On 14 May 2021, the Financial Conduct Authority (“FCA”) published a consultation on the introduction of a new “Consumer Duty” on firms providing financial services to consumers (the “Consultation”). The aim of this “Consumer Duty” is to set a higher expectation for the standard of care regulated firms owe to their consumers. As such, firms will have to carefully consider:
- the outcome reasonably expected by consumers from their products and services;
- their actions to enable rather than hinder such outcomes; and
- the effectiveness of those actions.
THREE KEY ELEMENTS
In order to achieve the ideal outcome, the FCA proposes a new Consumer Duty. This comprises: (1) a consumer principle; (2) a set of overarching rules; and (3) four outcomes, all of which are set out below.
This sets out the overall objective standards of behaviour that firms are expected to adhere to, which should be flexibly and dynamically applied to the services and products that firms are offering to consumers. The Consumer Principle sets a higher standard than the existing requirement on firms, which is to ‘pay due regard to the interest of its customers and treat them fairly’. Having said that, the FCA does not expect firms to go beyond what is reasonably expected of their role and the products or services offered to meet such requirements. The FCA hopes that, by introducing this new Consumer Principle, firms will play a more active and positive role in delivering good outcomes for retail clients, as well as acting in their best interests.
Overarching Cross-cutting Rules
FCA has put forward a number of cross-cutting rules with the aim of developing and clarifying the Consumer Principle and its application in practice. The rules set out three key behaviours to which firms should adhere, these are:
- to take all reasonable steps to avoid causing foreseeable harm to customers;
- to take all reasonable steps to enable customers to pursue their financial objectives; and
- to act in good faith.
The FCA imposes on firms the obligation to be fair in its description of the risks and benefits of the products and services of the firm and prohibit any misleading description or omission of key terms in documents, whether or not such documents will be read by customers. Moreover, taking into account the general imbalance in bargaining positions between financial services firms and their clients, the FCA acknowledges that the clients are only able to take responsibility for their own decisions provided that firms act honestly and openly.
The FCA further clarified the objective standard of conduct imposed onto these firms by setting out the concept of reasonableness. When assessing the firm’s conduct and their compliance to the new Consumer Duty, the FCA will consider the following:
- the nature of the product or service being offered or provided – this includes:
- the firm’s role and its relationship with its clients;
- the potential of the product or service to harm consumers; and
- the complexity of such product or service.
- the role of the firm in the distribution chain;
- the reasonable expectations of consumers; and
- the specific characteristics of customers, including vulnerability and protected characteristics.
The FCA describes the four outcomes as the key elements of the relationship between firms and consumers. They represent the way in which firms should design, sell and service their products. The FCA has categorised these four outcomes as follows:
- communications – this should equip consumers to make effective, timely and well-informed decisions about the financial products and services from the firm;
- products and services – these are to be specifically designed to meet consumers’ needs and target those whose needs are met by such products and services;
- customer service – consumers’ needs should be met to enable them to realise the benefits of the products and services offered, in a way that is in the consumers’ interests without undue hindrance; and
- price and value – the price of services and products should represent fair value for the firms’ target customers. This means that the price paid for the product or service should be reasonable in relation to the expected benefits of such product or service.
The FCA welcomes feedback to its proposals in this Consultation by 31 July 2021. After the deadline, the FCA will consider the responses received and set out the proposed text for any new rules or guidance, as well as any further considerations on the impact of the new Consumer Duty on the existing principles as set out in the FCA Handbook. The FCA expects to publish the second consultation by the end of the year, and will implement any new rules by 31 July 2022.
For a copy of the Consultation, please click here.
For more information, and any guidance or advice on understanding the requirements under the new proposed rules, Cleveland & Co External in-house counsel™, your specialist outsourced legal team, are here to help.