FCA publishes CP 21/36: A Consumer Duty

The FCA has published its proposed rules on the Consumer Duty. The proposals apply to firms operating in the “retail markets business”, which includes electronic money and payment services firms.

For in-scope firms, there is now a new High Level Principle for Business obliging firms to “act to deliver good outcomes for retail customers”.

Underpinning this obligation are three cross-cutting imperatives. These are:

1.       A firm must act in good faith, honestly and openly and in line with customers’ reasonable expectations

2.       A firm must avoid foreseeable harm to retail customers

3.       A firm must enable and support retail customers to pursue their financial objectives

The FCA has set out the four key outcomes firms must deliver.

Products and services

Whether a manufacturer, a distributor or an intermediate party in a value chain, firms must have a product governance framework to approve new products and services. Firms must have a clearly defined target market for the product and ensure an aligned sales and distribution strategy. As part of these deliberations, firms will be expected to identify potential customer harm and to minimise that harm.

This will necessitate a much deeper understanding of customer needs, profiles and buying behaviour. Firms will no longer be able to treat its target market as homogenous and will need to identify clusters in the target market who may not conform to the ‘norm’ and ensure any unique harm is also addressed.

Customer understanding

The FCA wants to ensure that customers are provided with sufficient information to understand products and services and to be able to make informed judgements about them. Its proposals are to provide customers with relevant, informative and timely information about the product or service at all points across the customer journey. For firms with mass-market omni-channel distribution strategies, this creates complexity about how to ensure adequacy of information without introducing friction or disengagement.

Customer Support                                         

The FCA expects firms to have the required operational capability to enable the customer to manage the product and service without hindrance. Firms will need to review existing operational processes and resources to ensure that these are compatible with the needs of customers and how they would typically engage. The next step will be to identify and address any process gaps, barriers and pain points that prevent the customer from realising the benefits from the product or service.

Pricing and value

Firms will need to perform a value assessment of the product and service. This is an objective assessment that the product offers ‘fair value’ to the customer. This is more than an assessment of price or costs over the holding period of the product or service. It will require a full assessment of the features of the product or service; how it meets the needs of the target market and the extent to which a firm’s operational configuration enables realisation of the benefits to the customer.  

Governance, oversight and monitoring

For the four outcomes, firms will need to undertake ex-ante and ex-post monitoring and testing of the outcomes and satisfy itself that no customer harm has crystallised. Where harm has crystallised, firms will need to remedy the harm and correct the underlying cause. On an annual basis, a report must be presented to the governing body detailing the outcomes of the testing. This body must approve the delivery of the outcomes and confirm that the firm complies with the obligations under the consumer duty.

Senior Managers and Certification Regime

The FCA proposes to introduce a new conduct rule:

·       Rule 6: You must act to deliver good outcomes for retail customers

This rule will replace Rule 4 and will be underpinned by the following principles:

·       You must act in good faith towards retail customers

·       You must avoid foreseeable harm to retail customers

·       You must enable and support retail customers to pursue their financial objectives

These rules apply to all conduct rules staff and will have varying degree of impact depending upon their functional role.

The FCA has not proposed making a named Senior Manager Function Holder (“SMF”) responsible for compliance with the consumer duty. Instead, it places the responsibility for compliance with the consumer duty on individual SMFs in the area of his or her functional responsibility. 

The Braithwate View

This is wide-reaching set of regulations. The precise impact will depend upon the sectors in which the firm operates and its organisational maturity. For banks and investment firms, the step change will not be as significant as for consumer credit firms, mortgage brokers, electronic money institutions and payment firms. For the latter firms, the consumer duty will land them with a complex set of changes across marketing, product, operations, technology, people, data and governance.

The crux of the consumer duty is about customer-centricity. Most firms contend they are already customer-centric. The most challenging aspect of the consumer duty will be to define a good outcome in a way that is objective and measurable.