The FCA published its final plans, the Policy Statement and Finalised Guidance, on 27 July 2022 with their new Consumer Duty, introducing a higher level of consumer protection across retail financial markets. The implementation deadline for most of the final rules is only a year away, with the regulator expecting firms to carry out all implementation planning by the end of October this year. This month’s insight summarises the key takeaways from the finalised rules and guidance.
New Consumer Principle and Cross-cutting rules
The FCA is introducing into PRIN (Principles of Business) a new Statement of Principle 12: Consumer Principle, which requires firms to act to deliver good outcomes for retail customers. This Principle will replace Principles 6 (Customers’ interests) and 7 (Communications with clients) for retail business. This concerns products and services being fit for purpose, price, value, consumer understanding and consumer support for retail clients. This is underpinned by three cross-cutting rules requiring firms to act in good faith, avoid causing foreseeable harm, and enable and support retail clients to pursue their financial objectives.
It also introduces rules relating to four outcomes it intends to achieve under the new Duty that relates to:
- Products and services
- Price and value
- Consumer understanding
- Consumer support
The regulator introduces a new application provision in PRIN 2A.3 to clarify that firms following specific requirements 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.
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 Regulation. However, the guidance confirms that price and value rules 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.
The Consumer Duty will apply to all firms in the distribution chain (manufacturers and distributors, e.g. fund managers) for products and services sold to retail clients, even where they have no direct relationship with the retail customer. The guidance confirms that, unless there are regulatory requirements or contracts require it, firms are responsible and have liability only for their activities and do not need to oversee the actions of other firms in the distribution chain.
Board accountability and Governance
New requirements exist for increased accountability and oversight over compliance with Consumer Duty. This includes management information to the governing body, an annual review and a board report. A firm’s compliance must be reflected in strategies, governance, leadership and people policies, including performance management and pay at all levels. The Regulation introduces a requirement to appoint a champion at the board level who, alongside the Chair and the CEO, will ensure the Consumer Duty is discussed regularly and raised in all relevant discussions and for non-UK activities/customers.
The final rules and guidance come into force in two phases. Firms will need to apply the Consumer Duty to new and existing products and services that are open to sale (or renewal) from 31 July 2023. The FCA has given firms longer (until 31 July 2024) to apply the Consumer Duty to products and services held in closed books. The FCA confirms that the Consumer Duty will apply, on a forward-looking basis, to existing products and services, including closed book products and services, not retrospectively.
Firms must plan and prioritise implementation work effectively to meet the duties’ standards. The FCA has set out key milestones they expect firms to comply with over the coming nine months before implementation next July.