Since its implementation in July 2023, the Consumer Duty has created a shift in the financial services industry, both in terms of the FCA's expectations and the regulation itself. The Duty has been described by the FCA as "a golden thread" running through the entirety of the FCA's work and engagement with the industry. In a drive to achieve better outcomes for customers, we have seen the Duty being used as a tool by the FCA to impose change and higher standards within industry.
This article explores the ways in which the FCA have used the Duty since its implementation and what we can expect from the Consumer Duty in 2024.
What is the Consumer Duty?
The Consumer Duty, implemented by the FCA in July 2023 to new and existing products, is a package of regulatory rules placing a positive duty on firms to deliver good outcomes to retail customers. The Consumer Duty applies not only to retail firms, but to all regulated firms that have a material effect on customer outcomes.
The Duty is composed of three elements. Firstly, a new Principle (the first new Principle since the creation of the FCA and indeed its predecessor the FSA) that sets a new higher standard: A firm must act to deliver good outcomes for retail customers.
Secondly, the cross-cutting rules, which expand FCA expectations and set out how firms should act to deliver good outcomes for retail customers. The cross-cutting rules apply to all aspects of a firm's conduct and require firms to:
- act in good faith;
- avoid causing foreseeable harm; and
- support retail customers to pursue their financial objectives.
Thirdly, the Duty introduces rules and guidance relating to four outcomes the FCA expect firms to achieve in delivering good outcomes for customers, related to:
- products and services;
- price and value;
- consumer understanding; and
- consumer support.
The FCA has been consistently clear that the implementation of the Duty is a board-level issue and must be leader led. In addition to the requirement to appoint a Consumer Duty Champion, the Senior Managers and Certification Regime establishes clear senior management responsibility for complying with the Duty.
Currently, the Duty only applies to new and existing products or services that are open to sale or renewal. From 31 July 2024, the Duty will also apply to closed products or services.
The Consumer Duty 2023
Since the Duty took effect, we have seen several instances where the FCA has used the Duty as a tool to intervene with industry practices that it does not deem suitable.
By way of example, prior to the implementation of the Duty, Harriett Baldwin claimed that UK high street banks were taking advantage of their savings customers to boost profits, noting that "savers have been getting a raw deal for too long". Considering these claims, Chancellor Jeremy Hunt called for banks to pass on higher interest rates to savers and stated that the FCA has his full backing "to ensure banks are passing on better rates as they should be".
As a result, in December 2023, the regulator confirmed that it would be increasing supervision of banks relating to how they treat retail customers regarding saving rates under the Consumer Duty regime. The Duty requires banks to act in good faith and ensure good outcomes for their customers, which includes communicating the range of savings accounts and interest available to its customers.
Earned interest is clearly a focus for the FCA, which has also expressed concern to 42 investment platforms and Sipp providers regarding the way in which they handle interest earned on clients' balances. The FCA found that most of these firms retain some of the interest earned, which may not accurately reflect the cost of managing the cash. Additionally, many companies charge clients a fee for holding their cash, a practice known as double-dipping.
The FCA has now told businesses to scrap double-dipping practices and urged these companies to ensure that the interest they retain and the charges they impose on customers holding cash result in fair value, a requirement of the Duty. This is particularly important in circumstances where the amount of interest earned on customers cash balances has increased over the past two years. The deadline for these changes to be made is February 2024.
Additionally, the Duty has been seen as a driver to simplify language used to communicate with customers and make products more accessible and transparent. In September 2023, following pressure from the regulator, St James's Place overhauled its fee structure to ensure that its structure complied with the Duty. The proposed changes to St James's Place fee structure included removing early withdrawal fees for new customers and fixing misaligned fees between new and existing customers, though these changes are not due to be applied until 2025. The FCA has since praised firms for "reviewing their fees with fair value in mind".
The pressure applied to St James's Place appears to expand to asset managers more generally. In a speech delivered by Ashley Alder, FCA Chair, the FCA set out its priorities for reforming the UK regime for asset management. Namely, making the regime for alternative fund managers more proportionate, updating the regime for retail funds, and supporting technological innovation. This reform, alongside the introduction of the Duty, places asset managers at the forefront of the FCA's mind.
By their nature, investments do not always achieve good outcomes for customers and some within the asset management industry believe that the new rules will boost rapidly developing passive investment managers. It raises concerns as to whether the Duty will make it more difficult for asset managers to do their jobs. Under the spotlight, asset managers need to ensure that they are strictly complying with the Duty, in particular delivering fair value to retail customers. Asset managers can demonstrate this by continuously improving the information and analysis for the assessments of value and considering such additional data points when making decisions. Such data and analysis can be used by asset managers to assess whether they are achieving good outcomes for their retail customers. Without this data, firms may struggle to satisfy the FCA.
What can we expect from the Consumer Duty in 2024?
Post-implementation, the FCA have stressed the "ongoing commitment" companies must invest into the Duty. In a recent speech delivered by Nisha Arora, Director of Cross Cutting Policy and Strategy at the FCA, it was stressed that the Duty is not a "once and done" exercise, with an emphasis on keeping "a foot on the gas".
The expectation that the Duty is embedded within a firm's culture and practices means that firms should be frequently reviewing systems, strategy, MI and governance to ensure that they continue to comply with the Duty. The FCA has made clear that the shift in both culture and behaviour must endure. Firms can therefore expect to see the FCA continuing to use the Duty as a tool to drive and maintain change within the industry.
Moreover, there are further deliverables of the Duty set to take effect in July 2024. Firstly, the Duty will come fully into force, applying to all closed products and services. This means that firms must consider whether closed products and services could lead to foreseeable harm or prevent retail customers from reaching their financial objectives and, consequently, achieving good outcomes. However, given that the products and services are no longer on sale, firms will not be expected to consider target market or distribution strategies.
Secondly, 31 July 2024 is the deadline for firms to produce their first annual report assessing whether the firm is delivering good outcomes for its retail customers in line with the Duty. The report should set out how the firm is making efforts to comply with the Duty. The board must review and approve an assessment of whether the firm is delivering good outcomes for its retail customers in line with the Duty.
This assessment should include:
- the results of the monitoring that the firm has undertaken to assess whether products and services are delivering expected outcomes in line with the Duty, any evidence of poor outcomes, including whether any group of customers is receiving worse outcomes compared to another group, and an evaluation of the impact and the root cause;
- an overview of the actions taken to address any risks or issues; and
- how the firm’s future business strategy is consistent with acting to deliver good outcomes under the Duty.
Although firms should, by now, have appointed a Consumer Duty Champion, it would be a mistake for other board members to think that the Duty is not relevant to them – indeed, all senior management should expect to be asked, and challenged, on the implementation and role of the Duty in the business, given the FCA's view that the Duty is that "golden thread".
Is there enforcement action on the horizon?
Whilst there has been no public enforcement action related to the Duty yet, the FCA’s press release accompanying the Equifax Ltd Final Notice is of note. It relates to pre-implementation cyber security breaches, but nonetheless refers to the Duty, stating that firms have “an ethical responsibility in the processing of consumer information" and that the "Consumer Duty makes it clear that firms must raise their standards.” The FCA has a specialist Interventions Team within Enforcement "ready from day one of the duty", so firms should not be complacent about the demands the Duty places on them.
Our experience is that the Consumer Duty pervades all aspects of the FCA's retail supervisory activities, and we have seen it feature in fairly draconian threatened early interventions. We may not necessarily see the FCA taking enforcement action for failing to implement the Duty per se, but for failures on the part of firms which cause detriment to consumers, the Duty will be a central feature of the FCA's investigation and enforcement action.