March 6, 2023
The FCA has finalised the rules and guidance for its new consumer duty (‘the Duty’) regime for UK firms, which comes into force on the 31 July 2023 and sets out a clear implementation timeline. The FCA is targeting culture and conduct changes across the financial services industry by introducing an expectation that a firm's approach to deliver good outcomes is embedded throughout the entire customer journey.
The FCA expects that the Duty will lead to a major shift in financial services and will promote competition. Another key aspect is to prevent harm from happening in the first place.
Explore our insights and what this might mean for your firm.
The Duty is a package of measures, rather than a single duty. Crucially, it introduces a new Consumer Principle that requires firms to act to deliver good outcomes for retail clients.
The Consumer Principle will be underpinned by a set of four cross-cutting rules that explain how firms should act to deliver good outcomes for customers:
The importance of the Duty has been reinforced in several FCA speeches. In a speech delivered on July 14, 2022, FCA’s Chief Executive Nikhil Rathi said:
“We want to break new ground with our New Consumer Duty, which will ensure all firms take account of the actual impact of their services and product suitability on the consumer. Selling someone the right product, easily understandable with suitable customer service is hardly controversial but, too often, even established firms aren’t delivering.
Those firms who do the right thing and show leadership should welcome action to tackle competitors who drive down standards, and we anticipate fewer rule changes as a result, lowering costs to good firms operating in the UK.”
The FCA sets five milestones to help meet higher and clearer standards of consumer protection across financial services:
The Duty applies to UK-authorised firms undertaking activities in the UK that ultimately have a material impact on retail clients.
It captures firms that provide services to retail clients, even where those firms do not have a direct relationship with the retail client as the duty applies where a firm has ‘a material influence over, or determine[s], retail customer outcomes.’ This is broadly consistent with the application of product governance requirements under MiFID II.
Importantly, the Consumer Duty rules will not apply retrospectively but on a forward-looking basis to existing products and services that are either being sold to clients (or renewed) or are closed products and services that are no longer being sold or reviewed but are still in place.
Firms are expected to appoint a “Consumer Duty Champion” at board level (and from the independent non-executive directors, where possible) to help ensure that the Duty is discussed regularly and raised in all relevant fora. Firms need to be prepared to share with the FCA the content of these discussions. The champion is not a ‘prescribed responsibility’ under the Senior Managers and Certification Regime (SM&CR) but is there to support the Chair and CEO in raising the Duty in all relevant discussions and to challenge the firm’s management on how it is embedding the Duty and focusing on consumer outcomes.
From a monitoring and governance perspective, it is likely that new MI dashboards will be required which specifically monitor outcomes, along with new ways of analysing and presenting data that helps senior managers and boards monitor the outcomes the business is generating.
To provide ongoing oversight, an annual assessment of the firms’ ability to deliver good outcomes and compliance with the Duty is required. The first annual report is due 31 July 2023.
With only a few months to go before the Duty comes into force, the FCA has published a review of firms’ implementation plans and highlighted where some firms are lacking in their planning and may struggle to apply the Duty effectively once the rules come into force on 31 July 2023. Areas called out include:
Overall, the FCA is concerned that not all firms will be ready in time.
Linda Gibson, Head of Regulatory Change (February 2023)
The regime represents a material divergence and “step up” from EU regulatory requirements and is an outcome-based regulation whereby each firm will need to define good outcomes for their customer and evidence these with supporting data.
Information sharing within the distribution chain is a key focus and FCA expects manufacturers and distributors to work together and share information, in order to perform their own roles effectively and deliver good outcomes. The requirements extend further than the current product rules. As called out in the FCA sector Dear CEO letters issued in February 2023, much work will need to be completed and data collected to meet the 31 July 2023 implementation date for open products and services.
FCA is expected to adopt a data led approach to its supervision and future enforcement framework to measure the success of the Consumer Duty. Firms should heed this and adopt the same data led approach themselves as the detailed gap analysis is completed and be ready to produce MI to evidence the initial gaps and the actions taken to comply with the rules.
We expect that the FCA will issue further guidance highlighting key areas of focus and the specific data points required. However, by now, firms should be having meaningful discussions at senior manager level to determine what changes or enhancements are required to put customers’ needs first.
The FCA has made clear its expectations of firms under the new regime and has produced many helpful publications and webcasts to guide firms — see Useful Links section on the right.