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

The Financial Conduct Authority (FCA) has now launched the Consumer Duty (the Duty). It’s considered to be the biggest regulatory overhaul in almost 20 years, and is part of the FCA’s mission to push firms to deliver a higher standard of consumer protection. After consultation with the financial services industry, the FCA has now issued its long-awaited Finalised Guidance.

The Duty is designed to ensure that UK retail consumers have access to a range of financial products and services that meet their needs and offer them fair value. The Duty follows on from the treating customers fairly (TCF) initiative, and marks a continued shift from a rules-based regulatory approach to one based on outcomes. As part of this, firms must consider the needs, characteristics and objectives of their consumers at every stage of the customer journey.

As well as delivering good customer outcomes, firms must understand and evidence how those outcomes are being met. The framework for achieving this has three new elements – all of which should be embedded within a firm’s culture and governance structure:

• a consumer principle;
• three cross-cutting rules; and four customer outcomes.

Because the Duty affects numerous stakeholders and business functions, firms are faced with a substantial volume of work to ensure compliance. The challenges of meeting the Duty are exacerbated by the very tight timelines for delivery: For new and existing products or services that are open to sale or renewal, the FCA’s new rules will come into force on 31 July 2023.

For closed products or services, the rules will come into force on 31 July 2024. Implementation plans must be finalised by 31 October 2022 – this does not afford firms very much time. We note that the FCA is already asking firms applying for authorisation, or variation of permissions, to explain their Consumer Duty implementation plans. So what are the Duty’s requirements, and what are the practical steps firms should be taking now?

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

The cross-cutting rules are supported by four outcomes. These set out more detailed expectations in key areas of the customer relationship and help firms to interpret the Duty in practice.

Products and services

Consumers can only pursue their financial objectives and avoid foreseeable harm when products and services are appropriate to their needs. Firms acting in good faith should design and distribute products and services to achieve this aim.

Meeting the products and services outcome

The products and services outcome includes requirements for firms to ensure that the design of a product or service meets the needs, characteristics and objectives of consumers in the identified target market. Firms must ensure that the intended distribution strategy is appropriate for that target market, carry out regular reviews to confirm the product or service continues to meet those needs, and avoid distributing products or services they do not properly understand.

In practice, firms often find it difficult to clearly identify and articulate their target market, sometimes defining it simply as consumers who require the product. Under the Consumer Duty and the Product Intervention and Product Governance Sourcebook (PROD), consideration of target market factors should inform all aspects of product development.

Firms are therefore required to define their target market in a more structured way, for example through market segmentation and assessment of consumers’ knowledge and experience, risk tolerance, demands and needs, and financial situation. Firms must also continue to assess the target market over time and periodically confirm that products are being sold to the correct consumers.

The FCA has confirmed that firms currently following PROD as guidance may choose to comply either with the PROD rules or with the products and services outcome. However, failure to comply with PROD would be treated as a failure to comply with the products and services outcome.

Manufacturers are not generally responsible for distributors’ activities unless they have an oversight role. However, firms that rely on another firm in the distribution chain must notify the FCA if they discover that the other firm is not complying with the Duty.

Price and value

Retail consumers experience harm when they do not receive value for money. Poor value is unlikely to support consumers in achieving their financial objectives, and firms cannot be acting in good faith if they knowingly manufacture or distribute products or services that offer poor value.

Meeting the price and value outcome

Even where other elements of the Duty are met, firms are still required to assess whether the price and value of a product or service are fair. This includes considering whether elements of the pricing structure could lead to foreseeable harm, whether fees or charges appear unjustifiably high compared to the benefits provided, and whether pricing reflects changes to benefits or underlying cost assumptions.

To assess whether a product or service provides value, firms must consider the nature of the product or service and the benefits that are provided or reasonably expected, any limitations that apply, and the total price consumers are expected to pay over the lifetime of the relationship, including all fees and charges.

In the past, some firms have increased prices by adding benefits they know consumers are unlikely to use. The regulator has also intervened where products appeared to lack value, such as payment protection insurance and motor legal expenses.

When designing new products or reviewing existing ones, firms should assess the likelihood that consumers will use the benefits offered. This assessment should be ongoing, with pricing adjusted where necessary to ensure fair value.

The rules do not prohibit cross-subsidisation between products, nor do they prevent firms from offering similar products at different prices across brands, provided each product represents fair value. Distributors are not required to duplicate manufacturers’ value assessments and are responsible only for the elements of pricing they control.

Consumer understanding

Consumers can reasonably be expected to take responsibility for their decisions only if firms’ communications enable them to understand the product or service, its features and risks, and the consequences of their decisions.

Meeting the consumer understanding outcome

This outcome builds on Principle 7 by requiring firms to ensure that communications are likely to be understood by consumers and support effective, timely and informed decision-making. Communications should be tailored to consumer characteristics, including vulnerabilities, the complexity of the product, the communication channel used and the firm’s role. Firms must also test, monitor and adapt communications to support understanding and deliver good outcomes.

Product features and consumer circumstances can change over time. Introductory rates may end, contracts may vary, and consumers’ needs may evolve. Communications do not always continue to support understanding after the point of sale. Firms are therefore expected to communicate at appropriate intervals so consumers can consider whether products and services continue to meet their needs and objectives. This is likely to result in more frequent testing of communications.

Consumer understanding can be assessed through indicators such as claims data, complaints and customer feedback. Firms may also test communications using consumer focus groups. As a result, many firms are likely to increase the frequency and depth of their customer communications.

Firms often fail to involve relevant stakeholders, such as marketing, compliance, customer service and senior management, early in product development. This can result in missed opportunities for insight and challenge.

This outcome has been reinforced by recent regulatory focus on financial promotions and high-risk investments. Firms should therefore implement robust governance arrangements for the development, approval and ongoing monitoring of communications and promotions.

Firms are also expected to use metrics to monitor communication effectiveness. Reviewing these metrics allows firms to identify trends, understand which consumers may struggle with understanding, and adapt communications proactively.

Consumer support

Consumers should be supported throughout the lifecycle of a product or service. Firms must provide support that meets customer needs, enables informed decision-making and avoids unreasonable barriers. The consumer support outcome should be read alongside other relevant rules, such as those relating to complaints handling.

Meeting the consumer support outcome

Firms should monitor the support they provide and act on feedback to address any weaknesses.

Consumers must be given accurate information and appropriate time to make important decisions. Firms may need to build additional safeguards into their processes to reduce the risk of harm, for example to prevent fraud or to ensure consumers understand the implications of cancelling a contract.

Where consumer support is outsourced, firms often have insufficient systems and controls to monitor third-party performance. Under the Duty, firms must conduct and document regular and robust assessments of third-party providers, including their operations, resourcing and culture.

As the FCA increasingly adopts a data-led approach, firms are expected to collect and monitor relevant data to evidence compliance with this outcome. This may include root-cause analysis of complaints, first-contact resolution rates, average resolution times, internal quality assurance and customer call monitoring.

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