In mid-May 2021, the FCA published a consultation on the introduction of a new Consumer Duty. In summary, the stated purpose of the new duty is to enhance the standards of care that Firms exercise towards consumers. This comes only a few months after the FCA published its long in the making finalised guidance setting out its wide-ranging expectations as to how firms should treat customers who are (or may be) vulnerable. This was accompanied by the startling revelation, based on detailed market research, that (as the FCA sees it) around 53% of the UK adult population has some characteristic of vulnerability. Around the same time as this, the Woolard review (summarised here) recommended that certain financing options prevalent in retail markets, most notably Buy-Now-Pay-Later, should be brought within the regulatory perimeter in order to minimise the risk of customer detriment. We summarise the key aspects of the new Consumer Duty in this article. Readers interested in a longer read on the vulnerability guidance and our tips on what firms should be doing now should look here.
What does all of this tell us about the FCA's priorities as the UK emerges from lock-down and how is this likely to manifest? Both the new Duty and the vulnerability guidance require firms to put its particular end user demographic at the heart of all of its activities and decision making, both protecting and (as importantly) enabling them to make informed decisions. In this respect the FCA is seeking to reduce the risk of bad practice and misconduct but also to introduce a consumer-focussed culture across the sector. How might firms see this play out?
- An uptick in Supervisory and Enforcement interactions instigated by reports of poor customer outcomes, in the months and years ahead, is very likely. The FCA will be no doubt be keen to back up all of its recent work and the public mood post-pandemic, by showing real activity. It is of course likely that any Enforcement proceedings will target firms and relevant Senior Managers.
- The enhanced monitoring of customer outcomes required by the new Duty should (the FCA believe) allow Enforcement to intervene more swiftly to arrest or prevent prejudice. Similarly, the analysis that firms are required to conduct of its target market demographic under the vulnerability guidance should better enable Enforcement and Supervision to assess the appropriateness of firms' activities. Again, this should allow the FCA to make swift(er) assessments of whether firms are meeting appropriate standards.
- In the current consultation on the Duty, the possibility of a new private right of action for consumers themselves is not the focus but this appears very much to be still on the table. Even if this does not come into force firms will of course see the Consumer Duty and vulnerability guidance as the backdrop both to litigation and Ombudsman claims in the same way that the FCA Principles for Businesses are already.
There can be no real doubt that firms dealing with retail clients (both directly and indirectly – see further below as to the relevance of this in wholesale markets) need to recognise the direction of travel that the FCA has strongly indicated and use this opportunity to get their houses in order. We have set out below a list of questions that firms should be asking themselves now – this is adapted from a list published by the FCA in its consultation on vulnerability as a "heads-up" to firms as to the kinds of questions that will be asked by FCA Supervision.
- What steps has the firm taken to understand the needs including the potential vulnerabilities of their customer base or target market? This should include an understanding of whether the product or service to be offered is "good value" and if it is an outlier in this regard, is there a good reason for this and is this communicated.
- What training do staff dealing with customers receive? This relates particularly to vulnerability but staff also need to understand and to be able to communicate the benefits and risks with a product.
- How are the customers' best interests, including in respect of vulnerability, catered for in key processes such as product design and communication?
- How is existing provision being monitored by the firm (including relevant Senior Managers) and are changes being made (where appropriate)? For example, does the firm know what area(s) complaints or claims tend mainly to focus on and is it doing anything about this?
The new Consumer Duty
The new Duty (which as summarised below is in truth a package of rules and guidance) will apply to those firms dealing directly and indirectly with "retail clients". As an aside, this distinguishes it from the vulnerability guidance which only applies to natural persons The vulnerability guidance also only applies to those who are or may be vulnerable – though as we have said this in fact a very large constituency. The FCA intend that the new Duty will apply wherever firms can through their regulated activities influence a material aspect of the design, target market or performance of a product or service that will be used by retail clients. So firms operating in wholesale markets may be captured.
The core features of the Duty are to be:
- A new Principle added to the FCA's Principles for Businesses – core tenets that often ground FCA Enforcement activity.
- The Duty will apply to all aspects of a firm's activities, from strategic planning to individual customer interactions.
- The Duty will have three elements:
- An overarching Principle that will require more than existing Principle 6 (Firms must pay due regard to the interests of customers and treat them fairly) and the Treating Customers Fairly outcomes;
- Rules requiring firms to take all reasonable steps to avoid foreseeable harm, to enable customers to pursue their own financial objectives and to act in good faith;
- Further rules and guidance for improved outcomes in the four key elements of consumer relationship, namely communications, products and services, customer service and price/value.
The FCA say that the concept of reasonableness will be embedded at all levels of the Duty, meaning that Firms conduct will be assessed by an objective standard. This will be supplemented by a set of factors that will inform the reasonableness decision. These include: the role of the firm in the distribution chain, the nature of the product (where it is higher risk or complex, greater care will be required) and the characteristics of the target market(s) including the presence of any characteristics of vulnerability.
We have set out below some examples from the consultation as to what the specific suites of rules and guidance aimed at improving outcomes in the four key elements of the customer relationship may look like:
- Communications. Rules and guidance requiring firms to communicate in a way that is reasonably understood and facilitates decision making. This will take into account the nature and complexity of the product, the target market(s) and the medium of communication (the FCA give the example here of a study that suggests that detailed terms are unlikely to be read if communicated on a mobile device). As part of this, firms will be expected to review or test communications first.
- Products and Services. Rules and guidance requiring a provider of a product/service to be responsible for ensuring that it meets a particular identified need within an identified target market with costs, benefits and performance being as consumers in that market would expect. There would also be rules and guidance aimed at those right across the distribution chain. As part of this, firms will be expected to design products with the appropriate customers. For example, does the product create unfair cost or risk such as a lock-in period?
- Customer Service. Rules and guidance allowing customers to realise all the benefits of products or services already purchased and to ensure that they are not prevented from acting in their own best interests. For example, so-called "sludge practices" that deliberately prevent customers taking the course of action in respect of a product that might benefit them (e.g. switching or making a claim).
- Price and Value. Rules and guidance requiring firms to consider and assess price and value at the product design phase, to ensure that they represent fair value for the particular target market(s), given the benefits they provide. The FCA are clear that they are not going to be prescriptive as to pricing of particular products/services. However, they will look at price and value broadly to include non-financial aspects such as a relinquishment of privacy.
In respect of timeline to implementation, the current consultation closes at the end of July 2021 and the FCA are clear that a further consultation on more detailed rules will be required and is expected by the end of the year.