Andrew Foyle

In the UK, the clock is ticking for financial services firms, regulated by the Financial Conduct Authority (FCA), to plan for the new Consumer Duty. Around 8% of the Scottish workforce is employed in the financial services sector, which according to Government figures continues to grow faster than the wider economy in Scotland and represents £8.8 billion of Scottish GDP. It’s therefore of vital importance that FCA regulated firms in Scotland know what is expected of them in relation to the Consumer Duty and are prepared for the changes which will come into force in 2023.

Before outlining precisely what the Consumer Duty is, let’s take a step back to understand what has led the FCA to overhaul the standards it expects of firms to uphold towards consumers.

Background

For well over two decades the FCA and its predecessor – the Financial Services Authority - has included the requirement to “Treat Customers Fairly” in its Principles for Businesses. There is also an obligation to pay due regard to the information needs of its customers. Those core requirements, set out in in Principle 6 and 7, have steadily been supplemented by specific rules and guidance. However, for several years the FCA has been of the view that the existing rules and guidance are insufficient to protect consumers.

Consequently, in 2021 and 2022 the FCA has consulted extensively on a proposal to replace Principles 6 and 7 with higher expectations as to the standard of care owed by firms to their retail customers. The result is the new Consumer Duty, the final iteration of which was published in July 2022. Comprised of a new policy statement, detailed new rules and specific non-handbook guidance, it sets out the FCA’s aims and objectives and the expectations it has of firms.

It is, by some measure, the most significant intervention by the FCA in the retail financial services sector for many years.

The Consumer Duty explained

Under the Consumer Duty, firms must proactively act to deliver good outcomes for retail customers.

The Consumer Duty comprises of:

• a new Consumer Principle (Principle 12) to replace Principles 6 and 7
• Overarching “cross cutting rules” and
• Four Outcomes

Principle 12

The new Principle is expressed in simple terms:

a firm must act to deliver good outcomes for retail customers

Overarching cross-cutting rules

There are three rules which inform and support the four outcomes:

1. firms must act in good faith towards retail customers;
2. firms must avoid causing foreseeable harm to retail customers; and
3. firms must enable and support retail customers to pursue their financial objectives.

The Four Outcomes

The fours outcomes applicable to the Consumer Duty are

1. Products and services – products and services must be fit for purpose and designed to meet the needs, characteristics and objectives of consumers in the identified market
2. Price and value – firms must consider whether products and services represent fair value
3. Consumer understanding – communication to customers must be such that they are able to make informed decisions
4. Consumer support - firms are expected to provide support that meets the needs of customers

The FCA’s expectation is that the Consumer Duty will be embedded in the distribution chain and will apply at all levels of the customer journey – including product design, distribution, promotion, outcomes and complaints. Significantly, in many firms, especially those who have limited or no consumer facing role, this will require a significant cultural change. A firm will need to demonstrate that the requirements have been embedded within the organisation and form part of the firm’s culture. In this regard, the non-handbook guidance in relation to the Consumer Duty sets out an expectation that firms will appoint an independent non-executive Director to act as a Consumer Duty champion.

Senior managers and certification regime

Notably, under its new rules, the FCA will expect senior managers in firms to be accountable for customer outcomes. Indeed, in the latest rules the FCA has introduced a new conduct rule that requires conduct staff to act to deliver good outcomes for retail customers.

Timeline

There is a great deal for firms to consider and clearly the timescale for implementation is tight!

• End of October 2022 - firms are expected to have an implementation plan in place approved by the board. The FCA has made clear that firm’s can expect to be asked to provide details of their plan and be challenged on its contents.
• End of July 2023 - the Consumer Duty will apply to existing and new products and services
• End of July 2024 – the Consumer Duty will apply to closed products and services which are no longer being sold or renewed after July 2023 but where the new standards will still have application

Time for firms to take positive action

Time is of the essence given the end of October deadline and firms need to start taking action now.

Notably, at Shoosmiths we have assembled a dedicated team of specialists who have been busy assisting clients to navigate the issues that will arise in implementing the consumer duty.

In essence, firms will need to consider the following key actions:

• a governance framework to identify who is responsible and accountable for delivery of the Consumer Duty within the business.
• Identify relevant products and services
• Identify relevant procedures (e.g. complaints processes)
• Undertake a gap analysis to identify areas where changes need to be made to products, services and/or processes
• Finalise and obtaining sign off on the implementation plan by the end of October 2022
• Create a compliant culture – appointing a Consumer Duty Champion, providing training on the requirements of the Consumer Duty, looking at performance and appraisal programmes, incentive schemes etc.
• Amend processes and procedures to ensure compliance with the Consumer Duty
• Identifying products and services that may need amendment or to be withdrawn

In light of the scope of these requirements, it’s likely that when implementing the Consumer Duty, firms will need, initially at least, to take a risk-based approach and aim to prioritise the areas that will have the greatest impact on consumer outcomes.

Failure to comply

If it becomes apparent that a firm will be unable to comply with the deadlines, or if compliance will require the withdrawal or restriction of products and services either permanently or temporarily, early engagement with the FCA will be vital.

A failure to comply with the new Consumer Duty may result in action being taken against the firm. In this regard, the FCA has a range of supervisory and enforcement powers which include (but is not limited to) a requirement to remediate, the imposition of financial penalties on the firm and individuals and restrictions on permissions to undertake certain types of business.

Although the new Consumer Duty broadly accords with the outcomes of the FCA’s consultation process, compliance within the stipulated timescales will be a significant challenge for many firms. The clock is ticking for all firms to comply and now is the time for decisive action by those businesses which have yet to take any significant steps to assess the work that will need to be undertaken.

• Andrew Foyle, Daren Allen, and Jonathon Crook are partners at Shoosmiths.