FCA consultation on Consumer Duty

The FCA is consulting on a Consumer Duty that would increase the expectations on firms in respect of their engagement with retail customers and, in the FCA’s view, provide stronger protection for consumers in financial markets.

Consumer Duty: overview

The FCA proposes that the Consumer Duty will have three key elements:

1. The Consumer Principle, which will reflect the overall standards of behaviour the FCA expects from firms. The wording being consulted on is: 'a firm must act in the best interests of retail clients' or 'a firm must act to deliver good outcomes for retail clients'.

2. Cross-cutting rules which would require three key behaviours from firms, which include: (1) taking all reasonable steps to avoid foreseeable harm to customers; (2) taking all reasonable steps to enable customers to pursue their financial objectives; and (3) to act in good faith.

3. The Consumer Principle and cross-cutting rules will also be underpinned by a suite of rules and guidance that set more detailed expectations for firm conduct in relation to four specific outcomes: (1) communications; (2) products and services; (3) customer service; and (4) price and value.

The intention behind the Consumer Duty is to encourage firms to “put themselves in their customers’ shoes” and to create an environment where firms compete in the interests of consumers. In particular, the FCA has highlighted that consumers’ ability to make good decisions can be impacted by numerous factors which the FCA is concerned can, in some circumstances, be exploited to the detriment of consumers. The FCA’s expectations of firms’ conduct in relation to their customers is currently governed by Principle 6 of the FCA’s Principles for Businesses (Principles) and there is a longstanding body of guidance from the regulator as to its expectations. The FCA has been focussed on customer outcomes and vulnerable customers for some time and that focus has only intensified since the onset of the COVID-19 pandemic. In February 21 the FCA published guidance specifically targeted at the fair treatment of vulnerable customers. In particular, the Consumer Duty makes clear that the FCA is concerned about:

• firms providing information which is misleadingly presented or difficult for consumers to understand, hindering their ability to properly assess products/ services;
• products and services that are not fit for purpose in delivering the benefits that consumers reasonably expect, or are not appropriate for the consumers they are being targeted at and sold to;
• products and services that do not represent fair value, where the benefits consumers receive are not reasonable relative to the price they pay;
• poor customer service that hinders consumers from taking timely action to manage their financial affairs and making use of products and services, or increases their costs in doing so; and
• other practices which hinder consumers’ ability to act, or which exploit information asymmetries, consumer inertia, behavioural biases or vulnerabilities.

In addition to strengthening Principle 6, the Consumer Duty will, through what is termed the ‘communication’ outcome, put more onus on firms communications with customers. To date, this has been governed by Principle 7 of the FCA’s Principles of Business which requires a firm to consider the information needs of its clients and to communicate in a way which is clear, fair and not misleading. However, the FCA considers that since this Principle was developed, there has now been a shift in the understanding of behavioural economics and consumers’ levels of comprehension. The new Consumer Duty would therefore require firms to look beyond the information that is provided to customers and to focus on communicating in a way that is understandable, facilitates informed consumer decisions and, ultimately, consumer outcomes.

What would the Consumer Duty mean for firms?

If implemented, these proposals would undoubtedly bolster the FCA’s regulatory tools and the direction of travel in this document is towards a more fiduciary relationship between firms and customers and a focus on outcomes. That being said, the Consumer Duty would be in addition to and would not replace existing rules, such as the product governance rules in PROD and the existing Principles for Businesses which firms are already striving to adhere to. In addition, these proposals in many ways highlight a number of features of the FCA’s work that most firms are already focussed on: treatment of vulnerable customers, clear, fair and not misleading communication, product governance and fair value. Increased clarity as to the FCA’s expectations would, in some respects, be welcomed.

However, if implemented, these proposals would undoubtedly mark a step up in the FCA’s expectations. In particular, firms would need to think carefully about the following:

• Target market identification and analysis: a focus on outcomes and identification of foreseeable harm will necessitate firms to be able to show how their target market research and product design and development work enables them to understand the behavioural biases and level of understanding of the target market including whether the costs, risk, benefits and overall operation of the product are compatible with the reasonable expectations of consumers.
• Pricing and value: the FCA has “included ‘price and value’ as a separate outcome” because it wants “to stress the importance of price in determining whether a product or service is fit for purpose and offers fair value”. Firms will therefore need to consider pricing and value at the product design stage and defensibly determine that the price consumers pay for their product or service is reasonable relative to its expected benefits.
• Post-sale reviews: the FCA will expect firms to compare and contrast their analysis during the product design phase “to ensure that [products] remain consistent with the identified need for the target market, and deliver the expected outcomes". It will be important for firms to document the actions taken following the review (or confirmation of no action) such that the steps taken will be capable of being evidenced at a later stage.
• Evidence of steps taken: where firms have taken steps or made changes following target market analysis, post sales reviews or other product governance steps it will be an important risk mitigant to ensure that those steps are recorded and capable of being evidenced if required.

Private right of action

Section 138D FSMA provides that breach by an authorised person of a rule made by the FCA is actionable by a private person who suffers loss as a result of that breach. The FCA Handbook sets out which rules are actionable by a private person. Whilst the consultation does not make any specific proposals about extending the ambit of s.138D FSMA to allow for a potential private right of action for breaches of the Principles (as was previously suggested in FS19/2 and DP18/5), it does set out a number of the arguments that have been made for and against such a proposal and states that the FCA continues to seek stakeholders’ views on this issue. The FCA frequently brings enforcement actions predicated on breaches of one or more Principle alone and broadening the circumstances under which a private action could be brought to allow private persons to bring an action for a breach of a Principles (including the Consumer Principle, and the wider Consumer Duty) would expose regulated firms to additional contentious risk. That would include an increased risk of claims being brought in circumstances where there had been a breach of a Principle but, for example, no loss sufficient to justify consumer redress in a regulatory context. If the FCA does take this approach then there may, in some instances, be an increase in firms’ follow-on litigation costs in the event of a Final Notice for breach of a Principle and, therefore, an impact on the approach taken to negotiating settlement with the FCA.

The deadline for feedback to the FCA about its proposals is 31 July 2021. Simmons & Simmons will be preparing a response to the consultation on behalf of a number of firms across the regulated sector and we welcome input from our clients.