On 27 July 2022, the FCA published Policy Statement 22/9 ‘A new Consumer Duty – Feedback to CP21/36 and final rules’ (PS22/9). This was accompanied by the FCA’s ‘Final non-Handbook Guidance for firms on the Consumer Duty’ (FG22/5).
PS22/9 follows Consultation Papers 21/36 and 21/13 on the new Consumer Duty, which the FCA published in December and May 2021 respectively. In PS22/9, the FCA set out their final rules for the proposals for the ‘Consumer Duty’. These final rules have confirmed the structure of the proposals – as set out in CP21/36 – which includes:
- a new Consumer Principle, which sets an overall standard of behaviour that the FCA will require from firms;
- cross-cutting rules that develop the FCA’s overarching expectations for common themes that apply across all areas of firm conduct;
- four key outcomes that the FCA expects firms to achieve in respect of retail customers; and
- non-Handbook guidance that sets out the FCA’s more detailed expectations for firms in complying with the Consumer Duty proposals.
In PS22/9, the FCA sets out:
- the responses received to CP21/36 and its analysis of them;
- revised proposals for the new Consumer Duty, including the proposed implementation deadlines; and
- the final rules for the Consumer Duty proposals.
FG22/5 provides the final non-Handbook guidance to help firms understand how to interpret and implement the final rules and guidance set out in PS22/9 for the new Consumer Duty.
The structure of PS22/9 is as follows:
- Chapter 2: scope of the new Consumer Duty. The FCA has confirmed its intention to align the scope of the Consumer Duty with the existing scope of FCA sectoral sourcebooks. The FCA has retained the application of the Consumer Duty to firms that ‘determine or materially influence’ retail customers, but has provided further clarity on the expected application of the new Consumer Duty to wholesale firms. The FCA has confirmed its proposed approach from CP 21/36 in respect of the proposed application of the Consumer Duty for unregulated activities, and that Principles 6 and 7 will continue to apply to out-of-scope firms.
- Chapter 3: how the Consumer Duty will apply to existing products and services, including contracts entered into before the Consumer Duty comes into force. The FCA has clarified how it will apply the Consumer Duty rules from the implementation date, and has responded to concerns raised by firms in relation to any retrospective view that the FCA could take. The FCA has also provided clarity on how the Consumer Duty will apply to firms that purchase a product or service book.
- Chapter 4: the FCA has confirmed that it is intending to proceed with the proposed disapplication of Principles 6 and 7 to firms where the Consumer Principle will apply going forwards. However, the FCA has decided that it will retain the non-Handbook guidance for Principle 6 and 7, as it expects that where firms do not comply with such guidance, it is likely that they will also be in breach of the Consumer Duty.
- Chapter 5: the FCA have confirmed their proposals for the introduction of cross-cutting rules in order to set overarching expectations for firms across all areas of a firm’s conduct. The FCA has updated the cross-cutting rule for ‘foreseeable harms’ to clarify that this will only require firms to avoid ‘causing’ foreseeable harms. However, the FCA has confirmed their view that firms could cause such harms either through actions or omissions.
- Chapter 6: the FCA have broadly confirmed their proposals for the products and services outcome. Importantly, the FCA have amended their final rules to clarify that where firms already comply with existing rules in PROD (such as the MiFID product governance framework in PROD 3) they will be compliant with the Consumer Duty proposals, as the FCA consider that the rules in PROD are consistent with its expectations for this outcome. The FCA has also confirmed that it has made a number of other changes to its final rules and guidance to address specific concerns and suggestions raised by firms in response to CP21/36.
- Chapter 7: the FCA has confirmed its proposals for the price and value outcome. The FCA has added further examples in its non-Handbook guidance of good (and poor) outcomes and the behaviours that it expects for firms in respect of this outcome. The FCA has also clarified that it does not expect firms to quantify non-monetary costs and benefits as part of its fair value assessment process, but that firms should undertake some form of qualitative assessment. Importantly, the FCA has also confirmed that its price and value outcome does not prevent cross-subsidies between products, requiring firms to move onto cost-plus pricing models or prevent the sale of similar products with different prices across various brands (as long as firms can demonstrate that such products/services are fair value).
- Chapter 8: the FCA has broadly confirmed their proposals for the consumer understanding outcome. The FCA have amended the language in its final rules for this outcome that referred to the ‘average customer’. Instead, the FCA has amended this language to instead clarify that firms are expected to ensure that communications are likely to be understood by the customers intended to receive the communication. The FCA has also amended its final rules to clarify its expectations for testing communications, which included clarifying that firms do not need to test all communications before communicating them to customers, but should do so where applicable.
- Chapter 9: the FCA has confirmed its proposals for the consumer support outcome, and has confirmed that it has provided further examples of good and poor practice in its non-Handbook guidance to assist firms in meeting this outcome.
- Chapter 10: the FCA has confirmed how it expects the Consumer Duty rules and guidance to align with its existing work on improving outcomes for customers in vulnerable circumstances and on diversity and inclusion. The FCA has clarified how vulnerabilities should be taken into account by firms when considering their target market, and the applicability of its guidance on the fair treatment of vulnerable customers (despite the disapplication of Principle 6 and differences in scope). The FCA has also amended the final rules and Guidance to clarify its expectations on how firms should take account of protected characteristics and characteristics of vulnerability, and how the Consumer Duty rules align with the Equality Act 2010.
- Chapter 11: the FCA has confirmed its view in CP21/36 that it does not intend to introduce a private right of action (PROA) as part of the new Consumer Duty. The FCA confirmed that any future review and decision to attach a PROA to the Consumer Duty would be subject to further consultation.
- Chapter 12: the FCA has revised its approach to the proposed implementation period for the Consumer Duty. The FCA has stated that firms will have until 31 July 2023 to fully implement the Consumer Duty for any new or existing/on-sale products and services, and will have until 31 July 2024 to fully implement the Consumer Duty for its closed/off-sale products and services (i.e. back-book products).
The FCA has also set out their key expectations for firms during the implementation period, which includes an expectation that firms’ boards (or equivalent management body) should have agreed their implementation plans by 31 October 2022. Manufacturers are then expected to complete all reviews necessary to comply with the four outcomes by 30 April 2023, so that they can share these with distributors by end of April 2023, and identify where changes may be required and implement any remedies by 31 July 2023.
The FCA has outlined its expectation on when firms should notify them during the implementation period, including where the firm considers that it will not be able to comply with the implementation deadline. The FCA expects firms’ governing bodies to provide oversight of the implementation of the new Consumer Duty requirements.
- Chapter 13: the FCA have broadly confirmed their proposals for how firms should monitor customer outcomes and its high level approach to supervision. The FCA has amended its non-Handbook Guidance to provide further clarity on the types of data that firms can gather, what data they can use to monitor outcomes, and other factors which may impact on firms’ monitoring. The FCA has confirmed that it may request information from firms on their approach to monitoring during the implementation period.
The FCA has also emphasised how the Consumer Duty rules and guidance will need to be embedded throughout firms, including as a part of its strategies, governance, leadership and people policies and its incentives at all levels. The FCA has also amended its guidance on its expectations for governance and oversight within firms for compliance with the Consumer Duty. The FCA has confirmed its proposed changes to the Senior Managers and Certification Regime, and the introduction of a new individual conduct rule.
- Chapter 14: the FCA has confirmed its proposed approach to its supervision of the Consumer Duty, and how they will interact with firms in the implementation period. The FCA has also confirmed that it will assess firms’ proposed compliance with the Consumer Duty as part of its authorisation process, and has outlined its proposed supervisory and enforcement strategy post-implementation. The FCA has confirmed that it will publish a set of metrics measuring the impact of the Consumer Duty proposals against its proposed top-line outcomes, and is committed to undertaking a post-implementation evaluation of the Consumer Duty.
- Chapter 15: the FCA has confirmed its cost-benefit analysis as set out in CP21/36.
As set out above in respect of Chapter 12, the FCA expects firms to comply with its final rules and guidance by 31 July 2023 for new and existing products, and 31 July 2024 for their closed products. However, firms are expected to begin their implementation plans immediately and to have these approved by their board (or equivalent management body) by 31 October 2022.
The publication of these final rules by the FCA has satisfied their obligations under the Financial Services Act 2021.
In our view, the Consumer Duty represents a step change for firms in how they are expected to treat retail customers. These proposals form part of the FCA’s broader push to ensure that firms are proactively doing the ‘right thing’ for customers. It will be important for firms to interpret the overarching Consumer Principle and the accompanying rules and guidance within this context. Although it will take time to see the effect of these proposals on the market, it is clear at this stage that firms will need to undertake a thorough review of their current approach to retail customers.
Please see our previous blogs and articles on the Consumer Duty proposals and our New Consumer Duty Series of podcasts for further information.