The Consumer Duty is a package of measures comprised of:
- A new Consumer Principle (Principle 12) that provides a high-level expectation of conduct and associated outcomes.
- A set of overarching cross-cutting rules which develop and amplify the standards of conduct that the FCA expects under the Consumer Principle.
- The four outcomes, which are a suite of rules and guidance setting more detailed expectations for a firm's conduct according to the four specific outcomes that represent the key elements of the firm and its consumer relationships.
Consumer Duty and the FCA Handbook
The new principle, rules and guidance will sit within the High-Level Standards Principles (PRIN) sourcebook. The Consumer Principle will become Principle 12 with Principles 6 and 7 disapplied for retail business.
- Scope — There is no overarching definition of `retail customer'. Instead, the FCA has chosen to align the scope of the Consumer Duty with the existing scope of the sectoral sourcebooks. For example, for investments, the scope of the Consumer Duty will follow the scope of the Conduct of Business Sourcebook (COBS).
- SM&CR — FCA propose to amend the individual conduct rules in the Code of Conduct sourcebook (COCON) for the Senior Managers and Certification Regime (SM&CR) adding a new rule requiring all `conduct rules' staff within firms to `act to deliver good outcomes for retail customers' where their firms' activities fall within scope of the Consumer Duty. Where this new rule applies, the existing individual conduct rule 4 will be disapplied.
For the FCA, this is a straightforward and simplified approach rather than seeking to fully integrate into existing handbooks with a significant volume of changes. All existing requirements will remain in place. The FCA has committed to use the implementation period to identify whether there are any areas of the Handbook that may require amendment, in light of the Consumer Duty. However, this may give firms insufficient time to respond effectively to any such changes — at least in the short-term.
However, for firms drawing a line between who qualifies as a retail customer in certain circumstances for certain products may not be straightforward. The FCA's expectation regarding insurers' responsibilities for assessing fair value for multi occupancy buildings insurance (summarised below) encapsulates this.
Case study: Consumer Duty scope
Definition of retail customer multi-occupancy buildings insurance
A recent Dear CEO letter to Insurers and brokers on approaches to insurance costs for multi-occupancy buildings demonstrates the processes the FCA expect firms to take when considering the line between retail customer and commercial customers.
The FCA highlight firms' responsibilities to take account of the freeholders duties to their leaseholders when determining 'fair value', what is in the best interests of customers and what meets their needs.
Although many freehold property owners will be commercial customers, consideration should be paid to the obligations they owe to their leaseholders who are likely to be retail consumers, as most leaseholders pay for buildings insurance through service charges and cannot shop around to find the best deals.
The Consumer Duty is underpinned by the concept of reasonableness. The FCA expect rules and guidance to be interpreted in line with the standard that could reasonably be expected of a prudent firm:
- Carrying on the same activity in relation to the same product or service.
- With the necessary understanding of the needs and characteristics of its customers.
Although the concept of reasonableness exists in current FCA requirements, the subjectivity of applying it to a broad range of interconnected aspects will prove a challenge for firms.
The cross-cutting rules strengthen the standards of conduct the FCA expect under the Consumer Principle. They develop the FCA's overarching objectives for firm behaviour through three common themes applying across all areas of a firm's conduct. They also intended to inform and help firms interpret the four outcomes.
The cross-cutting rules require firms to:
1. Act in good faith toward retail customers.
2. Avoid foreseeable harm to retail customers.
3. Enable and support retail customers to pursue their financial objectives.
The four outcomes
The four outcomes represent the key elements of the firm-customer relationship. The behaviour and actions of firms in relation to each of these outcomes are instrumental in enabling consumers to meet their financial needs and improve their financial wellbeing.
1. Products and services
2. Price and value
3. Consumer understanding
4. Consumer support
The outcomes establish the suite of rules and guidance setting the FCA's expectations of firms under the Consumer Duty, and whilst standalone, are unsurprisingly interlinked. For example, poor product design or governance may impact fair value considerations. Across all outcomes there is an expectation that:
- Firms review their current approaches to bring them in line with the Consumer Duty requirements.
- Firms ensure they can evidence outcomes.
- Outcomes are reviewed and monitored on an ongoing basis.
- Any issues identified are remedied or mitigated.
Governance and accountability
The FCA expects the focus on acting to deliver good outcomes will be at the heart of firms' strategy and business objectives. It expects firms to embed the duty in the same way, and receive the same level of ongoing attention, as they have with financial performance or risk.
Under the Consumer Duty, a firm's board or board equivalent, will be responsible for assessing whether it is delivering good outcomes for its customers which are consistent with the Consumer Duty. As such, firms will need to determine what type, frequency and level of granularity their board will need engage to be able to provide this assurance.
SM&CR will apply to the Consumer Duty as it does to other Principles and rules. The FCA doesn't want the responsibility for compliance with all elements of the Consumer Duty to apply to one individual. Instead, the responsibility should permeate throughout senior management and the design, distribution and delivery lifecycle. All senior managers are responsible for ensuring that the business of the firm complies with the requirements of the Consumer Duty on an ongoing basis. Therefore, the way firms design, implement, assess and monitor its solution to evidence outcomes will need to be a core focus of implementation activity at all levels of management.
This approach emphasises the fundamental change the FCA want to see with these measures — with a focus on delivering good consumer outcomes running through every action, fully embedded into every department and supported by robust evidence.