Consumer Duty series – a roundup on the key issues for firms

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

It is unsurprising that FCA proposals which aim to bring about a fundamental shift in culture and behaviour at financial services firms have generated a significant amount of debate and, in many parts of the financial industry, concern. But are firms right to be concerned? Certainly, it seems that the FCA is focused on the scope of (as opposed to the need for) the new Consumer Duty,  even if questions remain about the “gap” that the Consumer Duty fills and whether the FCA should instead be looking more closely at the regulatory perimeter or its own enforcement approach. If firms have concerns or comments about that scope, they should make their views known to the FCA before the 31 July deadline.

In our article "FCA proposals for a New Duty of Care" we explained the FCA’s contextual setting for its proposals. Firms are likely to want to “get it right” with their customers as the FCA wishes them to – and many will feel that they are already doing so. The multi-layered Consumer Duty the FCA proposes - comprised of an overarching Consumer Principle, developed and clarified by a set of “cross-cutting” Rules (relating to avoiding foreseeable harm, taking steps enabling customers to pursue their financial objectives and a requirement of good faith), and further articulated in four Outcomes (relating to communications, products and services, customer service and price and value) - is arguably designed to help firms to comply by: (1) setting the overarching tone or standard of behaviour, (2) specifying key behaviours that the FCA wants to see and (3) articulating how the Consumer Duty will play out in key elements of the firm-customer relationship. In addition, the new Consumer Duty will sit within a regulatory framework which already imposes a “best interests” duty on certain sectors of the market1 so a “levelling-up” of a firm’s duties to customers may seem logical and efficient for those firms whose business straddles different product areas where different duties are currently owed.

In our series of articles about the Consumer Duty, we discuss three key risk areas that firms will nevertheless want to take note of.  These are:

Proportionality: Are the FCA’s current proposals for the Consumer Duty proportionate to the issues at stake and/or free from potentially serious unintended consequences? For example, if the new Consumer Principle requires firms to act in their customers’ best interests², will this necessarily require the importation of an advisory-style relationship for all products and services? Where, in that, does consumer responsibility for financial decisions (which is a stated goal of CP21/13, and which is arguably the most efficient means of securing positive consumer outcomes) practically sit? Could this be a ground on which to say that the FCA has already chosen to impose best interests obligations in particular market areas and that, otherwise, “achieving good outcomes” is the more appropriate test? Is a new “best interests” Principle rather toothless in improving standards because the FCA rarely takes action to enforce the “best interests” rules that it already has, or is it the case that it is only a “best interests” standard that effectively improves firm conduct thus avoiding the need for FCA intervention?

The FCA’s Paper raises other questions. For example, the FCA says that the new Consumer Duty will not have retrospective effect, but is it possible that conduct predating the introduction of the new rules could be subject to an altered (and higher) standard pursuant to the new Consumer Duty? Could firms be criticised for breach of the new Consumer Duty where consumers have products which cause them loss, because that could be viewed – with hindsight - as an intrinsic corollary of the requirement to avoid foreseeable harm? These queries and possible inconsistencies may well be neatly ironed out in the FCA’s final proposals and guidance, but it is important that firms ask the FCA to address questions such as these in its final proposals. We explore these issues further in our article "Mind the Gap: is the FCA’s new Consumer Duty in CP 21/13 worth the cost?" We also look in more detail at the particular implications of the new Consumer Duty for the insurance industry in “The FCA’s Consumer Duty proposals in CP21/13: what do insurers and insurance intermediaries need to think about?”

Operational change: Firms may find that that the Consumer Duty brings with it a significant impact on their operations. As a starting point, firms should review their product base and consider how, in each case, the firm may or may not be delivering good outcomes or acting in a customer’s best interests³. Firms will then need to consider whether any changes will be required to the customer journey – for example, call script, staff training, communications, and the methods by which firms will monitor how their products are performing as against the Consumer Duty requirements and whether good outcomes or best interests have been achieved. We anticipate that this will be an extensive exercise for nearly all firms, and if firms foresee difficulties with implementation or that a significant implementation period will be required, then these representations should be made to the FCA before the 31 July deadline. For more detail on the operational changes that firms may need to make in order to comply with the new Consumer Duty, see our article “Operational impacts of the FCA’s Consumer Duty in CP 21/13”.

Litigation Risk: As well as examining the front-loaded obligations that the new Consumer Duty may impose on firms, it is also important to look at the implications of the FCA’s proposals should things go wrong. It is imperative that firms, and their senior managers, are clear on what they need to do in order to comply with the new Consumer Duty, so that (a) they are prepared for increased scrutiny of their compliance by the FCA, and (b) firms’ complaints handling teams have the processes in place to understand, interpret and take decisions about alleged breaches of the Consumer Principle, Rules and Outcomes. Firms will likely need to be able to point to records and documentation which show how they have complied with the Consumer Duty, and so, echoing our comments above, firms should ask the FCA for any clarification that they consider necessary before the 31 July deadline.

Firms may also face similar allegations before the FOS and the BBRS. It is unclear whether the FCA will offer guidance to those bodies, and how those bodies will interpret and apply the Consumer Duty.

There is also an open question about the necessity of attaching a private right of action to the Consumer Duty, including the Consumer Principle. The FCA notes that this could be argued to have a deterrent effect and encourage firms to deliver good consumer outcomes first time. However, it could also lead to firms facing legal action (including by Claims Management Companies and possibly even on a collective basis) relating to a new high level regulatory standard that would be subject to interpretation by the courts (whose interpretation may differ from the FCA’s).   You can find more detail on the possible litigation risks arising in our article "Litigation Risk and the FCA’s Consumer Duty proposals in CP 21/13: what does my firm need to think about?"

Next steps

Even where firms consider that they are already doing what the new Consumer Duty will require, CP21/13 does raise a number of complex issues about how the Consumer Duty will work in practice and the impact that it will have on the different areas of a firm’s business. The FCA is taking responses to CP21/13 up until 31 July, and firms should engage in that process if they have any concerns, queries, requests for clarification or requests for guidance about the new Consumer Duty.