The FCA updated their Consumer Duty page to include additional content on some of the key topics they have been receiving queries on. These include information on the FCA’s expectations for outcomes monitoring, the FCA’s position on retrospective application and proportionality, requirements for firms seeking authorisation, and other clarifications on scope and application.
The FCA also confirmed that they will be issuing portfolio and sector-specific letters to firms early in 2023 setting out the expectations for implementation and reflecting findings from the FCA’s review of firm implementation plans.
- FCA expectation for outcomes monitoring
Firms must be able to demonstrate that they are meeting the requirements set out in the Duty by assessing, testing, understanding and evidencing the outcome to its customers. The type of information firms may have depends on their size, customer base and types of products and services offered. Examples of what types of data firms may collect is covered under Chapter 11 of the Finalised Guidance
- Consumer Duty Board Champions
The FCA expects firms to appoint champions at the Board level to ensure good outcomes for customers. The FCA recommended that this should be an independent non-executive director (NED), where possible. This is not a ‘prescribed responsibility’ under the Senior Managers & Certification Regime (SM&CR). Firms can set it up in a way that fits with existing roles and responsibilities on their Boards. This does not affect the Board’s collective responsibility under the Duty or their roles in complying with the Duty under existing governance procedures. The primary role of the Board champion is to support the Chair and CEO in raising the Duty regularly in all relevant discussions, and challenging the firm’s governing body/management on how it is embedding the Duty and focusing on consumer outcomes.
- Definition of Closed Products
The Duty comes into effect on:
31 July 2023 – for new and existing products or services that are open for sale or renewal
31 July 2024 – for closed products or services
‘Closed products’ are no longer marketed or distributed to retail customers nor open to renewal. If existing customers can continue to make payments under the existing product terms, this would still be considered ‘closed’ if the product or service is not open to new customers. For example, a pension product that is no longer sold to new customers, but where existing policyholders can continue to pay in contributions, would be considered closed.
- Retrospective Application
The Consumer Duty does not apply retrospectively. Both the FCA and the Financial Ombudsman Service work on the basis that conduct should be judged on the rules and standards in place at that time.
The Duty applies in a reasonable way and focuses on good customer outcomes applicable to all aspects of firms’ operations and culture (Chapter 4 of the Finalised Guidance). All firms have a Duty to act to deliver good outcomes for their customers. What this means in practice will depend on key factors, including:
- The nature of the product or service. More complicated products are likely to need more attention than simpler or less risky products.
- The characteristics of a firm’s customers. Where customers are more likely to have characteristics of vulnerability, firms are expected to take additional care.
- The firm’s relationship with its customers. Obligations under the Duty reflect the firm’s role and ability to influence retail customer outcomes. The FCA would expect firms to focus on harms that are reasonably foreseeable.
- The size of the firm. The FCA does not expect a small firm to apply the same resources or processes as a large firm.
- Requirements for seeking authorisations
Authorisation assessments are forward-looking, so from February 2023 firms applying for the first time will have to prove they can comply with the Consumer Duty including demonstrating:
- the firms’ framework for assessing fair value
- the firms’ plans to monitor outcomes for retail customers
- the arrangements they will have with other firms in the distribution chain to meet the requirements that apply to them
- Firms can help their applications progress quickly if they prepare these supporting materials in advance and submit them along with their applications.
- Existing firms looking to vary their permissions should expect to be asked to provide a copy of their implementation plan and any supporting evidence needed, which would have been in place on the 31 Oct 2022.
- Portfolio and sector communications
The FCA will be publishing a package of portfolio and sector-specific letters early in 2023 setting out the expectations for implementation and reflecting findings from the review of firm implementation plans. The FCA already published portfolio letters for financial advisers and intermediaries, CFD providers and high-cost lenders.
- How the Duty applies to firms throughout the distribution chain
The Duty applies to all firms with a key role in delivering retail customer outcomes, including those with no direct customer relationship, where firms can determine or influence the design or operation of retail products or services, including their price and value, communications with retail customers and customer support for retail customers. More information about how the Duty applies across distribution chain is covered under the Chapter 2 of the Finalised Guidance.
- Information-sharing in the distribution chain
Manufacturers and distributors need to work together and share information, in order to perform their own roles effectively and deliver good outcomes. Distributors should have a clear understanding of the target market and the way products operate. The FCA expects distributors to get the information they need from manufacturers, and manufacturers to be monitoring that their products are delivering good consumer outcomes. 6.68 of the Finalised Guidance includes examples of the type of information the FCA would expect to be shared, where appropriate.In general, the FCA does not expect distributors to share information without being asked and expects the manufacturer to consider what information would be helpful and to take reasonable steps to gather it. For example, through focus groups or sending surveys to distributors. Unless there are regulatory or contractual requirements, firms are only responsible for their own activities and do not need to oversee the actions of other firms in the distribution chain. If a firm identifies consumer harm elsewhere in the chain, it must raise the concerns with other relevant parties. This could include situations where a distributor identifies foreseeable harm or problems with the way a product or service is operating in practice.Firms must also notify the FCA where they become aware that another firm in the distribution chain may not be complying with the Duty. This expectation is in line with the existing Principle 11 requirement to inform the FCA.
- Application to non-UK firms
Only firms conducting regulated activities in the UK are within our regulatory remit and subject to the Duty. Where the distribution chain involves firms in Gibraltar selling products or services to UK retail customers, the Duty still applies. It applies to those firms whether they have an establishment in the UK or operate on a cross-border basis.The FCA recognises that risks remain for UK retail customers if the distribution chain involves other parties outside the UK that are not subject to equivalent requirements. To help manage this risk, UK distributors of non-UK products and services must take all reasonable steps to understand the product or service, the target market it would serve and the value it provides so that it will be distributed appropriately.Regulated firms should also consider whether including a firm that is not subject to the Duty in the distribution chain leads to a risk of poor customer outcomes. There is more information on application outside of the UK in Chapter 2 of the Finalised Guidance.
- Application to non-UK customers
For firms dealing with non-UK customers, the Duty applies in line with the existing regulatory perimeter. Where current rules apply to a UK firm dealing with non-UK customers, the Duty will also apply.Where the chain includes firms outside the UK, which are not subject to the Duty, the FCA recognises that UK firms may not be able to meet elements of the Duty to the same degree. A UK product manufacturer may find it difficult to obtain information from non-UK distributors about their distribution of the product. In this case, UK firms should consider what is reasonable in the circumstances. For example, they could use any information that they do have available to support their work. The FCA would not expect UK firms to obtain information from firms that are not subject to the Duty.
- Clarifying the scope
The FCA consulted in the December 2022 Quarterly Consultation Paper (QCP) on changes to make certain points clearer in the rules including firms approving and communicating financial promotions, firms in the Temporary Marketing Permissions Regime (TMPR), defined benefit occupational pension schemes and occupational pension schemes – closed products and exemptions in sectoral Sourcebooks.
The FCA’s Finalised Guidance contains a wide range of additional information, including good and poor practice examples.
How we can help
If you’d like to know more about how we can assist you with implementation of the Consumer Duty or how we can support you with authorisation arrangements, or any other regulatory compliance matters, please contact our specialist team here.