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On 27 July 2022, the Financial Conduct Authority (“FCA”) published a Policy Statement 22/9 (‘‘PS22/9’’), and provided feedback to its December Consultation Paper 21/36 (‘‘CP21/36’’), setting out the final updated rules on the new Consumer Duty (the “Duty”) which will set higher expectations on the standard of care firms provide consumers in retail financial markets. In addition to the rules, the FCA have published additional guidance on: (i) how firms should comply with their obligations under the Duty; (ii) how to apply the Duty’s scope to different types of customers; and (iii) relationships between manufacturers and distributors, with a focus on developing a fair value framework…
purpose of the duty
The Duty will set a higher and clearer standard by ensuring that firms provide consumers with products and services that are: (i) fit for purpose; and (ii) offer fair value, to enable consumers to make effective choices that are in their best interests. To achieve this, the Duty will require firms to assess and evidence the extent they are delivering best results for customers. The Duty also requires more careful supervision by firms, meaning that firms will be obliged to monitor and aim to prevent harm before it arises, and where harm does arise, the impact of it should be reduced at an earlier stage. Firms will focus on outcomes that give Consumers, fair value for price and quality, and suitable products and services. These outcomes will create a fairer and consumer focussed approach, increasing consumers’ confidence in the individual firms and consequently, in the financial markets. The FCA holds the view that by focusing on these outcomes, firms will be prevented from presenting misleading information to consumers, or information that may appear misleading, or difficult to understand, which makes it even more difficult for consumers when making well-informed decisions. It is critical to note that in order for firms to successfully meet the outcomes under the Duty, they will be required to implement the necessary strategies and objectives set out in PS22/9. The rules and guidance (“Rules and Guidance”) introduced by the FCA will come into force on a phased basis. New and existing products and services open to sale or renewal will come into force on 31 July 2023, and for closed products or services, the rules will come into force on 31 July 2024.
final rules and guidance
The final Rules and Guidance will apply to all firms that distribute, manufacture, or provide products and/or services to retail customers. The key changes made to the Rules and Guidance are summarised in the table below:
| Scope of Consumer Duty |
– additional clarifications are introduced in relation to the expectations of different parties in the distribution chain. Subject to regulatory requirements, firms are responsible for their own activities and not the activities or actions of other firms in the distribution chain;
– notwithstanding the above, firms are required to notify consumers if they become aware that another firm in the distribution chain is not complying with the Duty, or if the firm believes the other firm in the distribution chain has caused or contributed to harm made to consumers;
– includes the definition of material influence and provides examples of when material influence does or does not apply. The Duty would not apply to a firm where their role is limited to operating within a mandate determined by another firm in the distribution chain. This includes a portfolio manager whose role is limited to managing assets under a mandate determined by a professional client, where that client is independent of the manager;
– introduces new guidance on the payment and e-money sector, stating that the distribution chains may look different from other sectors, regardless the duty will continue to apply to firms in this sector; and
– introduces a new description where a distribution chain includes non-United Kingdom (“UK”) distributors selling to non-UK customers. Additionally, it clarifies that manufactures will no longer be obliged to gather the same information when dealing with firms based in the UK, and firms are advised to use available information to support work under the duty but would not be expected to obtain information from firms that are not subject to the duty.
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| Application to existing products |
– the Duty will no longer apply retrospectively to past businesses or to firms’ past actions, therefore firms are only to be responsible for standards from present time onwards;
– includes a requirement for firms to consider the conditions that applied when products were designed and sold. Firms can consider their expected costs over the lifetime of the products and services, including costs over the lifetime of the product as part of assessing fair value;
– providing more clarity on the definition of “good faith”, and firms should now determine whether they are acting consistently with customers’ reasonable expectations, in relation to product and service design and value. |
| Cross-cutting rules |
– the FCA now provides firms examples of what a customer reasonably expects, and is determined by the nature and quality of the product or service and the firm’s previous conduct or interaction with consumers; and
– introduces a requirement for firms to avoid foreseeable harms. Firms must consider consumers’ experience and behaviour at all stages of the product lifecyle, such as, monitoring their communications with consumers at all stages. |
| Products and services outcome |
– firms must not forget their existing obligations to comply with the rules under the Product Intervention and Product Governance sourcebook (‘‘PROD’’). The FCA introduces a new application provision, and it would now be proportionate for firms to comply with the existing rules under PROD. The new application provisions in PRIN 2A.3 clarify that firms are not subject to both PROD and PRIN rules. |
| Price and value outcome |
– additional examples of good outcomes and the behaviours the FCA expect from firms under the Consumer Duty, and guidance for distributors on how it expects fair value to apply across the distribution chain and has amended PRIN 24A.5.8R (1) (a), adding “where appropriate”, stating that firms should decide which communications should be tested before sending them to customers. |
| References to average customer |
– removal of references to the term “average customer” and introduction of new rules to ask firms to consider the needs of vulnerable customers in their target markets, ensuring the communication between customers and firms are more likely to be understood. |
| Measuring success
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– the FCA aims to measure the success of its proposals by monitoring key outcomes for consumers: monitoring Financial Ombudsman Service (FOS), final decisions on complaints about fees or charges, or inappropriate product or service sales; and
– the FCA will further monitor the products and services consumers use, and measure consumers’ levels of trust and confidence, through a Financial Live Survey. It will also seek to assess its impact at the level of particular sectors and portfolios. |
next steps
The FCA will be hosting industry specific events to help prepare firms for the implementation of the new rules. For more information on this click here.
To view the CP21/36 consultation paper click here.
To view the PS22/9 paper click here.
For more information, and guidance on the application of Consumer Duty to your firm, Cleveland & Co External in-house counsel™, your specialist outsourced legal team, are here to help.
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