Consumer Duty Final rules have landed and not much has changed

On 27 July 2022, the FCA set out final rules (in PS 22/9) in relation to the new Consumer Duty, together with supporting guidance. PS22/9 reflected an emboldened regulator who, despite receiving 151 responses to its consultation, made very few changes to its stance. For the most part, after a summary of the responses it received, the regulator did its best Vicky Pollard impression with its own, "yeah but no but…". Even the biggest change – a delay to the implementation date for 'live' products and services - was a relatively insignificant three months, and has left industry feeling almost like it was a fig leaf token gesture.

To recap, the Consumer Duty will apply to firms providing regulated activities to retail clients in the UK and consists of three elements: a consumer principle; cross-cutting rules; and four customer outcomes.

The Consumer Duty represents the biggest change to the retail market in a generation, probably not seen since the retail distribution review, and will lead to material changes in the way in which firms will have to think about conducting their business with retail customers. For new and existing products or services that are open to sale or renewal, the rules will come into force on 31 July 2023. For closed products or services, the rules come into force on 31 July 2024. Before then, firms will be expected to share implementation plans, board papers and other relevant material with supervisors and ought to expect challenge from the regulator on their approach.

Background and general comments

For some time now, various stakeholders have raised concerns in relation to whether the regulatory framework sufficiently addressed the level of consumer harm in retail financial markets. Following the Financial Services Act 2021, the FCA was required to consult on a proposed consumer duty and introduce final rules by July 2022. The FCA published two consultation papers in May 2021 (see our briefing here) and in December 2021 (see our briefing here).

PS 22/9 now sets out the final rules and reflects some changes to what was earlier proposed. We set out below the key takeaways from this paper.

Helpfully, the PS 22/9 includes fairly detailed implementation guide at chapter 12 setting out timelines for regulated firms. The finalised guidance has also been significantly updated. We have set out below a redline of this version against the previous draft published in CP21/36 which shows just how much has been changed or been added. If you have been using the previous version of the guidance, it is worth revisiting work done in this area.

1. Scoping

a. territoriality

The duty will apply to firms engaging in regulated activities in the UK across the retail distribution chain. UK distributors of non-UK products/services will be within scope. UK manufacturers of products sold through non-UK distributors will also be in scope. However, the FCA has added clarity on its expectations where a distribution chain includes non-UK distribution firms and has acknowledged some of the challenges such firms will face, particularly on retail customer data.

b. retail customers

Despite concerns as to the proposed definition of retail customers, the FCA has not changed its stance on how firms should identify retail customers. The final rules will be linked to sectoral definitions of retail clients. This means there may be some discrepancies as a result of the relevant rules applicable to different products. The FCA acknowledges that firms may take different approaches to this issue.

c. regulated entities only?

There may be some scenarios where an unregulated entity has purchased or owns a book of regulated products. This is one of the areas where care will need to be taken. So, for example, an unregulated entity which holds a book of regulated mortgages will have some obligations under the duty. Such third party firms will need to use "best endeavours" to meet the requirements under the product and services outcomes. Care will certainly need to be taken in relation to these types of transactions to determine how the duty will be approached by any new (unregulated) owner.

d. wholesale only?

Concerns were raised that the FCA's approach to the distribution chain would bring too many wholesale firms into scope inappropriately. The FCA has clarified that the duty should not unintentionally impact wholesale business. That is not to say that wholesale business is wholly out of scope: where products are only marketed and approved for distribution to non-retail customers and are not provided to another firm under an arrangement between them as a part of a distribution chain for a retail product or service, the duty should not apply. Even where the duty does apply, the FCA notes that proportionality would mean that the impact may be less marked than some respondents suggested.

2. New Principle

The Consumer Duty consists of a new overarching Principle 12 to be introduced into the FCA's Principles for Businesses: "firms must act to deliver good outcomes for retail clients". The Principle would disapply existing Principles 6 ("a firm must pay due regard to the interests of its customers and treat them fairly") and 7 ("a firm must pay due regard to the information needs of its clients and communicate information to them in a way that is clear, fair and not misleading") where the new Consumer Principle applies. Principles 6 and 7 would continue to apply to conduct outside the scope of the Consumer Duty where they apply at present, for example to certain SME business or wholesale business. In the Policy Statement, the FCA confirms that it is planning to keep existing Handbook and non Handbook material linked to Principles 6 and 7, as it will continue to be applicable to firms and business activities outside the scope of the Consumer Duty.

3. Outcomes

a. Product and services outcome

The FCA has confirmed that firms that currently follow PROD would essentially be complying with the product and services outcome under the duty, although there would be an increased focus on this from the regulator.

b. Price and value outcome

The fair value outcome imposes a requirement on firms to offer fair value to consumers. The FCA has confirmed that fair value means a reasonable relationship between price and benefits. Where a product is "free", firms must consider if customers pay in non-monetary terms (for example, forgiven benefits). The guidance provides further examples that firms should consider.

c. Consumer understanding

This will require firms to focus more on consumer outcomes and understanding throughout the customer journey. Here there are some interesting statements from the regulator in PS22/9.
On customer disclosures, there looks like there is a move away from prescriptive EU requirements (although, let's see if that is reflected when the Sustainability Disclosure Requirements are published). The FCA also comments on how firms should consider what an average customer looks like and in particular that one in seven adults have literacy skills at or under an eleven year old. For mass market products, this needs to be taken into account. Firms will need to have a robust understanding of their customer base to be able to show how they achieve this outcome. Testing will become far more important in achieving this. Not all firms do this at present.

d. Consumer support outcome

This imposes a standard of support that all firms must provide, so that customers are able to use the products/services they buy as anticipated, without unreasonable barriers (including additional costs). The FCA states that firms should monitor the support they provide, take relevant feedback into account, and look for signs that may indicate their channel offering is not sufficient to meet the needs of their customers.

4. Consumers in vulnerable circumstances

Vulnerable customers remain a top priority for the FCA. This emphasis continues throughout PS 22/9 and in particular in light of the cost of living crisis.

5. Senior managers and governance

The FCA has stood by its proposals for a new COCON rule requiring all conduct rule staff within firms to "act to deliver good outcomes for retail customers", irrespective of the practical effect of implementing this for all conduct rule staff. It has also introduced the concept of a "Duty Champion" (in the same way as a Whistleblower Champion) who should be a senior manager at board level who ensures the duty is discussed regularly and raised in all relevant discussions. While this doesn't change the position that all senior managers will be responsible for compliance with the duty within their relevant remit, the Duty Champion should be the loudest voice among many.

Timetable and FCA expectations

The FCA is proposing that the rules and guidance come into force on a phased basis: 31 July 2023 for new and existing products or services that are open to sale or renewal; and 31 July 2024 for closed products or services. By the end of October 2022, firms’ boards (or equivalent management body) should have agreed implementation plans and maintain oversight of their delivery. By the end of April 2023, the FCA expects manufacturers to share key information with distributors to enable all firms to comply in time. The FCA expects firms to engage with it if they are considering withdrawing any products so that it can identify if there are any potentially significant impacts on consumers.

There is a huge amount of work needed on this, and there is now no room for delay. The FCA is asking firms applying for authorisation or variation of permissions about their Consumer Duty implementation projects, even with a year to go. No one working in UK financial services should be asking "what is the Consumer Duty?" Now is the time for the hard work to be put in.