What outcome is the FCA seeking to achieve?
The FCA believes that consumers’ ability to make good decisions can be impaired by various factors, including their weaker bargaining position, asymmetries of information, lack of understanding or behavioural biases. These factors can be intensified where consumers are in vulnerable circumstances. Additionally, firms may not always compete effectively to drive up quality and bring down costs in consumers’ favour. The FCA encounters too many firms that are not adequately considering the needs of their customers or prioritising good consumer outcomes as an objective of their business activities. The FCA wants all firms to be consistently placing their customers’ interests at the heart of their businesses. The FCA sums up its aims at paragraph 2.25:
“In short, we want firms to act in good faith, to avoid causing harm, to empower consumers by placing them in a position where they are able to make effective decisions, so that consumers can take responsibility for their actions and decisions. Our proposals would equip consumers to take this responsibility by requiring firms to ‘get it right in the first place’, and to continually self-assess so that they can justify the appropriateness of their business models and their treatment of their customers.”
Who will benefit from the Consumer Principle?
The proposals relate to products and services sold to ‘retail clients’. This is wider than the traditional definition of ‘consumer’ and includes all clients other than professional clients (such as large corporates and government bodies) and eligible counterparties. The Consumer Duty will apply to financial services offered to SMEs.
Which firms will be impacted?
As well as applying to firms with the direct customer relationship, the proposals also extend to firms that are involved in the manufacture or supply of products and services to retail clients, even if they do not have a direct relationship with the end customer. This will mean that some firms that operate exclusively in wholesale markets will be impacted. As with the other Principles, the Consumer Principle will apply to payment institutions, e-money institutions and registered account information service providers.
The Consumer Duty
The Consumer Duty is intended to set a higher standard of care and expectation beyond the current set of Principles and Rules. The Consumer Duty will have three key elements:
- Consumer Principle, which sets a clear tone and uses language that reflects the overall standards of behaviour the FCA expect from firms.
- ‘Cross-cutting Rules’, which develop and clarify the Consumer Principle’s overarching expectations of firm conduct and set out how it should apply in practice.
- The ‘Four outcomes’, a suite of rules and guidance that set more detailed expectations for firm conduct in relation to four specific outcomes for the key elements of the firm-customer relationship – Communications, Products and Services, Customer Service and Price and Value.
The Consumer Principle
The FCA has put forward two options for the Consumer Principle:
- 'A firm must act to deliver good outcomes for retail clients.'
The FCA acknowledges that the concept of a ‘good outcome’ does not have an established legal meaning – the rules and guidance would give greater clarity on what good looks like but would not be exhaustive.
- 'A firm must act in the best interests of retail clients.'
It would be an objective standard that would require firms to consider the reasonable expectations of their customer base as a whole, rather than achieving the absolute best outcome for each and every customer.
The Cross-cutting Rules
The Cross‑cutting Rules would set out the three key behaviours required by the Consumer Duty, and make clear that the Consumer Principle requires firms to:
- take all reasonable steps to avoid foreseeable harm to consumers
The FCA says that this means firms not causing harm to customers through their conduct, products or services and taking proactive steps to avoid it (where it is within the firm’s control to do so). They should not seek to exploit customers’ vulnerabilities, behavioural biases or lack of knowledge and should be fair in describing the benefits and risks of their products and services, not disguise these through misleading framing, omission, or burying key terms in documents they know customers won’t read.
- take all reasonable steps to enable consumers to pursue their financial objectives
The FCA states that consumers best understand their own circumstances and financial needs and objectives. They should be empowered to make choices for themselves and remain ultimately responsible for their decisions and actions. Firms should take responsibility for establishing an environment in which consumers can act in their own interests. Firms should take reasonable steps to understand behavioural biases and the impact of vulnerabilities and use their knowledge of how consumers behave to enable and support them to make good decisions.
This is a standard of conduct characterised by honesty, fair and open dealing and consistency with the reasonable expectations of consumers.
These behaviours will need to be enshrined in all of a firm’s activities – from high-level strategic planning to individual customer interactions.
The Four Outcomes
The FCA states that the Four Outcomes represent the key elements of the firm-customer relationship: how firms design, sell and service products and services, and the key contact points along the customer journey. The behaviour and actions of firms in relation to each of these outcomes are instrumental in enabling consumers to meet their financial needs and improve their financial wellbeing.
Outcome: communications equip consumers to make effective, timely and properly informed decisions about financial products and services.
To achieve this outcome, the FCA would require firms to communicate in a way that is reasonably likely to be understood and that facilitates decision‑making and also to take proportionate steps to review and, where appropriate, test and adapt their communications to ensure they are likely to be understood by the target consumers. The proposal reinforces and builds on the existing Principle 7, which requires a firm to pay due regard to the information needs of clients, and communicate information in a way which is clear, fair and not misleading.
Outcome: products and services are specifically designed to meet the needs of consumers and sold to those whose needs they meet.
The FCA are proposing to introduce overarching requirements that will mean products and services sold to consumers have been designed to benefit them and perform as would reasonably be expected. The Product Intervention and Product Governance Sourcebook (PROD) already sets substantially similar requirements on the design, approval, marketing and management of certain products and services throughout their lifecycle, but PROD does not have general application across all retail markets that the FCA regulate.
Outcome: customer service meets the needs of consumers, enabling them to realise the benefits of products and services and act in their interests without undue hindrance.
The FCA are proposing to set requirements for firms’ customer service arrangements that enable consumers to realise the benefits of products/services without undue hindrance, enable consumers to act in their own interests without undue hindrance and do not lead consumers to incur unreasonable additional costs. For example, it should be at least as easy to exit a product or service as it is to purchase it in the first place.
Outcome: the price of products and services represents fair value for consumers.
The FCA are proposing to introduce a requirement that firms set prices so that they represent fair value for their target customers. Firms would not be providing fair value if the price consumers pay for a product/service is not reasonable relative to its expected benefits. The FCA would not require firms to offer products at or below a set price. Nor do the FCA intend to use the proposed rule itself to introduce market interventions, such as price caps or other price interventions.
Private right of action?
In the Feedback Statement FS19/02, the FCA said they would consider the potential merits and unintended consequences of introducing a private right of action for breaches of the Principles. This consultation focuses on the proposals for the Consumer Duty, so no specific proposals on the private right of action are set out in this consultation. The FCA are seeking stakeholders’ further views on how a private right of action could support or hinder the success of the proposals and their intended impact on firms, consumers and markets.
So what next?
Although the FCA clearly has a mandate from Parliament to take these proposals forward, it is essential that firms review and feedback on the consultation to ensure that the new Consumer Duty is workable for firms whilst still achieving the FCA’s objectives. Principles-based regulation presents many challenges to firms – introducing a Consumer Duty to this regime will likely act to intensify these challenges.
Authored by Julie Patient and Catriona Deery