The how…

A new principle

The Consumer Duty will replace two key FCA principles (FCA Handbook PRIN 2.1) for regulated businesses (although these two principles will not be removed from the regulatory landscape altogether):

  1. Principle 6: A firm must pay due regard to the interests of its customers and treat them fairly
  2. Principle 7: A firm must pay due regard to the information needs of its clients and communicate information to them in a way which is clear, fair and not misleading

Principle 12 will require that firms must:

…act to deliver good outcomes for retail customers of its products or services.

This sets a higher and more exacting standard of conduct compared to what the existing Principles 6 & 7 would have otherwise required.

Achieving ‘good outcomes‘ is intended to be a clear step up from ‘treating customers fairly‘.

Note: This is not just the responsibility of Senior Management – there is a requirement for almost all employees in a firm to deliver “good outcomes”. (See Roles & Responsibilities)

The four Consumer Duty outcomes

The ‘four outcomes’ are a suite of rules and guidance setting more detailed expectations for a firm’s conduct in key elements of the firm-consumer relationship:

All products and services must be fit for purpose.

That is, designed to meet the needs, characteristics and objectives of customers and targeted/distributed accordingly. 

Consumers receiving fair value.

Value means more than just price – it can involve firms assessing all aspects of products and services to ensure that there is a reasonable relationship between the price paid and the benefit a customer receives.  

Firms’ communications must give customers the necessary information to enable them to make informed decisions about financial products and services.

Information must be provided to customers at the right time and in a way the particular targeted customers can understand. 

This outcome requires firms to communicate information in a way which is clear, fair and not misleading.

The design and delivery of support functions and processes must meet the needs of customers, including those with characteristics of vulnerability.

Firms must ensure that customers can use their products as reasonably anticipated.

Support should avoid harm and give customers a sufficient opportunity to understand and assess their options.

There should be no unreasonable barriers (including unreasonable additional costs) during the lifecycle of a product or service.

Firms are also required to monitor the quality of the support they are offering and to act promptly if/when issues arise.

The cross-cutting rules

Underpinning the new Customer Principle 12 and the four Consumer Outcomes are three ‘cross-cutting’ rules setting out how businesses should act to deliver good outcomes for customers.

Firms MUST:

Conduct characterised by honesty, fair and open dealing and acting consistently with the reasonable expectations of retail consumers.

Through action or inaction and in direct relationships with customers or as a result of their position in the distribution chain.

The actions a firm might need to take will be determined by the nature of the products or services and what is within the firm’s control.

This is based on its role and its knowledge of the customer.

Firms should take account of behavioural biases and vulnerabilities and should empower customers to make choices in their own interests.

roles and responsibilities

Who’s responsible?

Take a look through the following to see who’s responsible for what…

The board or equivalent governing body takes full responsibility for ensuring that the Duty is properly embedded within the firm.

The FCA expect firms to have a ‘champion’ at board level who ensures that the Duty is being discussed regularly.

The FCA expect the focus on acting to deliver good outcomes to be at the heart of firms’ strategies and business objectives.

This should be supported by individual accountability and personal conduct resulting from the Senior Managers & Certification Regime (SM&CR).

Every senior manager should be clear about what they are responsible and accountable for.

The individual conduct rules in the Code of Conduct Sourcebook (COCON) set minimum standards of individual behaviour in financial services and apply to almost all employees in a firm except for ancillary staff.

Individual conduct rule 6 reflects the new, higher standard of the Duty and the behaviour the FCA expect of all conduct staff.

The more senior a person is and the more relevant their role is to the Duty, the more the FCA expect from them in delivering good outcomes for customers.

Firms are responsible for the competency, compliance and capability of employees and Appointed Agents (Where a firm appoints an agent in accordance with the Consumer Credit Sourcebook (CONC 14.1.2 R) to carry on the business of the firm:

Firms are responsible for enabling and empowering consumers to take responsibility for their actions and decisions.

Firms must understand and take account of behavioural biases and the impact of customer vulnerability.

Firms MUST demonstrate (Evidence) to the FCA that they have not facilitated, or are not the cause of, poor customer outcomes.

The Duty does not remove consumers’ responsibility for their own choices and decisions. However, consumers can only be expected to take responsibility for their actions when they are able to trust that the range of products and services they choose from are designed to meet their needs, and offer fair value.

Consumers also need help understanding products and services.

They need confidence that a firm will help them in their ability to make decisions in line with their needs and financial objectives.

The Consumer Duty is a game changer for the FCA. They are able to intervene quicker and more effectively when poor consumer outcomes are identified.

There is a focus on customer outcomes, rather than technical compliance with rules.

The FCA will look for evidence that consumer outcomes are being achieved and will be more proactive, innovative and data-led.

There is a need for the FCA to develop a more flexible and future-proofed regulatory framework to reflect new trends (Sourcebooks etc).

This applies across the whole distribution chain – there are obligations on all parts.

The Duty applies to all firms with a key role in delivering retail customer outcomes, including those with no direct customer relationship. Also, Manufacturers and Distributors are required to regularly review the products they manufacture/distribute to assess whether the product remains compatible with the intended target market and whether the chosen distribution strategy remains appropriate. Important that firms work together irrespective of their place in the distribution chain to help the customer.

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