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The FCA’s Consumer Duty – a paradigm shift in retail consumer regulation?

Author: Anthony McManus

Published: 26 Oct 2023

As much as I am sure Cicero was not foreshadowing the actions of the Financial Conduct Authority (FCA) his statement that ‘there is not a moment without some duty’ feels apt following concerns raised by the financial services sector following FCA’s implementation of the Consumer Duty.

The FCA has described the introduction its new Consumer Duty in terms of a paradigm shift in its expectation of improved standards and consumer outcomes. The new regulations are all encompassing, setting higher and clearer standards of consumer protection and accountability across the retail financial services sector, with firms required to deliver good consumer outcomes across their retail products and services. 

The Consumer Duty through the introduction of the new regulatory Principle 12 and the cross-cutting rules with existing FCA regulatory obligations, means that regulated firms must at every stage of the consumer journey be able to evidence the outcomes of the Duty have been met.

The Consumer Duty requires that:  

  • Firms must act in good faith towards retail customers.
  • Firms must avoid foreseeable harm.
  • Firms must enable and support customers to pursue their financial objectives.
  • Products and services must deliver fair price and value.  

Firms must ensure that they have the necessary governance and culture to achieve these positive consumer outcomes and be able to evidence that these requirements are being met across their products and services. Included within the regulatory requirement, is that firms must be able to demonstrate that retail consumers in the distribution chain have properly understood the nature of the products and services, with particular emphasis on vulnerable customers, and that firms are delivering consumer support.  To align with these requirements, the FCA is proposing to amend the SM&CR individual conduct rules to reflect the higher standards of the Duty.   

For new or existing products and services open for sale or renewal, the Consumer Duty took effect from 31 July 2023.  For closed products or services, the Consumer Duty takes effect from 31 July 2024.        

Some concerns have been aired that the Consumer Duty could result in a reduction in the availability of affordable financial advice and that the regulatory changes may result in some financial advisers exiting the industry.  However, to keep matters in perspective, similar concerns were raised in 2012 when the Retail Distribution Review (RDR) was introduced to improve standards of professionalism and transparency in the retail financial advice sector.       

The new Consumer Duty is intended to deliver better consumer outcomes across the retail financial services sector, with the newly introduced regulatory Principle 12 requiring that ‘a firm must act to deliver good outcomes for retail customers.’ 

The regulatory changes are designed to deliver a ‘major shift in financial services,’ with there being no complacency for the time and resources required by firms to demonstrate compliance. Firms will need to assess and evidence how they are acting to deliver positive outcomes for their retail customers throughout the lifecycle of the products and services they provide.  

Products and services fall in scope of the Consumer Duty if they relate to a firm’s ‘retail market businesses’, and although the Consumer Duty will most directly impact FCA regulated entities that have retail customers, it may also apply to firms whose products or services are ‘in a distribution chain’ with retail clients.

Just because a firm does not itself have retail customers does not necessarily mean it will not be found to have in-scope ‘retail market business.’  A firm may have an in-scope ‘retail market business’ if it is able to ‘determine or materially influence retail customer outcomes in connection with the product.’ Firms must therefore consider whether they have regulatory obligations even if they themselves do not have retail customer clients.

The Consumer Duty is more of a building block than a standalone requirement. It is important to recognise that retail financial advisers already have a regulatory obligation to put the needs of customers first, to treat customers fairly and to recognise the needs of vulnerable customers. The new Consumer Duty requires that product manufacturers and advisers must be able to proactively evidence they have a very clear understanding that the needs of various customer segments are being met from outset, and that positive customer outcomes are subsequently being delivered at fair value.

The FCA requires regulated entities must have the data to be able to substantiate they have met their requirements and that the outcomes of the Consumer duty have been delivered. In other words, a tick-box mentality will not cut the regulatory mustard.             

It is early days for the FCA Consumer Duty, and It will inevitably take time to translate into practical terms what needs to be done to embed the culture and process to deliver the objectives of the new Duty.  After some initial disruption, the financial services sector embraced the positive changes that came with the RDR. With the introduction of the Consumer Duty, the sector’s adaptive and innovative qualities will again need to come to the fore to deliver the improved consumer outcomes that the Consumer Duty is intended to generate.      

Hopefully this summary adds some perspective to the ease the worries and fears that the Consumer Duty seems to have placed on many. George Eliot wrote that ‘we must find our duties in what comes to us, not in what we imagine might have been.’ Whether or not you think it is a good thing, the Consumer Duty is here to stay.

Anthony McManus

Personal Financial Planning Manager, ICAEW

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