Consumer Duty
FCA Finalised Guidance
23rd August 2022
On 27th July, the FCA produced Policy Statement PS22/9 and Final non-Handbook Guidance for firms on the Consumer Duty FG22/5.
On 27th July, the FCA produced Policy Statement PS22/9 and Final non-Handbook Guidance for firms on the Consumer Duty FG22/5. These documents are very long and detailed and set datelines that the Consumer Duty regime will be brought in next year.
Firms will need to apply the Duty to new and existing products and services that are open to sale (or renewal) from 31 July 2023. The FCA has given firms longer, until 31 July 2024, to apply the Duty to products and services held in closed books.
But firms are expected to be in position to practice the Consume Duty from 1st October 2022.
I understand that the FCA will be looking to enforce against firms that cannot evidence their readiness for the new regime. This seems unlikely to be operable as the regime is not going to be regulation until July next year and also the FCA is unlikely to have the resource to enforce, even if it felt so obliged. But I understand that there is significant recruitment being undertaken and new offices for the FCA in Edinburgh.
Over the years, there have been a series of regulations and FCA guidance.
- Treating Customers Fairly
- Retail Distribution Review
- Markets in Financial Instruments Directive I & II
- Financial Advice Market Review
- Senior Management & Certification Regime
And now, Consumer Duty.
The FCA are introducing rules comprising:
- A new Consumer Principle that requires firms to act to deliver good outcomes for retail customers.
- Cross‑cutting rules providing greater clarity on our expectations under the new Principle and helping firms interpret the four outcomes (see below). The cross‑cutting rules require firms to
- act in good faith
- avoid causing foreseeable harm
- enable and support retail customers to pursue their financial objectives.
- Rules relating to four outcomes we want to see under the Duty. These represent key elements of the firm‑consumer relationship which are instrumental in helping to drive good outcomes for customers. These outcomes relate to:
- products and services
- price and value
- consumer understanding
- consumer support
The FCA rules require firms to consider the needs, characteristics and objectives of their customers – including those with characteristics of vulnerability – and how they behave, at every stage of the customer journey. As well as acting to deliver good customer outcomes, firms will need to understand and evidence whether those outcomes are being met.
The Duty supports each of these outcomes:
- fair value: consumers receive fair prices and quality
- suitability and treatment: consumers receive suitable products and services and receive good treatment
- confidence: consumers have strong confidence and levels of participation in markets
- access: diverse consumer needs are met
Measuring Success
The FCA will measure the success of our proposals by monitoring key outcomes for consumers.
The FCA wants to know whether consumers experience improvements in outcomes.
- Fair value: Consumers pay a price for products and services that represents fair value and poor value products and services are removed from markets leading to fewer upheld complaints about poor value and unexpected fees or charges.
- Suitable products and services: Consumers are sold and receive products and services that have been designed to meet their needs, characteristics and objectives leading to a reduction in the number of upheld complaints about products and services not working as expected.
- Suitable treatment: Consumers receive good customer service leading to a reduction in upheld complaints about switching, cancellation and service levels and customers having higher levels of satisfaction with the service they receive.
- Confidence: Consumers increase their confidence in financial services markets and are equipped with the right information to make effective, timely and properly informed decisions about their products and services.
Act in Good Faith – surely that is a basic ethic of business and behaviour. Why would anybody not practice their business acting in good faith?
The cross-cutting rules are being stressed as the cornerstones and over-arching all the current regulations. These would seem to be such basic rules, that I find it bizarre that they need to be highlighted as being compulsory. For most firms, this will involve absolutely no change in practices.
- Act in Good Faith – surely that is a basic ethic of business and behaviour. Why would anybody not practice their business acting in good faith?
- Avoid Causing Foreseeable Harm – again why would any adviser put a customer on a course of foreseeable harm?
- Enable and Support Retail Customers to Pursue their Financial Objectives – this is pretty much the sole reason for providing advice. What else would any adviser be targeting?
The main issue around the new Consumer Duty is how advisers will be able to provide evidence to the FCA that their whole business practice is able to comply with the Consumer Duty. There are examples in the Guidance Notes of good and poor practice.
I presume that the FCA will be looking to collect information using RegData in this respect.
The first thing that I have advised my IFA firm clients to do is to set up a process to identify vulnerable clients and to evidence what steps they have taken to enable them to deal with the vulnerabilities to deliver the advice that has been requested. I have advised firms to set up a register of vulnerable clients and actions taken. I expect that this will be an extra piece of information that the FCA will want to include in future returns.
Most firms will already have a register of vulnerable clients. But my recent experience is that advisers have not actively looked for signs of vulnerability and this will be expected in future. Most recently, I undertook one-to-one KPI meetings with the advisers in a firm and none of them had met any vulnerable clients in the previous six months. Since May, they seem to be meeting them all the time!
For some years, I have been advising firms to have a robust complaints procedure and register and complaints have been on the RegData returns. Of course, a complaint is a good warning that clients may not have received a good outcome. I am sure that the FCA will be treating this as a hot potato in the future.
Complaints that go to the Financial Ombudsman Service will also be a high priority. It is evidence that the firm’s internal procedures have not provided the client with a satisfactory outcome, let alone the targeted good outcome.
As far as I can see, the new Consumer Duty will be the gift that keeps giving as far as compliance and/or enforcement agencies are concerned. In accordance with the ancient Chinese curse, we live in interesting times.