The New Consumer Duty (PS22/9)

Principle 12, cross-cutting rules and new outcomes… But does TCF still apply?

An overview.

As discussed in previous articles and during our workshops, the new Consumer Duty package is a package of regulatory instruments; designed to enable forward-looking rule and expectation setting by the regulator, the FCA.

 

Coupled with the ‘paradigm shift’ in the FCA’s supervision, culture and enforcement approach, the new Duty is set to change firms’ operation at its core, at a cultural level.

 

This should also enable the FCA to move away from the ‘retrospective rule making’ and in turn issue fewer rule changes in the future.

 

This of course requires every single FCA regulated firm to overcome a massive hurdle of ‘consume duty implementation’.

 

As you can see, the new duty consist of 3 tiers, namely:

  1. Consumer Principle

  2. Cross Cutting Rules

  3. Four Outcomes

The New Consumer Duty.

The new Duty consist of 3 tiers, namely:

  1. Consumer Principle

  2. Cross Cutting Rules

  3. Four Outcomes

 

The board directors, or its board equivalent, will oversee and be responsible for determining whether the company is providing satisfactory results for its clients in a manner that is consistent with the Consumer Duty. In order to be able to provide this assurance, firms will need to decide what kind, frequency, details and style of reporting (including MI) their board will need. 

 

Consumer Duty will be subject to SM&CR in the same way that other Principles and regulations are. The FCA does not want one person to be solely responsible for adhering to the requirements of the Consumer Duty. The accountability should instead extend to senior management and the entire design, distribution, and delivery lifecycle.

 

Let’s not forget the FCA’s requirement to appoint a consumer duty champion at the board level, which is indicated to be carried by a Non-executive director (NED) or equivalent. 

Scope of Consumer Duty.

The idea of reasonableness serves as the foundation for the Consumer Duty. The FCA made it clear that firm should interpret regulation (and them shall enforce the standards) in accordance with the standard that could be reasonably anticipated of a prudent firm. A prudent firm is who:

 

  • pursuing the same course of action with relation to the same good or service

  • With the reasonable understanding of the wants and needs of its target market

 

Firms should of course be cautions. Whilst this is not a new standard, subjectivity of applying this is a vague concept and could be viewed different by the firms, FCA and FOS. This is why firms should ensure all their decision, particularly of those reliant on reasonableness, are thoroughly documented and justified..

The Duty and its regulatory instruments.

Principle 12

'A firm must act to deliver good outcomes for retail customers."

The High-Level Standards Principles (PRIN) sourcebook will contain the new principle, Principle 12. Firms who engage with retail clients will be subject to the new Principle only, whilst Principles 6 and 7 will be disapplied. However, firm must note that guidance text and supporting information will remain relevant to Principle 12, therefore firms cannot outright disregards TCF (Treating Customers Fairly).

 

For firms who engage with both retail and commercial clients, they may indeed be subject to a dual regime. This is because Principle 12 does not apply to commercial clients (but instead, Principle 6 & 7 remain in force). 

 

Firms should also consider the extent of the application of Principle 12. For example, an insurance MGA distributing group policies will not be subject to the distribution aspects of the new rules, but other aspects remain within scope of the Duty. Once again, reasonableness needs to be considered.

 

As a derivative, the FCA has also amended the Code of Conduct Sourcebook (Cocon) for the SMCR regime; to require all conduct rules staff to ‘act to deliver good outcomes for retail customers. Once again, this only applies where staff is subject to the Duty and not where they handle (for example), commercial clients.

Cross Cutting Rules

Act in good faith towards retail customers

Avoid foreseeable harm

Enable and support retails customers to pursue their financial objectives

The cross-cutting regulations enhance the cultural standards that the FCA demands from firms, in accordance with the Consumer Principle. Three universal elements that apply to all facets of a firm's conduct help them define the FCA's broad objectives for firm behaviour. The cross cutting rules aimed at clarifying the standard expected from firms and of course, help them in their interpretations. 

 

The cross-cutting rules require firms to:

  1. Act in good faith

  2. Avoid foreseeable harm 

  3. Enable and support retail customers to pursue their financial objectives

Four Outcomes

Products and Services

Price and Value

Consumer Understanding

Customer Support

The four outcomes represents the key touch-points and risk areas that exists between the firm and customer throughout the customer life-cycle. By establishing the ‘what a good outcome is’ for every firm, customers can be aided and supported to pursue and meet their financial goals (and thus treated fairly). The four outcomes relate to:

  1. Product and Services

    1. Firms would need to ensure that their product and services (included certain unregulated, but intimate service/product) are in line with the consumer expectations and the wider Duty.

    2. Price and Value: as a long-standing theme, firms must ensure that their products and services are fairly priced and does not include unnecessary (and/or) hidden charges which may erode the benefits. 

    3. Consumer Understanding: somewhat of the key area firms will struggle with; given that they must measure and evidence that all their communication is clear and understood by the consumer (as intended by the firm).

    4. Consumer Support: similarly to certain TCF requirements, consumer support provided post-sale, must be of a high standard and must not hinder any of the outcomes.

 

The four outcomes and surrounding examples set by the FCA creates a set of guidelines and norms that define what businesses must do to meet the FCA's expectations under the consumer duty. The FCA stops short of providing specific examples. Firms must be aware that while the four outcomes are presented as stand-alone aspects, they are procedurally related. For instance, bad governance or product design may have an impact on fair value concerns. Therefore, when preparing a project plan (or indeed conducting a review), firms should not look at processes (or indeed general compliance) as a segregated process.

 

It is expected of every firm to:

  • Define what good looks like (for each process, product, each outcome)

  • Make necessary changes to bring the firm in compliance with the Duty

  • Implement continuous monitoring 

  • Review and document such outcomes

  • Issue remedial action (for foreseeable harm too).

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