Earlier this year, the Financial Conduct Authority (FCA) published proposals for a new Consumer Duty that would set clearer and higher expectations for firms’ standards of care towards consumers. Sushil Kuner, principal associate, Gowling WLG’s Financial Services Regulatory team, looks at the proposals in greater detail.
The proposals relate to products and services sold to ‘retail clients’ and would apply to all firms involved in the manufacture and supply of those products and services, including those who have no direct relationship with the end customer. The proposals therefore apply to all motor dealers who act as credit brokers, as well as motor finance lenders.
The FCA recognises that due to the way that financial services markets operate, customers don’t always receive products and services that meet their needs or the outcomes they might reasonably expect. Consumers’ ability to make good decisions can be impaired by various factors, for example, weaker bargaining positions, asymmetries of information, lack of understanding or behavioural biases.
The FCA is also aware that firms may not always compete effectively to drive up quality and bring down costs in consumers’ favour and is concerned that market conditions can be exploited by firms to consumers’ detriment.
While the FCA has seen many good practices by firms in retail sectors, it has made clear that it is encountering too many firms that are not adequately considering the needs of their customers and prioritising good consumer outcomes as an objective of their business activities.
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The Consumer Duty would therefore require firms to:
- ask themselves what outcomes customers should be able to expect from their products and services;
- act to enable rather than hinder these outcomes; and
- assess the effectiveness of their actions.
The FCA has stated that it “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?’”.
The proposals make clear that the Consumer Duty will be set out in the form of new rules and guidance in the FCA Handbook. The FCA wants firms, and in particular, their senior managers, to be clear about the changes in culture and behaviour that it wants the introduction of the Consumer Duty to bring about.
The new Consumer Duty would include the following three key elements:
- A ‘Consumer Principle‘ which is intended to set a higher standard of conduct for firms in relation to their retail market activities. It is intended that firms would be expected to provide higher standards of care and would strengthen the existing requirement of Principle 6 which requires firms to treat their customers fairly. The FCA is seeking views on two options for the wording of the Consumer Principle:
- Option 1 – “A firm must act to deliver good outcomes for retail clients.” This option extends the TCF Principle (Principle 6) and requires firms to focus on the impact of their actions on consumers, not simply the processes.
- Option 2 – “A firm must act in the best interests of retail clients.” The FCA wants firms to challenge themselves to do the right thing for consumers. However, the FCA has made clear that this does not mean that firms have to deliver the absolute best outcome for each and every customer; firms should satisfy themselves that their conduct could reasonably and objectively be said to be in consumers’ best interests and allow them to be able to make decisions in their best interests.
- ‘Cross-Cutting Rules’ which would develop and amplify the standards of conduct expected under the Consumer Principle. Under the proposals, the Cross-Cutting Rules would require firms to:
- “Take all reasonable steps to avoid causing foreseeable harm to customers.” This means not causing harm to customers through their conduct, products or services and taking proactive steps to avoid it, where it is within the firm’s control to do so. In particular, the FCA has made clear that firms should not seek to exploit customers’ vulnerabilities, behavioural biases, or lack of knowledge.
- “Take all reasonable steps to enable customers to pursue their financial objectives.” The FCA expects firms to take responsibility for establishing an environment in which consumers can act in their own interest. Firms should take reasonable steps to understand consumers’ behavioural biases and the impact that characteristics of vulnerability can have on consumers’ needs (see the recent FCA Guidance on the fair treatment of vulnerable customers).
- “Act in good faith.” This standard is characterised by honest, fair, and open dealings, and consistency with the reasonable expectations of consumers.
The FCA expects firms to comply with these Cross-Cutting Rules across all of the firm’s activities, from high level strategic planning to individual customer interactions.
- ‘Four Outcomes’ which are intended to build on the Consumer Principle and the Cross-Cutting Rules, and which represent the key elements of the firm-customer relationship; how firms design, sell and service products and services, and the key contact points along the customer journey. They are outcomes that describe the conditions needed for consumers to be able to obtain fair value in the products and services they buy, and each could therefore affect whether consumers receive fair value. The Four Outcomes are:
- Communications: Communications equip consumers to make effective, timely and properly informed decisions about financial products and services.
- Product/Service Design: Products and services are specifically designed to meet the needs of consumers and sold to those whose needs they meet.
- Customer Service: Customer service meets the needs of consumers, enabling them to realise the benefits of products and services and act in their interest without undue hindrance.
- Price and Fair Value: The price of products and services represents fair value for consumers.
Finally, under Section 138D of the Financial Services and Markets Act 2000, a breach by an authorised firm of a relevant rule made by the FCA is actionable at the suit of a private person who suffers loss as a result of the contravention. The FCA handbook sets out which FCA rules are actionable by a private person.
As part of its proposals, the FCA has made clear that it could allow the right for private persons to bring private action for breaches of its Principles, including the Consumer Principle and the wider Consumer Duty, through an amendment to the Handbook. While it is not making any specific proposals on a PROA at this stage, the FCA has welcomed stakeholder views on how a PROA could support or hinder the success of its proposals for the new Consumer Duty and their intended impact on firms, consumers, and markets.
The FCA’s consultation period closes on 31 July 2021. Regulated retail firms should act now to assess how the new Consumer Duty could impact their business models and risk management frameworks. Given the broad scope of the proposals, the higher levels of care expected of firms and an indicative publication date of the final rules in Q1 2022, with the new Consumer Duty being in place by 31 July 2022, firms should start preparing for the new Consumer Duty now.
Moreover, given the sharp rise in the number of claims management companies over the last few years, and the potential for a new PROA to be introduced in respect of the Consumer Duty, it is imperative that firms understand the full impact of the introduction of the Consumer Duty on their business and take necessary steps to safeguard themselves.