The new Consumer Duty to be required by financial services firms

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In this issue we cover the latest FCA consultation paper CP21/13, a new Consumer Duty which will be required by all financial services firms in relation to products and services sold to non-professional customers.

This week the FCA published a consultation paper CP21/13: A new Consumer Duty which introduces a new “Consumer Duty” for financial services firms dealing mainly with products and services sold to retail clients (including non-professional customers and SMEs). This would require firms to:

  • ask themselves what outcomes consumers should be able to expect from their products and services
  • act to enable rather than hinder these outcomes
  • assess the effectiveness of their actions

The proposed Consumer Duty would be a package of 3 elements:

  1. A Consumer Principle, which sets a clear tone and uses language that reflects the overall standards of behaviour from firms. The conduct this Consumer Principle requires would be developed in the other elements of the Consumer Duty.

The aim of this principle is to set a higher standard than the existing requirement of Principle 6 for a firm to ‘pay due regard to the interests of its customers and treat them fairly’. The indication to firms is that they need to play a greater and more positive role in delivering good outcomes for consumers, including those who are not direct customers of the firm.

  1. Cross‑cutting Rules’ which develop the overarching expectations for common themes that apply across all areas of firm conduct:
    • Take all reasonable steps to avoid causing foreseeable harm to customers
    • Take all reasonable steps to enable customers to pursue their financial objectives
    • Act in good faith.
  1. The ‘Four Outcomes’: a suite of rules and guidance setting more detailed expectations for firm conduct for specific outcomes representing the key elements of the firm‑consumer relationship.
    • Communications
    • Products and Services
    • Customer Service
    • Price and Value

Our thoughts

The duty of care concept is not a new topic for the FCA as it has been discussing the introduction of something along these lines for a few years.

  • In July 2018, it published Discussion Paper 18/5 on the proposed introduction of a duty of care which was to encourage better behaviours and conduct in firms to improve consumer protection.
  • In April 2019, it published Feedback Statement 19/2 purportedly showing support for changes to the way in which it applied existing regulations but noting that some respondents opposed the introduction of a new statutory duty.

The proposed Consumer Duty is designed to introduce a new and higher standard of conduct by creating a greater focus on customers’ interests and outcomes. To meet the requirements firms will need to consider the Consumer Duty at all stages of its processes and throughout its organisation.

We believe the introduction of this Consumer Duty could give rise to confusion where it impacts existing Principles as the broader package of rules and guidance making up the Consumer Duty, while similarly wide-ranging in application, would provide a level of detail that does not exist in the existing Principles. For example, it is likely the Consumer Duty would apply in preference to the existing Principles 6 and 7 such that the overlap with these existing Principles may be removed by disapplying them.

It appears the FCA is looking for firms to take more responsibility for customers actions and in some way be accountable for poor outcomes even if the firm had completed all the necessary due diligence on the customer beforehand. In CP21/13 it clearly states that the FCA wants to see firms putting themselves in their customers’ shoes, asking themselves questions such as ‘would I be happy to be treated in the way my firm treats its customers?’, or ‘would I recommend my firm’s products and services to my friends and family?’. In essence a paradigm shift in the way it sees the interaction between a firm and its customers.

The FCA is seeking feedback on these proposals before 31 July 2021. A following consultation will likely follow by year-end, with any new rules to follow by 31 July 2022.