In July 2022, the Financial Conduct Authority (FCA) published its final rules and policy statement, 'PS22/9: A new Consumer Duty'. The Consumer Duty sets higher and clearer standards of care that firms must provide to retail customers.
The Consumer Duty forms part of the FCA's transformation to become a more innovative, assertive and data-led regulator, and is a key part of the FCA's new three-year strategy to improve outcomes for consumers and in markets throughout the UK. The FCA has confirmed it is embedding the Consumer Duty into its approach for authorisation, supervision and enforcement.
This article gives an overview of the key new requirements - and practical considerations - for boards and senior managers when preparing for, and implementing and embedding, the new Consumer Duty into their firms' strategies, governance, leadership and people policies.
What is the Consumer Duty?
It's essentially a new, overarching principle outlining that 'a firm must act to deliver good outcomes for retail customers'. This is set out in Principle 12 of the FCA's Principles for Business. Firms will need to assess, and evidence, how they are acting to deliver good outcomes for their retail customers. Putting customers' needs first is the cornerstone of the Consumer Duty.
Which firms are in scope of the new Consumer Duty?
The Consumer Duty applies to all FCA authorised firms (including firms in the e-money and payments sector) that have a material influence over, or determine, retail customer outcomes in the UK, and in particular:
- The design or operation of retail products or services (including their price and value).
- The distribution of retail products or services.
- The preparation and approval of communications that are to be issued to retail customers.
- Engagement with customer support for retail customers.
Whether a 'material influence' exists depends on the extent to which a firm is, in practice, exercising discretion over retail customer outcomes. A material influence would not include, for example, a firm whose role is limited to operating within a mandate determined by another firm in the chain, or providing factual information to support the work of another firm in the chain, or providing IT systems.
Which firms are out of scope of the Consumer Duty?
FCA authorised firms that offer products or services that are not designed for retail customers are not in scope of the Consumer Duty, where they are only marketed and approved for distribution to non-retail customers, and not provided to another firm under an arrangement between them as part of a distribution chain for a retail product or service.
What are the new requirements under the Consumer Duty?
New, cross cutting rules – firms must act in good faith, avoid causing foreseeable harm, and enable and support retail customers to pursue their financial objectives. These obligations apply during the whole lifecycle of a product, and at every stage of the customer journey.
New rules relating to products and services – the FCA wants all products and services for consumers to be fit for purpose. They must be designed to meet the needs, characteristics and objectives of a target group of customers (including those with characteristics of vulnerability) and distributed appropriately.
New rules relating to price and value – the FCA wants all consumers to receive fair value. Firms must assess their products and services to ensure there is a reasonable relationship between the amount paid by a retail customer for a product or service and the overall benefit a consumer can reasonably expect to receive from it.
New rules relating to consumer understanding – the FCA wants firms' communications to support and enable consumers to make informed decisions about financial products and services. Consumers should be given the information they need, at the right time, and the information should be presented in a way that they are likely to understand.
New rules relating to consumer support – the FCA wants firms to provide a level of support that meets consumers' needs throughout their relationship with the firm. This includes ensuring customers do not face unreasonable barriers or costs when amending or switching a product, or transferring to a new product provider.
New guidance – the FCA has published 'FG22/5: Final non-Handbook Guidance for Firms on the Consumer Duty', which includes a range of good and poor practice examples to illustrate the types of behaviours the FCA does, and does not, expect firms to adopt to meet expectations under the Consumer Duty and deliver good outcomes for customers.
Other practical considerations
Proportionate and reasonable – the Consumer Duty applies in a proportionate way, based on the standard that could reasonably be expected of a prudent firm carrying on the same activity in relation to the same product and services. When applying the Consumer Duty, firms should take appropriate account of the needs and characteristics of customers in the relevant target market.
Culture – firms must ensure that the interests of their customers are central to their culture and purpose, and this must be embedded throughout the organisation. Firms must ensure their strategies, governance, leadership, and people policies (including incentives at all levels) lead to good outcomes for customers. Risk functions should pay attention to consumer risks and they should also be a key lens for internal audit.
Governance – the Board (or equivalent governing body) must take full responsibility for ensuring that the Consumer Duty is properly embedded within the firm, and senior managers are accountable for the outcomes their customers are experiencing, in line with their accountability under the Senior Managers and Certification Regime. Firms should have a champion at board level (or equivalent governing body) who, along with the Chair and the CEO, ensures that the Duty is discussed regularly and raised in all relevant discussions.
Monitoring – firms must regularly review the outcomes that their customers are experiencing in practice and take action to address any risks to good customer outcomes.
Outsourcing – FCA authorised firms are responsible and accountable for meeting their regulatory responsibilities under the Consumer Duty, even when they outsource or use third‑party arrangements. Firms will need to have arrangements in place with their outsourcers to capture any data necessary to enable them to monitor whether they are delivering good outcomes.
Product or service withdrawal – firms should engage with the FCA if, as part of implementation of the Consumer Duty, they are considering withdrawing or restricting access to products or services in a way that will have a significant impact on vulnerable consumers or on overall market supply.
Sanctions for breach – the FCA will use its full range of powers to tackle misconduct, including investigating and using its deterrent and remedial powers to secure redress for customers who have suffered harm through a firm's breach of the Consumer Duty. The FCA's focus will be increasingly on the outcomes customers experience, and it intends to intervene more quickly, and more assertively, when it identifies practices that harm consumers. It will also take a bolder approach to communicating its expectations to firms and, initially, it will focus on tackling the most serious misconduct.
When does the Consumer Duty come into force?
Implementation is being phased in (see dates below), though the FCA expects firms to consider bringing products and services up to the new standard ahead of the implementation deadlines, where possible.
- The Consumer Duty will apply to all products and services, and all existing products and services, that are marketed or distributed to retail customers (including by way of renewal), from 31 July 2023.
- The Consumer Duty will apply to closed products and services, i.e. those that are no longer marketed or distributed to retail customers, from 31 July 2024.
Key questions for firms
Below are examples of the types of questions firms can expect to be asked in their interactions with the FCA. The FCA expects these questions to guide discussions by the firm's Board or equivalent governing body.
Products and services
- Has the firm specified the target market of its products and services to the level of granularity necessary?
- How has the firm satisfied itself that its products and services are well designed to meet the needs of consumers in the target market and perform as expected? What testing has been conducted?
- How has the firm identified if the product or service has features that could risk harm for groups of customers with characteristics of vulnerability? What changes to the design of its products and services is it making as a result?
- Is the firm sharing all necessary information with other firms in the distribution chain and receiving all necessary information itself?
- How is the firm monitoring that distribution strategies are being followed and that products and services are being correctly distributed to the target market?
- What data and management information is the firm using to monitor whether products and services continue to meet the needs of customers and contribute to good consumer outcomes? How regularly is it reviewing this data and what action is being taken as a result?
- Where the firm is planning to withdraw a product or service from the market, has the firm considered whether this could lead to foreseeable harm? What action is it taking to mitigate this risk?
Price and value
- Is the firm satisfied that it is considering all the relevant factors and available data as part of its fair value assessments? Has it gathered relevant information from other firms in the distribution chain?
- What insight has the firm gained for its value assessments by benchmarking the price and value of its products and services against similar ones in the market? Has the price and value of its older products kept up with market developments?
- Can the firm demonstrate that its products and services are fair value for different groups of consumers, including those in vulnerable circumstances or with protected characteristics?
- If the firm is charging different prices to separate groups of consumers for the same product or service, is the firm satisfied that the pricing is fair for each group?
- What action has the firm taken as a result of its fair value assessments, and how is it ensuring this action is effective in improving consumer outcomes?
- What data, management information and other intelligence is the firm using to monitor the fair value of its products and services on an ongoing basis? How regularly is it reviewing this material, and what action is it taking as a result?
- Is the firm satisfied that it is applying the same standards and testing capabilities to ensure communications are delivering good customer outcomes, as they are to ensuring they generate sales and revenue?
- What insights is the firm using to decide how best to keep customers engaged in their customer journey, while also ensuring its customers have the right information at the right time to make decisions?
- How is the firm testing the effectiveness of its communications? How is it acting on the results?
- How does the firm adapt its communications to meet the needs of customers with characteristics of vulnerability, and how does it know these adaptions are effective?
- How does the firm ensure that its communications are equally effective across all channels it uses? How does it test that?
- What data, management information and feedback does the firm use in its ongoing monitoring of the impact of its communications on customer outcomes? How often is this data reviewed, and what action is taken as a result?
- How has the firm satisfied itself that its customer support is effective at meeting customer needs, regardless of the channel used? Does the firm test outcomes across different channels?
- What assessment has the firm made about whether its customer support is meeting the needs of customers with characteristics of vulnerability? What data, management information and customer feedback is being used to support this assessment?
- How has the firm satisfied itself that it is at least as easy to switch or leave its products and services as it is to buy them in the first place?
- How has the firm satisfied itself that the quality of any post-sale support is as good as the pre-sale support?
- What data, management information and feedback is the firm using to monitor the impact its consumer support is having on customer outcomes? How often is this data monitored and what action is being taken as a result?
- How effective is the firm's monitoring and oversight of outsourced or third party service providers, and is it confident that these services meet the consumer support standards?
Culture and governance
- Does the firm's purpose (whether publicly articulated or not) align with its obligations under the Consumer Duty? How is it embedded and understood throughout the organisation?
- How does the organisation's culture support the delivery of good outcomes for customers?
- How does the organisation ensure that individuals throughout the organisation - including those in control and support functions – understand their role in delivering the Consumer Duty?
- Are staff empowered and do they feel safe to challenge and raise issues where they feel the firm might not be acting to deliver good outcomes for customers? Are those challenges listened to, and where necessary, acted on?
- Is the Consumer Duty being considered in all relevant discussions such as strategy and remuneration? Are customers' outcomes a key lens for Risk and Internal Audit?
- How is the firm ensuring that its remuneration and incentive structures drive good outcomes for customers?
- Is the organisation prioritising acting to deliver good outcomes for customers? Are there any areas of concern?
- How is the external environment changing and how will that impact on the organisation's ability to deliver good outcomes for customers?
- Has the firm identified the key risks to its ability to deliver good outcomes to customers and put appropriate mitigants in place?
- How does the firm define good outcomes (over the short, medium and long term) for customers using its products and services?
- What data does the firm have about its customers and how they use its products? Are there any gaps in the data? What steps is the firm taking to address them?
- What outcomes are customers getting? Are they getting good outcomes that align with their reasonable expectations?
- Are certain groups of consumers getting different outcomes and, if so, why? What's driving any adverse outcomes?
- What actions is the firm taking to improve outcomes? Who's accountable for this work, what will improvement look like and when will it happen?
The FCA expects firms to make full use of the implementation period and to plan and prioritise implementation work effectively to meet the standards required by the Consumer Duty.
- By the end of October 2022 - firms' boards (or equivalent management body) should have agreed their implementation plans and be able to evidence that they have scrutinised and challenged these to ensure they are deliverable and robust in meeting the new standards. Firms should expect to be asked to share implementation plans, board papers and minutes with supervisors and be challenged on their contents.
- By the end of April 2023 - manufacturers should aim to complete all the reviews necessary to meet the four outcome rules for their existing open products and services, so that they can share with distributors the information necessary for them to meet their obligations under the Consumer Duty (for example, in relation to the price and value, and products and services outcomes). They should also be able to identify where changes to their existing open products and services are needed in order to meet the Consumer Duty and implement these remedies by the end of July 2023.
- By the end of July 2023 - Boards (or equivalent management bodies) should assure themselves that their firm is complying with their obligations under the Consumer Duty, and ensure the firm has identified any potential gaps or weaknesses in their compliance and any action needed to remedy this.
With the first phase of the implementation deadline fast approaching, it is important for firms to start preparing now. If you have any questions regarding this article or require any assistance with your implementation of the new requirements under the Consumer Duty, please contact Kam Dhillon.
 Source: FG22/5: Final non-Handbook Guidance for Firms on the Consumer Duty.