Introduction

Protecting consumers is one of the Financial Conduct Authority’s (FCA) operational objectives and, accordingly, is a core feature of the FCA's strategy for 2022-2025. One of the ways in which the FCA hopes to reduce the risk of harm to consumers is through the introduction of a new principle for business, Principle 12, which provides that firms must act to deliver good outcomes for retail customers (the consumer duty). The consumer duty will require firms to demonstrate compliance with the required good outcomes throughout the product journey. In a speech on 10 May 2023 Sheldon Mills, Executive Director Consumers and Competition at the FCA,  committed to taking "robust action”, including interventions or investigations, against firms where the harm or risk of harm to consumers justifies such action. This approach accords with the FCA’s stated objective to   use "enforcement and intervention powers more actively" in its drive to become a more assertive regulator. It will be particularly interesting to see how the FCA will approach the enforcement of the consumer duty as it shifts to an outcomes-based approach to regulation and on what sort of evidence it will base its decisions on what action to take. We understand that there are already s166 skilled person reviews into implementation underway so we expect the FCA to be quick off the mark.

The FCA highlights some of the types of harms which it will focus on minimising, both through the consumer duty and its work in other areas. These include the harms caused to consumers as a result of being treated poorly by firms and where firms fail to meet the FCA's minimum standards, in addition to harms caused by firms' failures. The consumer duty will provide further protection against these harms, supplementing the existing protections offered by product-specific regimes (e.g. consumer credit).

The importance of the consumer duty

The FCA has long held concerns that consumers were being asked to make an increasing number of decisions in a faster and increasingly complex environment, particularly in light of the increasing use of technologies (such as apps) in the consumer finance sector. Increasing pressure from the cost-of-living crisis has increased public pressure to protect consumers, and the FCA has recognised that this makes it even more important that consumers can make informed, effective decisions.

This focus is likely to become more prominent as the government continues to pursue its objective of ensuring the competitiveness of the UK financial markets against international competitors. The consumer duty will promote this objective by making firms think harder about how they can innovate to better serve their customers. In turn, this will help attract and retain customers and ultimately enhance the competitiveness of the sector and bolster the UK's reputation for a high standard in service and value.

The consumer duty seeks to reduce the risk of harm to consumers by requiring firms to consider how they will deliver good outcomes for consumers throughout the product lifecycle including:

  • Ensuring effective governance of products and services.
  • Requiring that the price of its products and services represent value for money to customers in light of the benefits that they will receive.
  • Ensuring customers understand products and services by tailoring communications to take into account the characteristics of groups of customers, the complexity of products, etc.
  • Providing customer support enabling customers to engage with the product or service, without facing unreasonable barriers, to achieve their objectives.

Measuring the effect of the consumer duty 

The FCA expects to be able to measure the success of the consumer duty by monitoring metrics relating to its existing top line outcomes. Although the top-line outcomes are more wide reaching than those of the consumer duty, these metrics do have read across to the consumer duty.  For example, through this wider workstream, the FCA will measure:

  • Consumers' confidence in the financial services sector.   
  • Whether firms "put customers first", considering metrics which indicate whether;
    • consumers are sold products and services that are designed to meet their needs and characteristics;
    • consumers get products and services which are fair value;
    • consumers understand the information they are given and make timely and informed decisions as a result;
    • firms provide consumers with good customer support; and
    • consumers have confidence in firms.

This workstream will collate data from sources including the FCA Financial Lives survey, the Financial Ombudsman Service and the Financial Services Compensation Scheme. It is hoped that metrics from these sources will demonstrate that the consumer duty reduces levels of harm, for example through a decrease in the number of claims under the Financial Services Compensation Scheme, and referrals to the Financial Ombudsman Service.

Enforcement

The consumer duty is within the first wave of the FCA's new outcomes-based approach to regulation, and therefore is interesting in terms of how other such approaches might be expected to operate. An outcomes-based approach means that, whilst the FCA has determined the standards which firms must meet, there is greater flexibility around how they may achieve this, this is seen as a significant departure from the EU’s rules-based approach. The FCA expects that this approach will support future innovation and require fewer rule changes. It is anticipated that a more nuanced approach to supervision and enforcement will be needed to reflect the variety of ways in which a firm may have chosen to implement the consumer duty.   

The FCA anticipates embedding the consumer duty into its existing supervision and enforcement framework, including its Senior Managers and Certification Regime (SM&CR).  

To date, the FCA has been actively supervising firms in the implementation phase of the consumer duty. Firms were required to have drafted implementation plans by the end of October 2022. The FCA reviewed a number of these plans and provided comments on its key areas of focus for firms to consider throughout the ongoing implementation of the consumer duty.  As the FCA moves towards its "data-led" approach to regulating, it is worth noting its comments on the use of data by firms to assess, test, understand and evidence the outcomes for customers. The FCA does not attempt to prescribe the metrics which firms should look to, but rather acknowledges that this will be for each firm to decide based on factors including its size, client base, and business. The FCA expects firms to maintain records of this so that they can be provided at its request. The inference being that the FCA will use these data points to monitor a firm's compliance with the consumer duty. 

In addition to requiring a "champion" who is responsible for ensuring that the consumer duty is raised and appropriately discussed at board level; the final guidance published by the FCA also highlights that senior managers are accountable for the consumers' outcomes under the SM&CR. Whilst the consumer duty will provide further means for senior managers to monitor and ensure good outcomes for a firm's customers, it also means that the FCA may exercise its disciplinary powers against anyone performing a senior manager function where that person is responsible for complying with the duty and where the desired outcomes are not delivered.

In its strategy document the FCA sets out its intention, as a result of its new data-led approach, to "quickly identify practices that negatively affect those outcomes and to intervene assertively". These interventions are likely to involve the use of the FCA's powers to impose a requirement or vary a firm's permissions. In the context of ensuring firms meet the threshold requirements, the FCA has indicated that it is scaling up its ability to intervene in real time, so that it can act faster to address ongoing risks. It will therefore be interesting to see whether this data-led approach will in fact enable the FCA to become a more agile and active regulator, particularly since metrics measuring consumer outcomes will tend to be backwards looking by their nature. 

Moreover, where it identifies serious misconduct by firms against the consumer duty; the FCA has indicated that it will use its "full range of powers" to deter and/or remediate this, such as issuing fines. We expect the FCA to want to take swift action and send a strong message early on, in contrast to the criticism it has faced for the lack of SM&CR cases some seven years on from the start of that major regulatory change. 

Conclusion

Because the FCA is taking an outcome-based approach, rather than setting prescriptive rules, firms are free to implement the consumer duty as they best see fit, and accordingly the impact that this will have on the financial services market, and individual consumers, is yet to be fully understood. Whilst this is an important step to further consumer protection in the UK, it is perhaps more important to reflect on how the implementation of the consumer duty indicates the FCA's approach to future regulation, as we move away from the EU's rules-based approach. This will also be indicative of the likely approach to be taken by other regulators across the UK financial markets, that are subject to similar reform.