FCA publishes second consultation on new Consumer Duty

On 7 December 2021 the UK Financial Conduct Authority ("FCA") published its second consultation paper (the “CP”) on its proposed new Consumer Duty (the “Duty”) that would set higher expectations for the standard of care that firms provide to their retail consumers. The CP deals with responses to its initial consultation paper (which was published last May) and sets out in draft the detailed rules and guidance required to bring the Duty into force.

What does the Duty mean for your business?

The Duty itself will impose a higher standard than the FCA's existing Principles 6 and 7, which set out the duties of firms in terms of treating customers fairly and client communications respectively. The FCA states that it will impose a "higher and more exacting" standard of conduct in relation to firms' retail market business. We have set out the scope and application of the Duty below.

What is the scope and application of the new Duty?

• Following feedback, the FCA has chosen a formulation of the Duty based on outcomes, rather than best interests. In the CP, the outcome-based Duty is defined as a duty to "deliver good outcomes for retail clients". This was preferred to the alternative option "to act in the best interests of retail clients" as it was considered to better demonstrate the onus on firms to put customers in the position where they can act in their own best interests. The Duty will be included as a new Principle 12 in the FCA Handbook and Principle 6 and 7 will be disapplied when Principle 12 applies. The FCA is also introducing a new Individual Conduct Rule 6 requiring conduct rules staff to act to deliver good outcomes for retail customers.

• The “cross-cutting” rules set out in the CP which describe the FCA's expectations of firm's conduct have been retained from its initial consultation, although a slightly amended wording and order has been used. Notably the FCA has confirmed that it intends to require firms to:
  • act in good faith;
  • avoid causing foreseeable harm to retail customers; and
  • enable customers to pursue their financial objectives.

Crucially, following industry concerns, there will be no requirement for firms to take “all reasonable steps” in connection with the cross-cutting rules as the procedural nature of such a requirement will be too onerous on firms. However, the concept of reasonableness is apparent throughout the new rules and guidance in the CP.

• Following industry concerns, the proposed right for customers to initiate Private Right of Action (“PROA”) proceedings against firms for loss caused by a breach of the Consumer Duty will not be introduced. The FCA's view is that the existing redress framework is likely to be more appropriate for almost all consumers to seek redress and it is working closely with FOS to improve awareness of the existing regime.

• The four outcomes underpinning the Duty are clarified as follows:
  • clear customer understanding;
  • products and services designed to meet customer needs;
  • fair value in regards to pricing; and
  • effective customer support

• The FCA has published new rules in the CP that it proposes to include in the FCA Handbook to implement the Duty, cross-cutting rules and the four outcomes, which have been included in existing sections of the FCA Handbook. The CP also includes draft non-Handbook guidance which sets out more detail on what the Duty requires and what the expectations on firms are in terms of complying with the new Consumer Duty. For example, the guidance states that the rules are designed to be proportionate and while firms will need to apply the rules for all products or services, the requirements are less onerous for simpler products with less risk of consumer harm.

Next steps

Responses to the consultation are due by 15 February 2022. The FCA intends to publish a policy statement with its final rules by 31 July 2022. Further, the FCA has indicated that firms should have until 30 April 2023 to fully implement the Consumer Duty (however, the FCA is asking for views on this timescale).Finally, the FCA has stated that its implementation of the Duty will be “iterative” and that it is considering whether and how it can give regular updates to firms to provide further clarity on the regulator's expectations.

How can we help?

If your firm sells regulated financial products and services to retail clients, the new Consumer Duty will apply to you. Our Financial Services Regulation team can assist you with all aspects of your business (including your sales and advisory processes, marketing and advertising, and advising on your data management and record keeping so you can evidence compliance with the new Consumer Duty). Our Financial Services Regulation team has extensive experience guiding authorised firms through regulatory change and delivers pragmatic, commercial and workable advice and guidance to assist firms in achieving compliant business practices. Our team would be very happy to advise on and assist you with your next steps.