FCA consumer duty consultation: quite possibly the biggest change since RDR

3 min read 17 Jun 21

One of our standard go-to “jokes” at the lang cat is that we read regulatory consultation papers so that you, dear advisers, don’t have to. Tragically we enjoy this sort of thing, immersing ourselves in a lengthy policy document and turning it into something more engaging for people in the real world to read and understand. Hey, it’s a living.

However, if there is one consultation that advisers really should read (and potentially respond to if  reading this before 31st July 2021), it’s the proposals for a new Consumer Duty. Having read the papers several times and attended a FCA hosted webinar, I think this has the potential to be a huge change for financial services as a whole, and quite possibly the biggest we’ve seen since RDR.

Scope

The proposals extend to all firms that are involved in the manufacturer and supply of products and services to retail clients, even if they don’t have a direct relationship with the end consumer. So, advisers are clearly in the firing line here, as are all the providers and asset managers you deal with. No more hiding behind “we don’t deal with customers directly” and expecting advisers to deal with poor communications, service availability etc. etc. Everyone is accountable.

It’s probably fair to say that in some respects this is about dragging the rest of retail financial services (banking, insurance etc.) up to the standards adopted by financial advisers. In addition to the obligation for individual suitability, advisers have been covered by the PROD rules requiring, amongst other things, an assessment of the target market they are looking to serve. Investment Manufacturers also have similar rules to follow. The proposed Consumer Duty will take this one step further, building on these rules but also potentially introducing new principles for all firms to follow.

So, what is it then?

The Consumer Duty will require all firms to put the customer at the heart of everything they do, offering products and services they know are fit for purpose and represent fair value. The regulator will expect firms to demonstrate how they are challenging themselves to achieve this, with example questions such as:

As a result the focus will be more about the outcomes that are being delivered, shifting away from simply following the rules. More judgement and accountability, less box ticking.

To achieve this the proposals include a new overarching Consumer Principle, currently with two suggested wordings:

option 1: “A firm must act to deliver good outcomes for retail clients” and/or;

option 2: “A firm must act in the best interests of retail clients.”

Irrespective of the wording of the principle, this will be underpinned with more specific outcomes and enforceable rules, the latter of which could see the bar being raised from the existing TCF outcomes and guidance. For some firms, this will mean a significant change in culture and focus.

The four outcomes

The outcomes represent the key elements of the relationships most firms have with their customers, covering…

  1. Communications
  2. Products and service
  3. Customer service
  4. Price and value

Expectations for each will be set as this work progresses, with cross-cutting rules applying where appropriate. All of these will carry their own impacts and challenges for different firms and it will certainly be interesting to see how explicit the FCA is when it comes to expected standards.

Next steps

The consultation is open until 31st July, with a second consultation containing the feedback and a more explicit definition of the exact rules expected before the end of the year. The FCA is currently anticipating the final rules to be implemented from July 2022 onwards. Watch this space everyone.

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