On 14 May 2021, the FCA published Consultation Paper 21/13: A new Consumer Duty (CP21/13).
In the FCA’s 2018 Approach to Consumers document the regulator explained how it would use its resources to protect consumers. The FCA also committed itself to periodically review and adapt its regulatory toolkit, including how it uses it and the impact of its interventions, to ensure they are achieving good outcomes for consumers.
As part of this commitment the FCA published Discussion Paper 18/05: A duty of care and potential alternative approaches (DP18/05). In DP18/05 the FCA acknowledged concerns raised by some stakeholders that its regulatory framework including its Principles might not be sufficient, or applied effectively enough, to minimise the level of consumer harm in retail markets.
In the Feedback Statement that followed DP18/05 (FS19/02) the FCA summarised a range of views from respondents to DP18/05. The FCA reported that most respondents considered that the level of harm to consumers was too high, and there needed to be a change to better protect consumers in retail financial markets. But opinions differed on options for change.
In FS19/02 the FCA concluded that it would:
- Review how it applies the regulatory framework – particularly how it applies the Principles in its authorisations, supervisory and enforcement functions, and how it communicates this to firms.
- Consider the introduction of new/revised Principles to strengthen and clarify firms’ duties to consumers.
- Consider whether a private right of action for breaches of the Principles is appropriate, and what any unintended consequences of this might be.
Package of proposals
In CP21/13 the FCA sets out a package of proposals for a ‘Consumer Duty’ consisting 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.
- 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.
Scope of the proposals
As regards scope, the proposals in CP21/13 apply to firms in relation to their regulated activities. The proposals relate to products and services sold to ‘retail clients’ which includes all clients other than professional clients and eligible counterparties. In CP21/13 the FCA uses the terms “consumer” and “customer” to mean retail clients who are within the scope of the proposals, including those the firm does not deal with directly. The proposals extend to firms that are involved in the manufacture or supply of products and services to retail clients, even if they do not have a direct relationship with the end customer.
The FCA states that it wants the Consumer Principle to set a higher standard than the existing requirement of Principle 6 for a firm to ‘pay due regard to the interests of its customers and treat them fairly’. It wants to indicate to firms that they need to play a greater and more positive role in delivering good outcomes for consumers – including those who are not direct customers of the firm. The FCA adds that the Consumer Principle itself should prompt firms to ask themselves questions such as ‘Am I treating my customers as I would expect to be treated?’ or ’Are my customers getting the outcomes from my
products and services that I would expect?’.
The FCA consults on two possible options for the Consumer Principle:
- A firm must act to deliver good outcomes for retail clients.
- A firm must act in the best interests of retail client.
The FCA is proposing to implement a set of cross-cutting Handbook rules and guidance which would develop and amplify the standards of conduct that it would expect under the Consumer Principle. The FCA proposes that the cross-cutting rules would require three behaviours from firms, requiring them to:
- Take all reasonable steps to avoid foreseeable harm to customers.
- Take all reasonable steps to enable customers to pursue their financial objectives.
- Act in good faith.
These behaviours are further examined in chapter 3 of CP21/13.
The four outcomes are intended to represent the key elements of the firm-consumer relationship: how firms design, sell and service products and services, and the key contact points along the customer journey. The outcomes are further explained in chapter 3 of CP21/13 and relate to: communications, products and services, customer service and price and value. The FCA proposes to set expectations for each of these outcomes in a suite of rules and guidance. These expectations would build on the Consumer Principle and the cross-cutting rules.
The FCA states that it wishes to embed a concept of reasonableness in the Consumer Duty, applying to the interpretation of all of its elements, including the Consumer Principle. The purpose of this is to clarify the objective standard of conduct that firms need to meet. The FCA intends to set out factors that influence what is reasonable.
In CP21/13 the FCA highlights that firms should take additional care to ensure vulnerable consumers achieve outcomes that are as good as those of other consumers. This reflects the FCA’s recently published guidance on the fair treatment of vulnerable consumers.
Private right of action
In FS19/02 the FCA stated that it would consider the potential merits and unintended consequences of introducing a private right of action for breaches of its Principles, including any new Principle it might propose. In CP21/13 the FCA is not making any specific proposals on a private right of action but instead sets out the arguments made for and against it. The FCA is seeking further views on how a private right of action could support or hinder the success of the proposals and their intended impact on firms, consumers and markets.
The deadline for comments on CP21/13 is 31 July 2021.
The FCA expects to publish a second consultation paper by 31 December 2021, and will make any new rules by 31 July 2022.