The new FCA Consumer Duty is the most important set of FCA rules for many years. A brand new FCA Principle for Businesses will be accompanied by a detailed set of rules and ‘evidential provisions’ which provide the FCA with the legal tools to deliver that ‘outcomes-based regulation’ – and the scope of the new rules goes well beyond what it says on the tin, extending beyond retail markets. So, what is the FCA going to do with the new consumer Duty, and where are the key risks for firms when the rules come into force in July 2023?
The new FCA Consumer Duty (coming into force from July 2023) represents perhaps the biggest financial services rule change since the Senior Managers and Certification Regime (SMCR) in 2016. A brand new FCA Principle for Businesses will be accompanied by a set of detailed rules and ‘evidential provisions’ (whose purpose is to amplify and clarify the scope of other rules), to ensure that ‘outcomes-based regulation’ by the FCA will at last be legally possible.
Where to focus
The impact of the Consumer Duty rules will vary across the specific sectors but there will be work to do for all firms. Insurers, for example, face a wide scope of application, capturing many commercial lines; but they have also had a head start in implementing the ‘price and value’ aspects of the Consumer Duty because of the fair value rules introduced in 2021. Wholesale market participants, who might have expected to be out of scope, still need to think about the extent to which they can “determine or materially influence retail customer outcomes” to work out whether they fall within the new rules.
Arguably the most challenging aspects of the Consumer Duty rules are the specific expectations relating to the handling of vulnerable customers, and to firms’ board governance, particularly the type and volume of data that boards will now be expected to receive and analyse to fulfil their duty to oversee their firms’ successful implementation of the Consumer Duty. The FCA has clearly signalled that it is on the road to becoming a ‘data-driven regulator’, pushing firms to become more data-driven too. We can expect a real focus from FCA supervisors over the coming months on how boards’ management information packs are being upgraded to reflect the new expectations.
The FCA is also introducing parallel duties (under the new Individual Conduct Rule 6) upon individuals working in regulated firms – everyone will now be required to “act to deliver good outcomes for retail customers”. The FCA says that this duty includes “acting in good faith towards retail customers”, and has creatively re-defined this to include “acting consistently with the reasonable expectations of retail customers” (PRIN 2.4.6 R) – not a definition you will find in any legal dictionary.
How will the risks manifest for firms from 2023?
I predict that, although this regime has clearly been built for enforcement, FCA enforcement is not going to be the thing that makes the Consumer Duty rules effective. Why do I say that?
- The SMCR has had an impact that has not been driven by regulatory enforcement. The original purpose of the regime was to make enforcement action against members of senior management easier for the FCA, thereby solving the individual accountability vacuum that the Parliamentary Commission on Banking Standards had written about in its 2013 report. Enforcement outcomes against senior managers have not, however, increased (and the regime itself is now set to be reviewed by the government in 2023, as part of the Edinburgh Reforms). But senior industry participants often tell me that despite the lack of enforcement outcomes, the SMCR has driven real improvements in governance and culture, because it has forced people to think more about their scope of responsibility, and hold each other accountable. I think that the Consumer Duty will have the same effect – it will act as an enabler for better customer outcomes to be achieved because it will provide a language and a framework within which this subject needs to be discussed.
- The FCA’s enforcement machine is broken. It is so jammed with cases that its jaws can hardly move. The strategy pursued in recent years of ‘policing the waterfront’ (opening enforcement investigations across a wide range of sectors on the basis of very little evidence) compounded by the challenges of managing teams through the pandemic has led to very slow progress of cases through the system. This is a real problem both for the FCA and for those firms and individuals whose cases are stuck in the machine.
- Perhaps partly because of (2), we are seeing the FCA reach increasingly for its supervisory intervention powers under FSMA 2000 to vary a firm’s permissions or impose requirements, either ‘voluntarily’ (i.e. at the firm’s request, prompted by the FCA’s suggestion) or on the FCA’s own initiative. In our practice, we have seen a significant increase in firms seeking advice in relation to these powers, which can be exercised at short notice, with very little process and whenever the FCA considers it desirable to further one of its statutory objectives, often with very little regard for the future prospects of the firm in question.
In our experience, ‘own initiative’ variations of permission and requirements are rarely imposed out of the blue – there is a road leading up to such outcomes where firms have the chance to reach an agreement with the FCA to avert the use of its supervisory powers.
My view is that the FCA will not want to go through the rigmarole of an enforcement investigation to pursue suspected breaches of the Consumer Duty, other than in the most egregious cases (which we expect will involve vulnerable consumers in desperate circumstances linked to the cost-of-living crisis). Everything else is likely to be dealt with quickly, effectively and assertively by the FCA’s supervision team, using its intervention powers.