Treating customers fairly is not a new concept for the FCA. Since 2015, the FCA has bolstered its approach to the fair treatment of customers. It has done this through finalised policy guidance on vulnerable customers and consumer research like its Financial Lives Survey.
However, this guidance and related studies highlighted that firms were not doing enough to achieve good customer outcomes. So, in July 2022, the FCA provided businesses with the FCA's Consumer Duty bundle, which included a policy statement (PS22/9) and a finalised, non-handbook guidance (FG22/5).
FCA Consumer Duty explained
- What is the FCA's Consumer Duty?
- Why is the FCA's Consumer Duty important?
- What does the FCA's Consumer Duty consist of?
- To whom does the FCA's Consumer Duty apply?
- Who is responsible for enforcing Consumer Duty?
What is the FCA's Consumer Duty?
These rules and guidance impose a higher obligation on firms to incorporate better consumer protection standards that aim to put their needs first.
The FCA Consumer Duty requires companies to be proactive in their actions to prevent consumer harm. Firms must prepare a plan demonstrating how the entire business will work towards achieving better outcomes. This plan will allow the FCA to monitor these proactive actions and quickly act to penalise those who do not aim for better consumer outcomes.
Why is the FCA's Consumer Duty important?
Consumer Duty is an essential change in UK regulation as it is part of the FCA's three-year strategy to better customer outcomes. It will become crucial to its supervision, enforcement, and authorisation approach. This also emphasises that the FCA now wants to focus on outcomes more than principles.
So companies must demonstrate how they act to deliver good outcomes through methods like management information (MI) or complaints data. This means that the FCA now expects a higher standard of care, based on the concept of reasonableness (defined in paragraph 1.4 of the finalised FCA guidance), to remedy harm to customers.
What does the FCA's Consumer Duty consist of?
The FCA's Consumer Duty is a collective package of rules which apply to in-scope FCA-regulated firms. It has three main features:
1. Adopt a higher standard of care under Principle 12
The New Consumer Duty Principle (Principle 12) details that firms must aim to prioritise good outcomes for retail customers. This rule will apply instead of Principle 6 (the duty to take customers' interests into account and treat them fairly) and Principle 7 (the duty to communicate information to clients and consumers in a transparent, fair, and non-misleading way).
If firms do not follow the rule of Principle 12, it will be a breach that the FCA can penalise. Although Principle 6 and 7 will no longer apply for Consumer Duty purposes (it is still relevant for conduct outside of the FCA's Consumer Duty), its existing guidance will still apply to firms who want to meet their obligations under Principle 12. Therefore, if the FCA discovers that a company is not acting in line with Principles 6 or 7, it could be considered a breach of Principle 12.
2. Act in line with the cross-cutting obligations
In addition to Principle 12, the FCA's Consumer Duty package also includes cross-cutting obligations (set out in PRIN 2A). These obligations govern what Principle 12 requires and describes how companies should act to provide good outcomes for retail customers. These obligations require firms to:
Act in good faith toward customers
This conduct rule requires businesses to have open, honest, and fair dealings with retail customers and always act in line with what they expect.
For example, the FCA's Consumer Duty guidance (paragraphs 5.6 to 5.16) highlights that this could mean providing product information that explains its benefits and risks to better their customers' understanding. However, this requirement does not mean that companies have to act in a fiduciary function if not required. It also allows firms to go after legitimate commercial interests as long as they are aligned with the FCA's Consumer Duty.
Avoid foreseeable harm
This condition means businesses must be proactive and reactive in their acts and omissions not to cause foreseeable harm.
Examples of guidance (paragraphs 5.20 to 5.36) from the FCA include resolving issues when they arise, rather than several days down the line, and monitoring existing complaints data to identify current friction to customer journeys. By proactively looking for issues, you could offer an enhanced level of customer support by having measures to prevent this situation. But this FCA Consumer Duty rule does not mean that a firm has to avoid all kinds of harm, especially if not foreseeable.
Enable and support customers to go after their financial objectives
This final cross-cutting rule involves companies needing to proactively put customers in the best position when using a product or service it provides so that a customer can meet their financial goals.
For example, the guidance (paragraphs 5.37 -5.48) states that if a customer has sought advice from a firm as they want to retire at a particular age, this company would understand more about the customer's specific financial objectives. They, therefore, need to act on this information regarding tailoring communication and support.
But this rule does not require a firm without advice permission to give advice and go outside their regulatory permissions. In other words, firms need to create an environment where customers can act to fulfil their financial interests without unreasonable barriers.
3. Meet Consumer Duty requirements with the outcome rules
Lastly, the most detailed guidance on the FCA's Consumer Duty comes in the form of the four outcomes (Chapter 2A of PRIN) and help define the requirements of Principle 12 and the cross-cutting rules even further:
- Products and services outcome
- Price and value outcome
- Consumer understanding outcome
- Consumer support outcome
To whom does the FCA's Consumer Duty apply?
This new duty will be relevant for all firms who are authorised under the Payment Services Regulations 2017 (PSRs), Financial Services and Markets Act 2000 (FSMA), and the E-Money Regulations 2011 (EMRs) in terms of future and actual retail customers.
The FCA finalised guidance highlights that the definition of a retail customer will depend on the relevant handbook section or existing regulation for a particular sector within paragraph 2.3.
For example, in terms of mortgages, the FCA states that the duty will follow the provisions of the Mortgage Conduct Sourcebook (MCOB), meaning that it will cover regulated mortgage contracts but not unregulated buy-to-let products or commercial lending.
Additionally, while the FCA Consumer Duty applies to regulated activities, it applies to those unregulated but is 'ancillary' to the regulated activity. As defined by the FCA in paragraph 2.43 of the finalised guidance, examples of ancillary activities include ongoing customer support. Even more, companies that influence essential aspects of the design of a product or service, who might not have a direct relationship with a retail customer, will still be in scope.
On the other hand, wholesale products or services which are only designed, marketed, and approved for non-retail customers are not within scope (paragraphs 2.29 to 2.34 of the finalised guidance detail other exclusions for wholesale activities). Alternatively, investment companies, including investment trusts, firms that sell products and services based in Gibraltar, companies falling within the temporary permissions regime, or the financial services contract scheme, are within the scope of this duty.
Lastly, paragraph 2.39 of the FCA's finalised guidance highlights that UK distributors of non-UK products and services need to take reasonable steps to understand what they are responsible for distributing, the value it provides, and the target market it services.
Who is responsible for enforcing Consumer Duty?
It is apparent that firms within the scope of the FCA's Consumer Duty must make major changes to their business practices. More importantly, the new rules and guidance emphasise that your entire firm needs to get involved in improving customer outcomes, whether it is finance or IT.
For many, this will be challenging as retail customers must become a focal point of a product and service lifecycle rather than solely focusing on sales.
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