United Kingdom: FCA publishes detailed Consumer Duty proposalsJanuary 9, 2022
On 7 December 2021, the FCA published its second consultation on the Consumer Duty, setting out more developed proposals for rules and guidance following feedback from its first consultation.
The proposals set out in the first consultation have been mostly carried forward, though the FCA has made some important amendments and clarifications in response to feedback received. For more detail on the first consultation, including background to the introduction of a Consumer Duty, please see our previous alert.
The updated Consumer Duty package
The Consumer Duty remains a package of three elements:
• The Consumer Principle: A firm must act to deliver good outcomes for retail clients.
• The Cross-cutting Rules, which require firms to:
1. act in good faith towards retail customers;
2. avoid causing foreseeable harm to retail customers; and
3. enable and support retail customers to pursue their financial objectives.
• The Four Outcomes to be achieved by the Consumer Duty:
1. Products and services: consumers are sold products and services that have been designed to meet their needs, characteristics and objectives.
2. Price and value: consumers pay a price for products and services that represents fair value to them.
3. Consumer understanding: consumers are equipped with the right information to make effective, timely and properly informed decisions.
4. Consumer support: customers receive the support they need.
These elements have been reformulated from the proposals set out in the first consultation to better achieve the FCA’s aims. The FCA has chosen Option 1 for the Consumer Principle: A firm must act to deliver good outcomes for retail clients. This wording also avoids much of the confusion with a fiduciary duty (as had arisen in response to proposed Option 2, A firm must act in the best interests of retail clients), or a policy that required the best outcome to be achieved for each consumer, as well as other existing “best interests” language in some parts of the Handbook.
The Cross-cutting Rules have been reworded to remove the reference to firms taking “all reasonable steps”. The FCA wants firms to focus on acting reasonably, rather than focusing on processes and the steps they take, which could have the result of firms seeking to focus on compliance with the rules rather than ensuring good outcomes for their customers. Instead, the entire Consumer Duty is underpinned by a concept of reasonableness. The standard reflects the tortious concept of how a reasonable prudent firm would act and is one firms are already familiar with due to existing duties under common law – new proposed rules require firms to interpret the Consumer Principle in accordance with the standard that could reasonably be expected of a prudent
- carrying on the same activity in relation to the same product; and
- making assumptions about the needs and characteristics of its retail customers based on the needs and…