Exploring the New Consumer Duty Provisions: What does it mean?

Presenting a comprehensive suite of measures, the Consumer Duty acts as a catalyst for the regulator of conduct in financial services. The new blueprint encompasses the following:

1. A pioneering Consumer Principle, known as Principle 12, setting the overarching conduct expectations and subsequent outcomes.

2. Comprehensive rules that enhance the standards under the Consumer Principle.

3. Four unique outcomes, laying down specific expectations for firm conduct, indicative of the major aspects of the consumer-firm relationship.

Understanding the Consumer Duty

Within the broad High-Level Standards Principles (PRIN) framework, the novel principle, rules, and guidance find their home. The Consumer Principle emerges as Principle 12, replacing Principles 6 and 7 in the context of retail business.

Scope and Alignment

While ‘retail customer’ is not defined expansively, the FCA has decided to match the scope of the Consumer Duty with that of sectoral sourcebooks. This alignment also applies to investments, with the Consumer Duty aligning with the Conduct of Business Sourcebook (COBS).

Senior Managers and Certification Regime (SM&CR)

The FCA intends to alter the individual conduct rules under the Code of Conduct sourcebook (COCON) as part of the SM&CR. The proposed amendment mandates all staff, governed by ‘conduct rules’, to strive towards achieving beneficial outcomes for retail customers, provided their firm’s activities fall under the Consumer Duty. This alteration replaces the existing conduct rule 4, streamlining and simplifying the process rather than fully amalgamating with existing handbooks.

Case Study: Defining a Retail Customer

A recent directive from the FCA to Insurers and brokers concerning insurance costs for multi-occupancy buildings elucidates the expected approach when distinguishing between retail and commercial customers.

While most freehold property owners fall under the category of commercial customers, it’s essential to consider their obligations to leaseholders, who are likely retail consumers. Given that leaseholders typically pay for buildings insurance through service charges, they are unable to browse the market for the best deals.

The Reasonableness Criterion

The principle of reasonableness underpins the Consumer Duty. Firms are expected to follow rules and guidance in accordance with the standards reasonably expected from a prudent firm operating in the same area, providing the same product or service, and possessing an understanding of its customers’ needs and characteristics.

Cross-Cutting Rules

These rules accentuate the conduct standards expected under the Consumer Principle, developing the FCA’s overarching objectives for firm behaviour. They are classified into three common themes spanning a firm’s conduct and assist in interpreting the four outcomes.

These cross-cutting rules mandate firms to:

1. Act in good faith towards retail customers.
2. Steer clear of foreseeable harm to retail customers.
3. Empower and assist retail customers in achieving their financial objectives.

The Four Outcomes

The four outcomes are integral to the consumer-firm relationship, shaping consumers’ financial needs and enhancing their financial wellbeing.

These four outcomes are:

1. Products and services
2. Price and value
3. Consumer understanding
4. Consumer support

The outcomes form a suite of rules and guidelines outlining the FCA’s expectations under the Consumer Duty. While they stand alone, the outcomes are undeniably interconnected.

Governance and Accountability

The FCA anticipates that firms will place the pursuit of good outcomes at the heart of their strategy and business objectives.

Within the Consumer Duty, a firm’s board, or its equivalent, is entrusted with ensuring that it delivers beneficial outcomes for its customers. The responsibility for compliance with the Consumer Duty elements should permeate throughout senior management and the design, distribution and delivery lifecycle.

By emphasising a focus on delivering favourable consumer outcomes, the FCA aims to effect a paradigm shift, with the measures embedded into all departments, backed by solid evidence.

Further Reading

Navigating The Requirements Of The FCAs Consumer Duty: A guide for business owners and compliance officers