On 27 July 2022, the FCA published its long-awaited new Consumer Duty which will come into force from 31 July 2023. This will take the form of a new Principle 12 supported by various cross-cutting rules.
The FCA has been clear that the objective of the new duty is to make regulation more flexible, less prescriptive and more outcomes-focused than ever before. Although regulated firms are already under an obligation to treat customers fairly, the new rules shift the dial significantly on this and will require firms to achieve good outcomes for retail customers. This means that, in theory at least, a firm can do everything right in terms of, for instance, pre-contract information and disclosure, customer communication, suitability assessments but could still be potentially in breach if the customer, for whatever reason, receives a sub-optimal outcome. This is a real shift in the FCA’s approach to regulation and consumer protection and will likely result in a substantial increase in the compliance burden on regulated firms as well as drawing a significant amount of senior manager resource.
Whilst there will inevitably be a time-lag between the Consumer Duty coming into force and the FCA seeking to take enforcement action for a breach of it, there are some very immediate issues for those entering, or already in, the regulated sector to consider.
Firstly, new firms seeking FCA authorisation will need to demonstrate at the gateway how they will comply with the duty and how their systems and controls will allow them to deliver upon it. We expect the FCA to challenge new applicants robustly on their understanding of the new duty and to potentially refuse applicants for a failure to have it appropriately bedded in.
Similarly, existing authorised firms will need to review their systems, controls, policies, procedures, customer journeys and training framework to ensure compliance with the new requirements. Firms need to have confirmed their implementation plans to the FCA by the end of October 2022 before the final implementation of the new rules in 2023.
Firms which fail to effectively implement the new duty in time can expect supervisory attention and possibly intervention by the FCA. The FCA may seek to use VREQs, OIREQs and s166 reports in cases where firms fail to do so. These can have serious costs implications and can also result in disruption to businesses and customers. Similarly, firms may potentially be liable for remediation or redress in cases where customers have suffered a loss as a result of a failure to comply with the new duty.
In terms of individual accountability, a new COCON Rule 6 will be applicable to all SMCR staff requiring them to “act to deliver good outcomes for retail customers”. The purpose of is to bring personal accountability to all levels of an organisation and to make implementation of the consumer duty a personal responsibility for all staff, regardless of seniority. We consider that this increases the potential enforcement risk for more junior employees going forwards.
There will also be new guidance for senior management function employees around existing SC Rule 4 (“you must disclose appropriately…”) stating that regulated senior managers should report other firms to the FCA if they know that they are not delivering on the consumer duty, in order to discharge their obligations under SC Rule 4. The intention of these additional responsibilities on individuals would appear to be ensuring that the implementation of the Consumer Duty occurs vertically throughout an organisation and also laterally across the wider market and we would expect individuals to potentially face action where they fail to deliver on it.
In addition, firms need to have appointed a Consumer Duty Board Champion (ideally an independent NED) by the end of October 2022 and, more generally. Senior managers in regulated firms will need to consider what amounts to “reasonable steps” in the context of their business, this increasingly outcomes-based approach to regulation and their existing SMCR obligations.
The Consumer Duty is a key aspect of the FCA’s ongoing Transformation programme which priorities the protection of consumers and assertive action. It is clearly taking the new Duty extremely seriously, and we would anticipate that it seeks to monitor – and enforce – its implementation just as vigorously.
