On the 27 July, the FCA published the final Rules and Guidance on the new Consumer Duty (the 'Duty'). In a significant regulatory move to put consumer interests at the heart of the financial services industry, the Duty creates a higher standard of care that requires firms to put customers' needs first.
The FCA first consulted on the Duty in May 2021, and a second consultation paper followed in December. The rules have not changed greatly since the publication of the second consultation in December last year. In fact, the fundamental nature and scope of the Duty remains largely the same.
The Duty will be made up of three elements: -
- a Consumer Principle that requires firms to act to deliver good outcomes for retail customers
- cross-cutting rules that require firms to act in good faith, avoid causing foreseeable harm, and support retail customers to pursue their financial objectives.
- four outcomes relating to: (1) products and services (2) price and value (3) consumer understanding and (4) consumer support.
This may sound relatively familiar to those who have been aware of the previous consultations. However, the final Rules and Guidance contain some important changes and welcome clarity on the shape of the Duty.
Key points to note
The FCA responded to industry concerns in relation to timescales, and have extended the implementation period from 8 months to 12 months (31 July 2023) for new and existing products and services that are open to sale or renewal, and to 24 months (31 July 2024) for products and services held in closed books.
However, it is worth noting that by end of October 2022, firms’ boards (or other equivalent management bodies) must have agreed their implementation plans and be ready to evidence their proposed delivery of the Duty. In addition, by the end of April 2023 manufacturers should aim to have completed all the reviews of open products and services. Implementation plans, board papers and minutes may be requested and challenged by FCA supervisors to ensure firms are actively working on the implementing the Duty in a timely and effective manner.
The Duty will apply to 'retail customers' and the FCA have confirmed the approach of applying the Duty to align with the existing handbooks will remain, including where regulation applies to the provision of financial services to SMEs. Therefore, in cases where SMEs are already protected by FCA rules under a sectoral handbook, the Duty will also apply.
In terms of territorial scope, the Duty will apply to firms conducting regulated activities in the UK. It will also apply to firms in Gibraltar selling into the UK and firms in the temporary permissions regime and financial services contract scheme following the UK's withdrawal from the EU. Further clarity has been provided in terms of non-UK distributors, recognising that manufacturers will not be able to gather the same amount of information as when only dealing with UK-based firms. In these circumstances, firms should use any available information to support their work under the Duty but are not expected to obtain information from firms that are not subject to the Duty.
Although the FCA stated that wholesale markets would not fall under the scope of the Duty, firms raised concerns that there was a lack of clarity, for instance, where a wholesale firm provides advisory services to a retail fund manager which then provides a service to a retail customer. Would this draw the wholesale firm into scope? The final Rules state that products or services that are not designed for retail customers are not in the scope of the Duty, where they:
- are only marketed and approved for distribution to non-retail customers; and
- are not provided to another firm under an arrangement between them as part of a distribution chain for a retail product or service.
The Duty will apply to all firms in the distribution chain that can influence material aspects of a retail financial product or service. The final Guidance provides examples to assist firms with this assessment and sets out the FCA's expectation of different parties in the distribution chains.
New rules have been added which will require firms to notify the FCA if they become aware that another firm in a distribution chain is not, or may not be, complying with the Duty, and other firms in a distribution chain if it thinks they have cause or contributed to customer detriment.
Governance, culture and oversight
The new Rules contain an important emphasis on governance of the Duty, reflecting the FCA's drive to introduce tangible changes. The Rules make it clear that the Duty must be reflected at all firm levels, including appropriate input and oversight from firms' boards and senior management. The FCA expects the Duty to be shown in firms’ strategies, governance, leadership and people policies, including in relation to remuneration and incentives.
In addition, the Guidance has been amended to include an expectation for firms to have a Duty champion at board level who, along with the Chair and the CEO, will ensure the Duty is being embedded into the firm's culture, products and services. Where possible, this champion should be an independent non-executive director.
Whilst the implementation period has been amended slightly, timescales remain tight to ensure senior management boards are ready to present their delivery plans by the end of October this year.
The new Rules and Guidance provide a necessary steer on the FCA's expectations, with an emphasis on continual reviews and data collection to ensure products and services best meet customers' needs. In particular, the requirement for a champion at board level is a clear sign that the FCA wants the Duty to be central to firm wide policy and development.
Undoubtedly, the Duty signals a significant step in the right direction for consumer protection. Firms in the financial services industry will need to be pro-active in making sure this higher standard is implemented, as it is now here to stay.
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