirements under the Consumer Duty are not yet final, the FCA states in CP21/36 that it expects the draft rules and non-Handbook guidance to give enough clarity to allow firms to begin implementation. The FCA have also stated that implementation of the Consumer Duty will be iterative. It intends to engage with firms on their implementation plans and as part of this is considering whether and how it can give the market more regular updates on what it is seeing and its views on it.
The FCA proposes to amend the SMCR individual conduct rules in the Code of Conduct sourcebook to reflect the higher standard of the Consumer Duty by adding a new rule requiring all conduct rules staff within firms to ‘act to deliver good outcomes for retail customers’ where their firms’ activities fall within scope of the Consumer Duty. The FCA is also proposing to include obligations as part of this new individual conduct rule that reflect the Consumer Duty’s cross-cutting rules. This means that, where the new rule applies, conduct rules staff will be required to: (i) act in good faith towards retail customers (ii) avoid foreseeable harm to retail customers, and (iii) enable and support retail customers to pursue their financial objectives.
The deadline for comments on CP21/36 is 15 February 2022.
The FCA expects to publish a Policy Statement which confirms the final rules by the end of July 2022. As noted above, the implementation date for these rules is currently stated as 30 April 2023.
We note that the UK Parliament has also called strongly for a change to the standard of protection for consumers, and the publication of CP21/36 meets the FCA’s obligations under the Financial Services Act 2021.
There is a lot for firms to consider in CP21/36 and given that some of the obligations are new and other obligations build on existing arrangements it is more than likely that firms will begin their implementation projects by conducting a gap analysis.
Such an analysis could be structured around various themes which relate to the high-level requirements in CP21/36. We would expect it to touch on a firm’s governance framework and control framework – in particular, its product design and approval processes, distribution arrangements, internal policies and procedures, customer journey flows, communication programmes, management information and reporting frameworks and training programmes.
Want to hear more?
On 12 January 2022, we held a client webinar where we discussed CP21/36. Also, during February to May we will be running a series of podcasts on the Consumer Duty. If you would like to receive a link to the recording of the webinar and/or receive further details regarding our podcast series please contact one of the authors of this briefing note.