Firms dealing with retail clients need to prepare immediately for the incoming Consumer Duty regulations to avoid the severe penalties of non-compliance. The regulations aim to reduce risk to retail customers through improving standards ultimately underlining the prioritisation of the consumer in the market. Additionally, the new proposals will grant the FCA further regulatory flexibility as its focus on consumer welfare is enhanced.
The Consumer Duty regulation is made up of three elements:
- A consumer principle
This principle is evidenced by a statement issued by the FCA following consultation
“A firm must act to deliver good outcomes for retail clients”
- Cross-cutting rules
Expanding on the FCA’s statement firms must take steps to ensure the following:
- They act in good faith;
- They take steps to avoid foreseeable harm to customers; and
- They enable customers to pursue their financial objectives
- Four outcomes
The FCA has stated a set of rules will determine firms’ conduct in relation to:
- Products and services;
- Customer service; and
- Price and value
Principles 6 (a firm must pay due regard to its customers and treat them fairly) and 7 (a firm must pay due regard to the information needs of its clients and communicate information to them in a way which is clear, fair and not misleading) will be disapplied when the new Principle 12 is brought in. Existing SMCR rules will also be amended in line with this new principle. Finally, the FCA has emphasised no new fiduciary responsibility will be created between a firm and their retail clients beyond those already in place.
As such, Consumer Duty should not be regarded as a brand-new set of regulations, though those impacted will be:
- Firms which offer ‘services’ along with products to their customers following the ‘product’ definition change in the FCA Handbook; and
- Firms which do not have direct client relationships but are still part of the distribution chain with consumers
Additionally, firms will need to improve their standards in the following areas:
- When new products are changed or introduced. Furthermore, the specification documents pertaining to such releases must highlight specific steps that will be taken to prioritise the customer service;
- Fair value assessments will be needed on new products and services;
- Sufficient testing and review of products and services must be carried out; and
- Potentially Vulnerable Customer (PVC) Policies must be readily available within the context of offered products and services.
In practice, firms with retail clients must comply with the Consumer Duty standards with specific attention to:
- Risk management and identification with the aim of maximising consumer protection;
- Bad outcomes and root cause identification;
- The firm’s ability to change their products, services, policies and practices in light of new issues and risks that may arise; and
- The firm’s ability to show how issues resulting in poor outcomes are identified
Further expectations include:
- The firm’s ability to differentiate various groups of clients and rank them based on the severity of bad outcomes; and
- Boards must consider (at least annually) a report assessing whether their business practices are delivering the best results for their clients whilst adhering to the Consumer Duty. Similarly, firms should be regularly releasing management information related to their compliance with Consumer Duty.
Following the implementation of Consumer Duty the FCA will expect a significant increase in reporting, as well as further supervision on the creation and accuracy of such reports. In order to improve the FCA’s ability to generate accurate comparisons and conclusions at an increasingly faster rate, it is anticipated that some form of standardised reporting to the FCA will be expected. The finalisation of the Consumer Duty rules will occur throughout 2022, with the implementation target by 30 April, 2023. FCA regulated firms should prioritise their preparation for the Consumer Duty rules in order to avoid the associated penalties in the future.
If you need any help and advice with Consumer Duty or any compliance, regulatory and risk management issue please get in contact with Dan, Simon or one of the team.