The Consumer Principle and 21/36: the latest instalment

The FCA has published its response to industry feedback on consultation paper cp21/13, and a further consultation paper on its revised proposals for a consumer duty. This is the latest in a long history that started with the publication of a discussion paper on a duty of care in July 2018. The FCA has now arrived at some firm proposals, and is seeking feedback on them. The FCA’s consultation is open for comment for a relatively short period until 15 February 2022. The FCA is then proposing to publish a policy statement by 31 July 2022, with an implementation period running for only 9 months to 30 April 2023.

The FCA’s response to feedback on CP21/13

It is clear that the FCA received a significant amount of often polarised feedback on the previous proposals, but has now reached a landing place on some of the more controversial topics. Whilst the tone of the paper may have softened a little, with more references to ‘reasonableness’ and ‘proportionality’, the substance is materially as outlined in the earlier consultation:

• The Consumer Duty is here to stay: whilst it is clear that some respondents to CP21/13 argued that the FCA’s outcomes for customers could be achieved under the existing rules, the FCA appears resolute that a “reset” is needed to drive change – for both the regulator and the industry. The FCA wants to impose “higher standards”, and to do so they say requires regime change. And even if firms are meeting the existing rules, the FCA thinks they will need to consider if they need to do anything more to meet the Consumer Duty.

•  The FCA believes that the Consumer Duty will mean better supervision: whilst the FCA’s structural toolkit for supervision and enforcement will remain broadly the same, the FCA believe the Consumer Duty will lead to “more agile and assertive supervision”. 

• There will be guidance for firms on how to comply with the Consumer Duty: it seems that many respondents said that outcomes-based regulation lacks practical clarity, and in response the FCA has annexed its proposed new Handbook and non-Handbook rules to the Consultation Paper which it says will help firms to understand what they need to do to meet the Consumer Duty. The FCA is also proposing to see how they can give more regular updates about what they are seeing in the market, and has said it is keen to work with firms during the implementation period, for example to identify and work through examples of good and bad practice. 

•  Consistency at the Financial Ombudsman Service: the FCA has said that it is aiming to ensure a consistent view on the interpretation of the Consumer Duty, and will work closely with FOS so that it is aware of the FCA’s expectations of firms. The FCA has also confirmed that firms are to be held accountable to the relevant standards prevailing at the time. 

• Dealing with unintended consequences: the FCA says it takes seriously respondents’ views on the possible unintended consequences of the Consumer Duty, such as a withdrawal of certain product offerings. The FCA aims to work closely with firms during the implementation period to try to mitigate any such effects.

•  Consumers will still have responsibility: the FCA confirms that the Consumer Duty does not replace a consumer’s responsibility for their decisions or impose an open-ended duty. However at the same time, this may still be confusing in consumer’s minds as the FCA has stressed that generally customers can only take responsibility if they have the information and support to make informed decisions. 

• The Consumer Duty will be forward looking: the FCA affirms that the Consumer Duty will be forward looking. However, the FCA also says that firms will need to apply any relevant rules to customers with existing contracts and whilst it would not expect firms to give up any contractual rights, it will require firms to consider how to prevent harm for existing customers. 

The FCA's proposals, and key developments since CP21/31

The Consumer Principle formulation

In CP21/13, the FCA consulted on two options for the wording of the new Principle:

• Option 1 – A firm must act to deliver good outcomes for retail clients 

• Option 2 – A firm must act in the best interests of retail clients

Having considered responses from respondents, the FCA proposes to go with Option 1 which will sit as a new Principle 12. The FCA believes that this will result in the “shift” in firm behaviour that they want to see, and will encourage firms to put customers in a position where they can act and make decisions in their own interests. 
The move away from a formulation based on a customer’s “best interests” is to be welcomed, but the challenge for firms will now be to quantify and measure how they can deliver good outcomes to an intrinsically varied customer set. The FCA says that it will work with firms and provide guidance where needed, but it seems that there is an inherent risk that customers and firms can have a different view of what a good outcome is for them. 

The elements of the Consumer Duty

As foreshadowed in CP21/13, there will be two layers of rules supporting the Consumer Principle:

The Cross-Cutting Rules 

The FCA are still proposing three Cross‑cutting Rules would set out the key behaviours required by the Consumer Principle:

• avoid foreseeable harm to consumers

• enable and support consumers to pursue their financial objectives

• act in good faith towards retail customers 

These behaviours will need to be enshrined in all of a firm’s activities – from high-level strategic planning to individual customer interactions.

A key difference in the current proposal is that the FCA will no longer require firms to take “all reasonable steps” to avoid harm and enable customer to pursue their financial objectives. The FCA cites feedback that such a standard was very high or even unachievable, and also potentially very procedural. The FCA now says that it does not want firms to focus on processes and the steps that they need to take, but also commented that it does think that such a reasonableness standard is unachievable for firms. The FCA does not specifically address the previous proposal of “all” reasonable steps – and whether it considers that that would have been an arguably reasonable burden on firms. 

The FCA has also reformulated the financial objectives Rule, to require firms to “enable and support” customers based on matters with a firm’s control including their knowledge of consumers. Practically speaking, it is unclear whether this change will be any easier for firms to implement. 

Finally, despite feedback which emphasised the ambiguity of “foreseeable harm”, the FCA is continuing with this formulation. The FCA says that it would not “impose an open-ended duty that goes beyond the scope of the firm’s ability to determine or influence customer outcomes”, and that firms would only be required to avoid harm which is “reasonably” foreseeable. There is, however, no “reasonable” in the current formulation, and in the face of the myriad variables in any customer’s outcomes firms will need to think hard about how they can measure and apply this Rule. The FCA also says that this Rule would not require firms to protect customers from poor outcomes or risks of which they were aware, although it is unclear whether customers will nevertheless equate harm with loss, regardless of the cause.

The Four Outcomes 

The FCA’s proposals retain the structure of the Four Outcomes, representing the key elements of the firm-customer relationship: how firms design, sell and service products and services, and the key contact points along the customer journey. The FCA is also proposing to introduce different requirements for firms depending on their role in the distribution chain – in particular, citing specific rules for manufacturers and distributors. 

The FCA has also now proposed a specific set of rules and non-Handbook guidance in relation to the following four areas:

Products and Services 

The FCA says that it does not expect the new rule to restrict access to products. Rather, the FCA says that it expects better and healthier competition and innovation, and anticipates that the risks of unintended consequences are minimised by the rules proposed. The FCA gives relatively short shift to feedback concerning the significant costs that implementing such a rule might create, saying “all products and services should be designed to take account of consumer needs”.

The “consumer understanding” outcome 

The FCA has revised the name of this outcome from the previous “communication outcome”, to emphasise what they want firms to focus on. The FCA says that this outcome will require firms to go beyond ensuring that communications are fair, clear and not misleading, and will entail a review of their overall approach to marketing and how they monitor, test and adapt their communications to demonstrate that this outcome has been achieved. For example, the FCA explains that firms should take steps to ensure that they consider the information needs of the likely recipients and is envisaging a highly tailored communications strategy by firms. The FCA says that it is not proposing to change the point at which a communication is regarded as providing advice, but this may be a difficult line to delineate in practice. 

The “customer support” outcome

The FCA has similarly amended the name of this outcome from “customer service”, to focus on what firms should be delivering and making clear that this is not limited in relevance to after-sales services or any particular department of a firm. The FCA reiterates that it should be “as easy to exit a product as it is to enter”. 

Price and Value 

The FCA cites some significant feedback in relation to this outcome, in particular that it might amount to price regulation. The FCA has tried to move the focus away from pure questions of price, looking for example at how price is communicated, how fair value represents more in terms of customer outcomes than price, and that price should be proportionate to value. Whilst the FCA says that it has no intention of setting prices, it is difficult to see how that will not be the effect in practice of any intervention based on the failure of a firm to offer ‘fair value’. 

Relationship with existing Principles

In CP 21/13, the FCA had sought views on how Principles 6 and 7 and the Treating Customers Fairly Outcomes should interact with the new Consumer Principle – in particular, whether they should be disapplied where the Consumer Principle applies. 

The FCA proposes to disapply Principles 6 and 7 where the Consumer Principle applies, on the basis that the Consumer Principle applies a higher standard: effectively rendering additional compliance with Principles 6 and 7 unnecessary. 

The clarity this can bring to firms may have some clear advantages, but will mean that firms will need to implement systems and procedures to apply different Principles to different customer groups. The FCA is also currently proposing to retain the Handbook and non-Handbook material relating to Principles 6 and 7 for firms to consider when applying the Consumer Duty, even though compliance with the Principle 6 and 7 is not in itself required. 

Who will the Consumer Principle and rules apply to? 

The FCA is proposing to align the scope of the Consumer Principle with the existing scope of their sectoral sourcebooks, recognising that the previous proposal of “retail clients” sat uneasily with the other Principles and the Handbook. The FCA is also continuing to propose that the Consumer Principle will apply to all firms in the distribution chain that can influence material aspects of the design, target market or performance of a retail financial services product or service – although the FCA says that firms will generally only be responsible for their own activities. 

No private right of action

For the time being, the FCA is not proposing not to provide a private right of action for breaches of any part of the Consumer Principle. The FCA cites the existing redress framework (i.e. firms’ complaint processes under DISP, and the FOS), saying that this is likely to be a more ‘appropriate route for almost all consumers to seek redress’ as it is ‘designed to make it straightforward for consumers to pursue complaints at no additional cost to them, and without the need for representation”. Nevertheless, the FCA does say it will keep the option of a private right of action in mind – it is not entirely out of the picture.

So what next?

Firms will have an extremely short implementation period from the publication of the FCA’s Policy Statement in July next year, and so it is crucial for firms to consider the FCA’s new detailed proposals and draft rules in detail to ensure that they are workable and to plan for that implementation.

Authored by James Black, Arwen Handley, Julie Patient, and Katie Skeels.