In this article we take a look back at the Consumer Duty’s journey to date and look forward to what implications there could be for financial services firms and their insurers.
The new Consumer Duty: what is it and why is it needed?
The introduction of a new duty of care in financial services has been on the FCA’s radar for some time, stemming mainly from a discussion paper in July 2018. The Financial Services Act 2021 then legislated for public consultation about whether the FCA should make general rules providing that authorised persons owe a duty of care to consumers. Two consultations took place in 2021 and the 2021/22 FCA Business Plan confirmed that the improvement of consumer outcomes through the new Consumer Duty is one of its five consumer priorities.
In a nutshell, the FCA wants to see a higher level of consumer protection in retail financial markets and considers that the introduction of a new consumer duty will set higher expectations for the standard of care that firms provide to consumers. The FCA considers that consumers will be better protected from current and new/emerging drivers of harm and firms will have more certainty of the FCA’s expectations to support innovation, competition and new ways of servicing customers.
The new Consumer Duty applies to the regulated activities and ancillary activities of all firms authorised under the Financial Services and Markets Act 2000 (FSMA), the Payment Services Regulations 2017 (PSRs) and E-money Regulations 2011 (EMRs), in respect of products and services for prospective and actual retail customers.
Policy Statement (PS22/9)
In its Policy Statement, the FCA set out its final rules and guidance for a new Consumer Duty, comprising:
- A new Consumer Principle that requires firms to act to deliver good outcomes for retail customers.
- Cross‑cutting rules providing greater clarity on the FCA’s expectations under the new Principle and helping firms interpret the four outcomes. The cross‑cutting rules require firms to:
- act in good faith
- avoid causing foreseeable harm
- enable and support retail customers to pursue their financial objectives
- Rules relating to four outcomes the FCA wants to see under the Consumer Duty. These outcomes relate to:
- the governance of products and services
- price and value
- consumer understanding
- consumer support
The FCA therefore views the rules as requiring firms to consider the needs, characteristics and objectives of their customers and how they behave, at every stage of the customer journey. Importantly, as well as acting to deliver good customer outcomes, the FCA notes that firms will need to understand and evidence whether those outcomes are being met.
Final non-Handbook Guidance for firms on the Consumer Duty (FG22/5)
The FCA has also published a finalised guidance document (FG22/5) under section 139A of FSMA in order to provide further guidance (across more than 120 pages) to firms on how they should comply with their obligations under the new Consumer Duty as set out in the new Principle for Business 12 and the new PRIN 2A.
FG22/5 provides a number of examples and makes the following key points:
- The Consumer Duty is underpinned by the concept of reasonableness, which is an objective test and means that the rules and guidance must be interpreted in line with the standard that could reasonably be expected of a prudent firm.
- What is expected of firms under the Consumer Duty will be interpreted in light of what is reasonable given the circumstances (factors such as the nature of the product or service being provided, the characteristics of the retail customer and the firm’s role will all be relevant).
- While all firms have the same responsibility to act to deliver good outcomes, it is recognised that there will be differences in the capabilities of a firm depending on its size and activities.
Implications for FI and D&O insurers
In the following paragraphs we focus in on some aspects of the Consumer Duty that may be of interest to FI and D&O insurers (from an underwriting and/or claims perspective) when it comes to what the implications could be for their insureds.
- Impact on Senior Managers and Certification Regime
- The FCA is clear that it expects firms to ensure their board or equivalent governing body takes full responsibility for ensuring that the Consumer Duty is properly embedded within the firm, and the FCA will hold senior managers accountable for the outcomes their customers are experiencing, in line with their accountability under the Senior Managers and Certification Regime (SM&CR).
- According to FG22/5, where firms outsource activities to third parties, they remain responsible for compliance under the Senior Management Arrangements, Systems and Controls sourcebook (SYSC).
- When it comes to data and monitoring, firms must get all necessary information to enable them to understand and monitor consumer outcomes. Firms must also consider their record keeping obligations under SYSC. As we noted above, a firm’s ability to evidence compliance with the Consumer Duty to the FCA is going to be crucial.
- The existing SM&CR individual conduct rules in the Code of Conduct sourcebook (COCON) have been updated to accommodate the new Consumer Duty with all conduct rules staff within firms now required to “act to deliver good outcomes for retail customers” where that firm’s activities fall within scope of the Consumer Duty.
- However, the individual conduct rule will apply only to the extent it is reasonable and proportionate: the more senior a person is and the more relevant their role is to the Consumer Duty, the more the FCA will expect from them in delivering good outcomes for customers.
- Even where a firm is not subject to SMC&R (such as payment and e-money firms), the FCA nonetheless expects them to ensure that they have senior management oversight and accountability for the Consumer Duty and to ensure that their staff are acting in accordance with the requirements of the Duty.
- These developments therefore have the potential impact on D&O cover as senior management will be required to proactively consider the consumer duty and will be accountable for value assessments.
- Private right of action?
- A contentious point throughout has been whether the FCA would introduce a private right of action (PROA) for breach of its Principles.
- CP21/36 confirmed that the FCA did not propose introducing a PROA at this stage in relation to the new Consumer Duty as it wanted to allow the industry time to embed the changes without the prospect of a private action being brought.
- The FCA notes in PS22/9 that consumer organisations expressed disappointment at this decision, observing that, without a PROA, the FCA would not have the ability to introduce an industry-wide consumer redress scheme under section 404 of FSMA and the Financial Services Compensation Scheme would not be able to provide compensation for breaches of the Consumer Duty.
- Firms, on the other hand, welcomed the decision. Many industry respondents to the FCA’s consultations argued that a PROA was not necessary as the Financial Services Ombudsman (“FOS”) provides a more appropriate route to consumer redress.
- However, it is clear that the FCA has not completely closed the door on a PROA but any decision to attach a PROA would be subject to further consultation. Further, in response to consumer organisation feedback at the consultation stage, the FCA had made changes to the Consumer Duty in order to help replicate some of the benefits of a PROA, such as having strengthened governance and accountability requirements, as well as redress requirements.
- Implementation and enforcement
- During the consultation stage, the FCA’s expectation was that firms would have fully implemented requirements by 30 April 2023. This received some negative reaction from the industry that it was far too short for affected firms to prepare themselves.
- Firms were given a slight reprieve when the policy statement was published, with the deadline for implementation pushed back by 3 months to 31 July 2023 (stretching to 31 July 2024 for closed products or services).
- There will also be no retrospective effect and so the Consumer Duty will not apply to past actions by firms. In practice the position may not be quite so straightforward, particularly with application of the price and value rules relating to existing products.
- Firms therefore expressed concern at the consultation phase that the FOS might seek to apply the new standards to past conduct. In response, the FCA has stated that it has worked closely with the FOS throughout the development of the Consumer Duty and that it expects to continue to do so during the implementation period and firms will be held accountable against the standards that prevailed at the time of the problem.
- Nevertheless, in spite of no private right of action having been introduced, firms may still find themselves the subject of increasing claims in this arena as consumers better understand their new rights.
- The FCA’s approach to enforcement is clearly stated in PS22/9. While they see the implementation phase as one for education and engagement with firms, once the Consumer Duty is in force, the FCA will focus on detecting, triaging and acting on breaches of it. Where the FCA identifies serious misconduct by firms, it will use its full range of powers to tackle it, including investigating and, where appropriate, using its deterrent and remedial powers. This could include issuing fines against firms and securing redress for customers who have suffered harm through a firm’s breach of the Duty.
As with all new rules, between now and the implementation date (31 July 2023, or 31 July 2024 for closed products/services) there will undoubtedly be a bedding in period as affected firms get to grips with the new requirements and consumers understand their enhanced rights, though a significant number of firms have been preparing for the introduction of the new duty for some time. Nevertheless, the proposed reforms will likely increase the exposure of financial service providers within the retail market to regulatory investigations and consumer complaints which will have an impact on PII cover.
Brokers will also need to ensure they are properly advising policyholders affected by the reforms to make sure their PII cover reflects new areas of exposure. Brokers in the retail market will also themselves be subjected to the new consumer duty and will, therefore, also be open to regulatory investigations and complaints. This increased exposure may impact brokers’ E&O cover.