Mind the Gap: Is the FCA's new Consumer Duty in CP21/13 worth the cost?

Click here to read more - CP21/13: A new Consumer Duty

What is the FCA proposing?

The headline proposal is the introduction of a new Principle for firms, which would require them to act in the best interests of customers, or alternatively to take all reasonable steps to achieve good outcome for customers. This would be underpinned by three cross-cutting rules, and four ‘outcomes’, giving firms much more to think about. Our summary of, and further details about the proposals can be found here.

The proposals are explicitly intended to raise the bar for consumer protection and to make firms consider every aspect of their operations from the customer’s perspective.

What’s not to like?

For a start, the proposals present a number of inconsistencies and contradictions, suggesting that the FCA itself is perhaps in two minds about the wisdom of the suggestions. More importantly, however, the introduction of the new Consumer Duty would impose a significant administrative and compliance burden on firms, and bring far greater uncertainty. It is not obvious that this is a price worth paying for the protection gap that would be bridged by the new duty. In fact, it is far from clear that the added protection could not be achieved through more rigorous enforcement of existing rules.

A few of the issues and inconsistencies worth highlighting include:

• Many of the more significant scandals in recent financial services history – London & Capital Finance, mini-bonds, Wirecard – would not have been prevented by the new rules, and the FCA would not have had improved powers to intervene. Should the FCA be more concerned with the regulatory perimeter, and firms operating on the edges of it, rather than with the behaviour of firms within it?
• The changes would not be retrospective. But in practice, can firms really be confident that yesterday’s actions won’t be judged by tomorrow’s standards? Where a course of action starts before the introduction of the duty, could it really be considered acceptable up to that point if it is actionable afterwards?
• How will this impact decision-making at FOS? When the FCA publicly states that standards of care are not high enough, does that in itself give FOS licence to impose a higher standard? ¹
• Will firms be able to act in the best interests of their clients without giving advice to clients on the decisions they should be making? And to what extent can consumers be held responsible for making their own decisions?
• The FCA has said that it wants firms to avoid foreseeable harm to their consumers. However, consumers may equate harm to loss – and may argue that firms therefore have a duty to avoid their customers suffering any loss. Firms may want to seek further guidance from the FCA to understand the extent of this aspect of the duty and how they can comply. 

Unintended consequences

If the new duty is introduced in a way that imposes significant additional burdens on activities within the regulatory perimeter, it runs the perverse risk of incentivising firms to carry on unregulated activities or structure their activities to avoid regulation in the UK. This could lead to increased risk of consumer harm.

It is also likely that regulated products will become increasingly simple and vanilla, in order to minimise risk and avoid having to give advice. Access to more complex products may become the preserve of those who have access to independent advice or are classed as ‘sophisticated’, potentially damaging efforts to increase financial inclusion. There is a risk that firms will also increasingly want to serve only low-risk customers, leaving vulnerable consumers marginalised because they are considered higher risk. 

What does it mean in practice?

Assuming the new duty is introduced (which looks to be a safe assumption since the FCA is consulting only on the wording of it, not its existence), firms will have a lot of work to do to prepare for it. Since the Consumer Duty would need to be embedded in every aspect of the product or service, the first step should be to conduct a root and branch review of products, policies, processes and internal training to identify weaknesses. In order to do so, firms will have to identify the intended outcomes for customer groups, the foreseeable risks of harm, and the financial objectives of those groups in order to provide a yardstick against which to measure performance.

Looking ahead, these things should form the backbone of every new initiative, and firms will need to conduct ongoing reviews to ensure that the expected outcomes are being achieved. Where deficiencies are identified, firms will need to address them quickly in order to prevent harm.

Next steps

The consultation is open until 31 July. Following that, the FCA plans to publish draft rules for consultation by the end of the year, with a view to bringing them into force in summer 2022. At the very least, firms should be requesting the FCA to provide a transitional period to allow sufficient time for an overhaul of current operations ahead of the changes.