The FCA Consumer Duty - final countdown to new rules for open products and services coming into force 31 July 2023

The Financial Conduct Authority (FCA) introduced a new Consumer Duty (the duty). Following two consultation papers issued in 2021, the FCA published the final rules and guidance on 27 July 2022. Firms have had since then to prepare and set out implementation plans on how they will comply and adhere to the new duty.

The rules and guidance come into force on a phased basis:

• For new and existing products or services that are open to sale or renewal, the rules come into force on 31 July 2023
• For closed products or services, the rules come into force on 31 July 2024

The FCA has suggested that the duty will “lead to a major shift in how financial services are delivered”. The aim of the duty is to set higher standards of care and protections that firms should give to customers in retail financial markets. The FCA has warned that firms should not see the duty as a tick-box exercise.

It is important to note that the duty does not replace any rules but it is intended to be compatible with the existing FCA Handbook rules. Firms must also consider consumer protection legislation when providing products and services to retail customers.

What is the duty?

There are three parts to the duty:

1. The consumer principle (principle 12)
2. The four outcomes
3. The cross cutting rules

The consumer principle 12

The introduction of the consumer principle requires firms to act to deliver good outcomes for retail customers. This reflects the overall principle that the FCA expects firms to act proactively to deliver good outcomes for consumers.

Where the consumer principle 12 applies, principle six (a firm must pay due regard to the interests of its customers and treat them fairly) and principle seven (a firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading) will not apply to firms given the overlap.

The four outcomes

The four outcomes set out rules and guidance in four different areas that represent key elements of the firm-consumer relationship:

1. Governance of products and services – firms need to ensure that its products and services meet the needs, characteristics, and object of customers in the identified target market.
2. Price and value – firms need to provide retail customers with value for their money.
3. Consumer understanding – firms need to ensure they provide retail customers with all the information they need, at the right time and in a way they can understand.
4. Consumer support - firms should provide support that meets customer needs.

The FCA will expect firms to act where poor outcomes are identified.

The cross-cutting rules

The cross-cutting rules underpin the consumer principle 12 and provides guidance on how firms should act to deliver good outcomes for retail customers.

The cross-cutting rules require firms to:

• Act in good faith towards retail customers – this is a standard of conduct characterised by honesty, fair and open dealing, and consistency with the reasonable expectations of customers.

• Avoid foreseeable harm – firms must take proactive and reactive steps to avoid causing harm to customers (e.g adopting a flexible consumer support approach that takes account of the needs of customers with characteristics of vulnerability).
   
• Enable and support retail customers to pursue their financial objectives – firms can support customers by sharing communications tailored to the customers so that they are likely to be understood.

The FCA expects firms to do more to identify the characteristics, needs and objectives of the customer.

Reasonableness

Of course, the duty is underpinned by the concept of reasonableness. This is an objective test and means that the rules and guidance must be interpreted in line with the standard that could reasonably be expected of a prudent firm.

All firms will have the same responsibility to act to deliver good outcomes for retail customers, but it will depend on the capabilities of a firm depending on its size and activities.

Who does this affect?

The duty applies to products and services offered to "retail customers" both prospective and actual customers in the UK. The duty only applies within the FCA’s regulatory perimeter, so will not apply to unregulated business. However, the duty applies to authorised firms conducting ancillary activities.

For more information, please contact Heidi Sawtell or Stephanie Craig.