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In this first in a series of blogs about Consumer Duty (CD), I will provide an overview of the key points of the new CD rules. In subsequent blogs I will discuss the challenges CD presents for firms before talking about the practical steps firms need to take to help ensure compliance with each of the four customers outcomes in the new rules. I hope you will find this series of blogs of help in implementing CD within your firm.
The incoming Consumer Duty (CD) regulation represents a seismic shift in the FCA’s expectations of firms. Seismic because CD will require firms to think and behave differently to how they have been asked to behave in the past. With previous regulation, firms have responded by writing new, or amending existing policies, frameworks, procedures and governance arrangements. However, CD requires firms to evidence across the entire customer journey or lifecycle that they are behaving in ways that deliver good outcomes for those customers. Say it quickly, without thinking too much and you might think the traditional ways of responding will work with CD. However, think about it more deeply and you will quickly realise, CD requires a change of mindset, which will see firms needing to move their focus from a process driven approach to compliance to focusing on ensuring that all processes deliver good outcomes, effectively thinking ‘outside in, not inside out’.
However, before I get into the detail of the key points of the incoming CD, let me provide a few quotes from the FCA about how they see CD:
- “CD requires firms to deliver a higher standard of care and protection and to go further to equip customers to make more effective decisions in their interests”.
- “By setting higher standards for firms, the Duty is central to our transformation to become a more innovative, assertive and adaptive regulator and is a key part of our new three-year strategy to improve outcomes for consumers and in markets throughout the UK”.
- “We expect firms to step up and put consumers at the heart of what they do and we’ll be holding senior managers accountable if they do not”.
Strong words indeed.
So, what are the key elements of the new CD regulation:
- A new Consumer Principle (Principle 12)
- Three new Cross Cutting Rules
- Four Consumer Outcomes that must be met
For those of you thinking the new Principle 12 sounds remarkably like the existing Principles 6 and 7, you’re correct! So, for firms that already fall under Principles 6 and 7, these will be ‘dis-applied’ and replaced by the new Principle. However, it is worth underlining the fact that the FCA have been very clear that the new Principle 12 demands a higher standard from firms.
In writing these incoming rules the FCA noted that, to be effectively implemented, CD is as much about behaviour and culture as it is about anything else. Truly considering the consumer in every context of a product and service delivery, before, during and after the event. To that end, the FCA is introducing a new conduct rule for all staff which asks every individual operating within financial services to ensure that they, ‘act to deliver good outcomes for retail customers’.
Interestingly though the FCA have chosen not introduce a new Prescribed Responsibility for CD. Rather it will require each firm to assign a NED to be the role ‘Consumer Duty Champion’ and for that NED to work closely with the Chair and CEO to ensure CD is at the heart of everything the firm does. Senior managers will need to demonstrate their alignment with the new rules by evidencing ‘reasonable steps’ in pursuit of CD outcomes in their area of the business. In short, the FCA expects CD to be reflected in every area of the firm, from strategy to governance, leadership to people policies – including incentives. From a senior manager perspective, there is a collective expectation across the board with the Chair and NED’s in support.
For those firms operating in insurance, retail and investment banking, there is already specific guidance via the PROD rulebook on how firms have to consider product and product development, however CD builds on this with much wider expectations around customer treatment and support. Finally, there is a new obligation for firms to notify the FCA of breaches of CD by other parties in their distribution chain, which is an interesting development and one that we will watch over time to see what sort of data the FCA are publishing around this area.
The timetable the FCA has set, whilst slightly more relaxed because of feedback to its Consultation Paper, is still demanding:
- 31st October 2022: Boards (or equivalent) must have agreed their implementation plan for the business and be able to evidence this as requested by the FCA
- 30th April 2023: Firms that are manufacturers must have completed their work on current product range and shared key information with their distributors.
- 31st July 2023: Implementation of the CD
- 31st July 2024: Deadline for firms who have closed book products/services, to demonstrate they are complying with the duty in respect of the closed book items.
As you can see the impact of CD will reach far and wide into every aspect of firms’ operations and will require not only a significant amount of planning, organising and implementation of change. It will need highly competent individuals who are provided with the right environment, tools and input to help deliver this all-encompassing regulatory change.
In my next blog, I will focus on the challenges Consumer Duty presents for firms before turning my attention in subsequent blogs to practical guidance on implementing each of the four new consumer outcomes.