FCA publishes ‘CP21/23: A new “Consumer Duty”’ (owed by financial services firms)

Today, the Financial Conduct Authority published ‘CP21/13: A new Consumer Duty’, its consultation on introducing a new “Consumer Duty” for financial services firms dealing with consumers.

The Consumer Duty proposed in this new consultation would relate to products and services sold to “retail clients” (a very wide term which would include non-professional customers and most SMEs) and would apply to all firms involved in the manufacture and supply of those products and services, including those who had no direct relationship with the end customer. The Consumer Duty would require firms to:

• ask themselves what outcomes consumers should be able to expect from their products and services
• act to enable rather than hinder these outcomes
• assess the effectiveness of their actions

The proposed Consumer Duty would be a package of measures, comprising of 3 key elements:

1. A new “Consumer Principle”
2. Overarching “Cross-cutting Rules”
3. Four Outcomes

Consumer Principle

The Consumer Principle would be an objective standard that required firms to consider the reasonable expectations of their customer base. It would set a higher standard than the existing requirement of Principle 6 for a firm to “pay due regard to the interests of its customers and treat them fairly”. The FCA is seeking feedback on two specific wording options for this Principle:

1. ”A firm must act to deliver good outcomes for retail clients”
2. ”A firm must act in the best interests of retail clients”

Overarching Cross-cutting Rules

The Cross-cutting Rules would develop and clarify the Consumer Principle, setting out how it should apply in practice. The FCA proposes that the Cross-cutting Rules would require firms to adhere to the following three key behaviours:

1. Take all reasonable steps to avoid causing foreseeable harm to customers
2. Take all reasonable steps to enable customers to pursue their financial objectives
3. Act in good faith

Four Outcomes

The Outcomes describe what the FCA seeks to achieve from the Consumer Duty and are set out in narrative form (rather than draft Handbook rules and guidance) for the purposes of the consultation. The consultation sets out the FCA’s proposals on how firms should meet each of the four Outcomes:

1. Communications – communications must equip consumers to make effective, timely and properly informed decisions about financial products and services.
2. Products and Services – products and services are to be specifically designed to meet the needs of consumers, and sold to those whose needs they meet.
3. Customer Service – customer service must meet the needs of consumers, enabling them to realise the benefits of products and services and act in their interests without undue hindrance.
4. Price and Value – the price of products and services must represent fair value for consumers.

Commentary

The FCA has been discussing introducing a duty of care in financial services over the last few years.

• In July 2018, the FCA published Discussion Paper 18/5 and sought feedback on the proposed introduction of a new and pervasive duty of care which was intended to encourage desirable behaviours and conduct in firms and improve consumer protection.
• In April 2019, the FCA published Feedback Statement 19/2. This showed there was support for changes to the way in which the FCA applied existing regulations but that some respondents opposed the introduction of a new statutory duty. Respondents pointed to potential difficulties in applying a new duty across the broad range of relationships in financial services and to the uncertainty and additional complexity that would be caused by its introduction.

CMS’ previous Law-Nows on this important topic can be found here and here.

Along the way, there was political support for the FCA to introduce such a duty of care. The Financial Services (Duty of Care) Bill was a private member’s bill introduced in the House of Lords. It included a provision requiring the imposition of a duty of care on financial services through an amendment to the Financial Services and Markets Act 2000. The Financial Services Act 2021 does not go quite so far, instead featuring a provision that requires the FCA to hold a public consultation on whether it should introduce new rules stating that authorised persons owe a duty of care to consumers. The relevant section of the Financial Services Act (section 29) is not yet in force but requires the FCA to publish its analysis of the consultation by 1 January 2022 and, following the consultation, make its rules about this duty by 1 August 2022.

The FCA expects that the implementation of the proposed Consumer Duty would create a paradigm shift in the expectations of firms in retail markets, introducing a new and higher expectation of standard of conduct and creating a greater focus on customers’ interests and outcomes. Whilst some firms would already be compliant with this Consumer Duty, others might need to introduce significant changes to meet the requirements and every firm would need to consider the Consumer Duty at all stages of its processes and throughout its organisation. The introduction of such a Consumer Duty could give rise to uncertainty, for example, as to how it impacts or sits alongside existing Principles. While all stakeholders will agree that raising standards is desirable, views will vary as to whether this new Consumer Duty will be the least disruptive and most effective way to achieve that objective.

There are no specific proposals in the consultation in relation to a private right of action for breaches of the Principles. However, the Consultation Paper does refer to arguments both for and against the implementation of such a right and the FCA is requesting further views on this as part of the feedback to this consultation.

At the moment, this FCA Consultation relates to the introduction of the Consumer Principle and the scope and structure of new rules. The FCA is seeking feedback on these proposals and the deadline for responding to the consultation is 31 July 2021. A following consultation will likely follow, setting out the proposed text of the new rules and guidance, along with further discussion of a private right of action. The FCA expects to publish this further consultation by 31 December 2021, with any new rules to follow by 31 July 2022.

Co-authored by Darcy Evans