What is the Consumer Duty, and when does it come into force?

The Consumer Principle – Principle 12

The Duty will be enshrined in a new principle of the FCA’s Principles for Businesses (the Principles), Principle 12. Firms will be familiar with Principles 6 and 7, which relate to TCF and the requirement to be ‘clear, fair and not misleading’ when communicating with clients. Principle 12 requires firms to apply a much higher standard.

Firms must now be more proactive in relation to their conduct and consumer outcomes. This means acting “to deliver good outcomes for retail customers”, regardless of whether the consumer is a direct customer of the firm or not.

How can firms prepare to meet Principle 12?

Firms should focus on consumer outcomes that may result from their actions by considering what they know, or could reasonably be expected to know, about the consumer. The FCA views this ‘reasonableness’ as depending on a range of factors relative to a firm’s role in the distribution chain, and its ability to determine, or materially influence, the consumer’s outcomes. These factors include:

• the nature of the product/service being offered;
• the characteristics of customers in the relevant target market; and
• the firm’s role in relation to the product or service.

Firms should regularly challenge themselves to ensure their actions are compatible with delivering good outcomes, and also identify and correct anything that may result in poor consumer outcomes. In our experience, firms may fall short of meeting the requirements of the Duty if they don’t continually assess their practices and outcomes, particularly as the market or consumer base evolves.

The cross-cutting rules

The Duty includes three cross-cutting rules, which set out how firms should act to deliver good outcomes for retail consumers:

1. act in good faith towards retail consumers;
2. avoid causing foreseeable harm to retail consumers; and
3. enable and support retail consumers to pursue their financial objectives.

The cross-cutting rules articulate the standards of conduct that the FCA expects under Principle 12. They set out how firms should act both proactively and reactively to deliver good outcomes for consumers.

The four outcomes

Culture, governance, accountability and monitoring

The Duty will require a significant shift in the culture and behaviour of many firms. We anticipate that a significant number of firms will struggle to ensure that all of their strategies, governance, leadership and people policies are aligned.

All firms should use the Duty as an opportunity to look at their own culture and governance frameworks and make changes as necessary, starting from the top of the organisation. This will require firms to define, implement, measure and evidence purposeful culture that reduces harm to consumers and the market.

Boards and other governing bodies must at least take responsibility for conducting assessments to determine if the firm is delivering good outcomes for its customers that are consistent with the Duty. These assessments should be undertaken at least annually and along with any management information (MI) that sits behind them, form part of the evidence to the FCA when it determines a firm’s compliance with the Duty.

We have seen instances where boards do not fully understand what is required. Firms must have board members with the skills needed to provide effective oversight. The Duty should already feature on the agenda at each board meeting. Firms must have board members with the skills needed to provide effective oversight. Boards will also need to be provided with relevant MI on an ongoing basis, so that they can give adequate oversight of whether the firm is meeting the Duty’s requirements.

The FCA expects firms to have a Duty Champion at board or equivalent level who, along with the chair and the CEO, ensures that the Duty is discussed regularly and raised in all relevant contexts. Ideally, the Duty Champion should be an independent non-executive director.

Senior managers will take accountability through the Senior Managers and Certification Regime (SM&CR) for the role they play in complying with the Duty. The FCA will amend the individual conduct rules in its Code of Conduct sourcebook (COCON) by adding a new rule. This will require all conduct rules staff to “act to deliver good outcomes for retail customers”. Firms must plan staff training for those who are subject to the conduct rules. This training must explain the additional rule, its implications, and what this will require from the staff members affected.

Firms must also ensure that their staff incentives, performance management frameworks and remuneration structures are consistent with ensuring good outcomes for customers.

Six practical next steps

We recommend that firms that have not already done so should:

1. engage all relevant stakeholders;
2. assign a project lead, allocate resources and design a governance structure for the project, for example steering and working groups;
3. conduct a gap-analysis of the requirements against your current practices and consider the changes that will need to be implemented;
4. consider whether you have adequate resource/expertise to develop and deliver the changes;
5. document an implementation plan before October 2022, ensuring that actions and deadlines are assigned to owners;
6. track delivery of the plan on an ongoing basis, and ensure that updates on progress and any risks/issues are escalated to the board.

How RSM can help

We work with a diverse range of firms across the financial services sector as they assess and implement regulatory change. We can support you to:

• understand the impact of the Duty on your business;
• analyse your current practices against the new requirements and recommend actions to ensure compliance;
• develop (or quality assure) your implementation plan;
• support you to document new policies and procedures, or create new processes;
• identify key performance indicators and key risk indicators that can be monitored on an ongoing basis to provide evidence of compliance with the Duty;
  train senior management and operational staff on compliance with the Duty.

Please contact Paul Jennings to discuss how we can work together to prepare your business for the new Consumer Duty, including implementing and developing these practical steps.