On 27 July 2022 the Financial Conduct Authority (FCA) published its final rules and guidance on the new Consumer Duty to set a higher standard of consumer protection in retail financial markets.

The FCA has made some changes to its proposed rules and guidance published last year in light of the feedback it received. 

TIMING AND NEXT STEPS  

The final rules and guidance come into force on a phased basis:  

• for new and existing products or services that are open to sale or renewal the rules come into force on 31 July 2023;
• for closed products or services, the rules come into force on 31 July 2024. 

Firms are expected to make full use of the implementation period, and to plan and prioritise implementation work effectively so they meet the standards required by the Duty.

THE FINAL RULES AND GUIDANCE- KEY UPDATES 

Some of the key updates to the final rules and guidance include the following:

• Consumer Principle: The FCA is proceeding with the proposed wording of the new Consumer Principle i.e., ‘a firm must act to deliver good outcomes for retail customers’ and dis-applying both Principles 6 and 7 where the Duty applies; 
• Cross-cutting rules: It has provided further guidance on its cross-cutting rules including further examples of foreseeable harm and added new rules and guidance requiring firms to proactively consider whether remedial action, such as redress, is appropriate where they identify that customers have suffered harm because of the firm’s conduct either through action or inaction; 
• Products and services outcome: It has introduced a new application provision in PRIN 2A.3 to provide clarity that firms that currently follow certain provisions under the FCA's current Product Governance (PROD) rules may choose whether to follow the rules in PROD or those under the products and services outcome; 
• Price and value outcome: It has added further examples in the guidance on the price and value outcome and clarified that firms already subject to fair value rules will meet the price and value outcome of the Duty. However, it has confirmed that price and value rules under the Duty would apply to payment and e money firms, even though they are already subject to detailed pre contractual and pre transaction disclosure requirements under the Payment Services Regulations 2017 and Electronic Money Regulations 2011; 
• Scope of the Duty: 
  • It is taking forward its proposals that the Duty would apply, on a forward looking basis, to existing products and services, including closed book products and services. It has provided further guidance on how firms can apply the price and value rules specifically to existing products and services and how they can conduct the review in a proportionate manner;
  • It is maintaining the approach of applying the Duty in line with the approach in existing sourcebooks, including for SMEs where relevant protections are provided under sectoral sourcebooks;
  • It is retaining the proposed scope of the Duty to include customers with whom a firm does not have a direct relationship. This is to ensure the Duty applies to firms that can determine or materially influence retail customer outcomes. It has introduced additional guidance to clarify expectations of different parties in the distribution chain, including on the proportionality in the application of the Duty to different firms in the distribution chain; 
  • It is maintaining its approach that while all firms in the distribution chain would have responsibilities under the Duty, they would only have liability for their own activities and would not be responsible for outcomes arising from the actions, or omissions, of other firms in the chain (except for a Principal firm). However, notification requirements apply to firms where they become aware that another firm in the distribution chain is not complying with the Duty;   
  • It has provided further guidance on the definition of manufacturers and distributors in relation to the payments and e money sector; 
• Governance and Oversight: 
  • It is going ahead with the proposed amendments to the Senior Manager and Certification Regime (SM&CR) but provided further clarification to ensure firms are clear where responsibility lies and on the expectations that the Duty to be reflected in firms’ strategies, governance, leadership and people policies; 
  • It has amended its guidance to give more information about the types of data firms could use to monitor outcomes and to clarify that firms should have a champion at board level (or equivalent governing body) who, along with the Chair and the CEO, ensures that the Duty is discussed regularly and raised in all relevant discussions; and
• PROA: Lastly, it is continuing with its preferred approach of not attaching a Private Right of Action (PROA) to any aspect of the Duty at this time.

IMPLEMENTATION

In addition to the extension on implementation deadlines, which will be welcome, the Policy Statement includes a number of requirements on the senior managers and boards with some challenging interim milestones. Specifically, they have included additional rules with an October 2022 deadline for the board to approve implementation plans, the need for a Consumer Duty champion at board level as mentioned above, and a requirement for the board to closely oversee the firms' compliance with the Duty with board assurance post implementation. The FCA has not provided additional guidance on the annual board report, but expects the first report to be in July 2024 and firms should expect that the FCA will want visibility of those reports.

By April 2023 all manufacturers should have undertaken reviews of open products consistent with the four outcomes to enable them to share necessary information with distributors to enable both parties to meet the July 2023 deadline. If there is any harm identified the firm should prepare remediation proposals and communicate those with the FCA including accelerating implementation in advance of the July deadline where possible. If a firm is considering withdrawing or altering products and services which could have an impact on vulnerable customers, they should engage with the FCA. For significant changes to products and services and any indication that the firm cannot meet the regulatory deadlines the FCA expects notifications in line with the usual regulatory requirements. 

The FCA is developing a supervisory approach to ensure that firms implement the Duty effectively and will undertake a post implementation review to understand how firms have implemented the Duty. Specifically, it is requiring firms that are relationship managed to provide regular review of their implementation plans to assess their progress with implementation. 

If you have any queries, please pick up with any member of our team.