At a glance
- The final rules will need to be implemented by the end of July 2023 giving firms three more months than previously anticipated to prepare. For closed books, firms have a further 12 months to July 2024. For many firms, the work needed to implement the rules and evidence compliance is extensive. These extra three months will provide some relief although most firms will find it challenging to meet the first deadline.
- The FCA is setting out a roadmap for implementation. Boards are expected to have agreed their implementation plans that include evidence of scrutiny and challenge by October 2022. Firms should prepare to share the documentation with the FCA on request.
- The FCA has kept the Consumer Principle, cross-cutting rules and outcomes broadly unchanged but has introduced changes that lay the ground for ensuring increased accountability and oversight over compliance with the Duty. In addition to the annual board report, firms will need to reflect the Duty in their strategies, governance, leadership, and people policies including incentives at all levels.
- The final rules and guidance provide more clarity around key concepts such as good faith, foreseeable harm, and responsibilities through the distribution chain. They also include a requirement for firms to notify the FCA if they become aware that another firm in the distribution chain is or may be in breach of the Duty.
- The Duty rules are released at a moment when many consumers face increasing financial hardship due to the cost of living crisis. The FCA makes clear that, where firms identify consumer harm, they should prioritise this for remediation since harm is likely to breach existing Treating Customers Fairly requirements rather than wait until the Duty’s implementation date.
- The FCA has introduced rules where firms will be expected to monitor and compare consumer outcomes between distinct groups of consumers. These will include consumers with certain vulnerabilities and those who share protected characteristics. This could present a challenging task for firms and one which could reveal inadvertent forms of discrimination.
- Overall, the FCA plans to monitor compliance with the Duty across the market on an iterative basis. Our view is that the approach to compliance and regulatory expectations will evolve over time and firms will need to maintain a flexible approach to ensure ongoing compliance.
Summary of the requirements
The FCA has issued final rules and guidance for its new Consumer Duty (the Duty) in PS22/9 and FG22/5. The Duty sets higher expectations for the standard of care that firms give consumers and follows consultations in May and December 2021 (see our blog on the December consultation).
The Duty is a package of measures, comprised of:
- A new Consumer Principle (Principle 12) - ‘a firm must act to deliver good outcomes for retail customers’ - that will replace Principles 6 and 7 for retail business.
- Cross-cutting rules setting out how firms should act to deliver good outcomes and providing greater clarity on the FCA’s expectations under the Consumer Principle. The cross-cutting rules require firms to:
- act in good faith;
- avoid causing foreseeable harm; and
- enable and support retail customers to pursue their financial objectives.
- Four Outcomes: the outcomes provide more detailed expectations across the key elements of the firm-consumer relationship including:
- products and services;
- price and value;
- consumer understanding; and
- consumer support.
This blog summarises material changes since the December 2021 consultation, the key areas of focus for firms and the steps they need to take to prepare for implementation of the Duty.
Deloitte will be hosting a webinar on the Duty on 14 September. Sign up here to learn more about the practical implications of the Duty, the key challenges, and the actions your firm should be taking as it moves from assessment to implementation of the requirements.
The Duty goes live in stages
The Duty rules will be effective from 31 July 2023 to all products and services that are either new, remain on sale or are open for renewal. The Duty will also apply to closed products and services from the end of July 2024. This will be welcome news for firms as it provides more time than anticipated to implement the necessary changes to comply with the Duty. The FCA initially proposed that the Duty be implemented by 30 April 2023 for all products. This was a demanding timetable and there were concerns that many firms would have struggled to meet it.
The FCA acknowledges that the final deadlines will still be challenging for firms and is setting out a roadmap to implementation to help ensure that firms are compliant by the end of July 2023. The roadmap includes the expectation that boards will have signed off the Duty implementation plans by October 2022. This includes recording evidence of board scrutiny and challenge, and firms should be prepared to share this evidence with the regulator when asked. In addition, manufacturers should aim to complete all the reviews necessary to meet the four outcome rules on their existing products and services and share the necessary information with distributors by April 2023. This could be particularly challenging for firms that have not yet started their programmes or completed their gap analysis.
Context is key
The economy today looks very different to six months ago with the UK going through the worst cost-of-living crisis in 40 years. The FCA is concerned about the increased financial hardship consumers face and the Duty is expected to be an important tool in achieving good consumer outcomes at a time of need for many. The FCA clarified that where firms identify serious issues causing consumer harm during the Duty implementation period, they should make dealing with them a priority as it is likely the harm will be a breach of existing requirements such as Treating Customers Fairly (Principle 6).
Notwithstanding the Duty’s effective implementation date, the FCA expects firms to start thinking now about how they support customers experiencing pressure from the rising cost of living, in line with the expectations it has set out under the Duty. In June, the FCA wrote to over 3,500 lenders, setting out its expectations for supporting customers affected by the rising cost of living. More insight on the actions firms can take to manage customer outcomes during the cost-of-living crisis is available here.
What has materially changed since consultation?
Board assessment, review and governance
In its previous consultations, the FCA stated that boards must review, at least annually, an assessment of whether their firm is delivering good consumer outcomes in line with the Duty and approve plans to address poor outcomes. The requirement for an annual board report on compliance with the Duty is maintained and the first board report is expected within 12 months of the rules coming into effect. This means that the first report must be finalised before end of July 2024.
In addition, boards must assure themselves that their firm is complying with the Duty by the end of the implementation period – 31 July 2023. Boards must also ensure that the firm has identified any gaps or weaknesses and that there is a plan of action to remedy them. This means that although a formal report is not required until mid-2024, boards are expected to assess compliance from the end of the implementation period. This is likely to be a more challenging timeline than was expected in the last consultation.
Firms need to ensure that they have appropriate and effective management information to provide the board with the evidence they require on whether the firm is achieving good customer outcomes. Our paper - Improving Customer Outcome Testing - provides suggestions to firms on improving their approach to outcome testing.
The FCA and some respondents were concerned that, without the right level of senior management accountability, firms would not implement the Duty effectively. As a result, the FCA decided to supplement the annual board report with requirements for firms to reflect the Duty in their strategy, governance, leadership and people policies, including incentives. This is intended to ensure that the Duty is embedded in the firm’s culture and that its culture is focused on enabling good consumer outcomes. In addition, firms will need to appoint a “Duty Champion” at board level to help ensure, alongside the CEO and Chair, that the Duty is discussed regularly. Firms need to be prepared to share with the FCA the content of these discussions and the MI used.
Monitoring Duty compliance and the FCA’s supervisory approach
Throughout the final rules and guidance, the FCA emphasises the importance of monitoring outcomes with a special focus on vulnerable customers and other distinct groups of customers. The FCA now expects firms to identify whether particular groups of customers are receiving worse outcomes. Firms are likely to struggle to assemble the necessary data to assess this. However, this is a sensitive topic that could reveal potential areas of harm to groups of customers that firms have not previously identified. For example, the recent Citizens Advice Bureau report on discriminatory pricing concluded that ”…research indicates a worrying trend between ethnicity and price” in the car insurance market. Monitoring under the Duty could help uncover instances of indirect discrimination for certain groups of customers.
The FCA is taking an active approach to ensuring that firms implement the Duty effectively and measure the consumer outcomes accurately. Throughout the implementation period, the FCA will conduct high-profile campaigns to raise awareness of the Duty and assist firms in understanding the FCA’s expectations of them in line with the Duty. Additionally, the FCA is requiring firms to be able to demonstrate that they meet the standards of the Duty at the authorisation gateway. The FCA will only authorise firms if they are able to demonstrate that the Duty is embedded throughout the organisation.
In line with the FCA’s three-year strategy, the FCA will monitor the set of metrics of its outcomes on fair value and suitability & treatment, coupled with data from the Financial Lives Survey and Financial Ombudsman Service’s complaints to track the progress of the Duty. The FCA intends to develop a wider range of data sets, including sectoral data, to assess the extent to which firms are delivering good outcomes for consumers.
The FCA expects the implementation of the Duty to be iterative as industry good practice emerges. Firms should build sufficient flexibility into their implementation plans to enable them to adapt their policies, procedures and practices. The FCA plans to undertake a post-implementation review of the Duty but has not set a timeline for it.
Responsibilities across the value chain
The FCA has confirmed that, while all firms in the distribution chain will have responsibilities under the Duty, they will only have liability for their own activities and will not be responsible for outcomes arising from the actions of other firms in the chain. However, the FCA has introduced a new rule requiring firms to notify the FCA if they become aware that another firm in the chain is not or may not be complying with the Duty. A firm must also notify another firm in the chain if it thinks that firm has caused or contributed to harm to retail customers. This means that in practice firms will still need to pay attention to information they receive about what other firms are doing. This raises the question of what will be notifiable and whether the FCA might challenge a firm if evidence comes to light that indicates it should have known that another firm was in breach of the Duty. Firms will need to consider this new requirement from both a legal and process perspective to ensure they are able to comply.
The FCA has also clarified the respective roles and responsibilities of manufacturers and distributors in relation to value assessments. The FCA has clarified that distributors are not required to re-do or challenge the value assessments carried out by manufacturers – but they do need to understand the manufacturer’s value assessment and assess whether their distribution fees could result in the product ceasing to provide fair value. Manufacturers must consider the overall charges that the customer might pay, including any that might result from the firm’s distribution strategy - for example, they should factor average intermediary fees into their value assessments.
Manufacturers are expected to complete their open product reviews by April 2023. This is three months ahead of the overall implementation deadline and has the objective of allowing a suitable time period for manufacturers to share their review outcomes with distributors and to identify where changes are needed to enable remediation before the deadline. In practice, providing distributors with information on product reviews as it becomes available might be a preferable option to avoid an extremely busy period in the last three months of the implementation period. Firms should consider maintaining an open dialogue with other parties in the distribution chain to avoid having to make harsh commercial decisions as the deadline approaches.
Interaction with existing rules
The FCA has also clarified that firms that meet the value rules in PROD 4 (for non-investment insurance), COLL (for asset managers) or PROD 7 (for funeral plans) will meet the price and value outcome under the Duty. This will give these firms comfort that they will not have to amend their existing value assessment processes, although some of these firms will need to carry out value assessments for a wider range of products under the Duty. Pensions providers complying with COBS 19 will still be required to meet the price and value rules under the Duty, but must use the assessments carried out by their Independent Governance Committees or Governance Advisory Arrangements to inform their assessments.
The FCA has also introduced a new rule clarifying that firms that are already complying with product governance rules in PROD 3 (financial instruments and structured deposits), PROD 4 (insurance) or PROD 7 (funeral plans), do not need to comply with any additional requirements under the Duty’s products and services outcome.
Better clarity over key concepts such as “foreseeable harm” and “good faith”
The final rules and particularly the guidance provide more clarity around key concepts of the Duty. In particular, firms requested clarity around implementing the three cross-cutting rules. This has been addressed by including more explicit guidance on what it means to act in good faith, to avoid causing foreseeable harm and to enable customers to pursue their financial objectives. There are more examples and detail on what is and is not expected within each rule.
The introduction of the Duty does not extend the definition of consumer harm but firms will need to challenge themselves about what foreseeable harm means (for example, whether a product is unaffordable or unsuitable and how to deal with the dynamic nature of harm), recognising that all financial services products come with a level of risk.
The requirement to mitigate harm exists today. However, the Duty means that firms will need more data and evidence to demonstrate that they have acted reasonably to meet the three cross‑cutting rules.
Closed book/existing products
Whilst the Duty will not apply retrospectively to past business, the FCA is proceeding with its proposal to apply the Duty on a forward-looking basis to existing products and services which are still being sold to new customers, or closed products and services that are not being renewed or sold. The FCA is giving a further 12 months for firms to implement the Duty to closed books.
The FCA acknowledges that the rules under the price and value outcome are difficult to apply to closed books as they are linked to original contractual terms. Some of these contractual terms will be vested rights. Although the FCA states that it will not infringe on vested rights, it expects firms to seek alternative methods to prevent harm for existing customers under these products.
Firms are expected to assess whether a product exploits lack of knowledge / behavioural biases, has an overly complex charging structure and whether there is a good relationship between price and benefits.
Firms are expected to build the expectations set out above into the due diligence process and information gathering they carry out before purchasing a book of business from a third party.
Next steps for firms
- Plan board involvement given that implementation plans should be signed off by October 2022. Consider the role of second and third line of defence to support the board in assessing compliance with the Duty.
- Consider the final rules and whether it is necessary to prioritise certain aspects of the Consumer Duty programme in light of the staggered deadlines.
- Complete gap analysis of the requirements of the Duty against product lifecycles and customer journeys. Identify the firm’s responsibilities throughout the distribution chain, and identify enhancements needed to systems and controls, particularly in relation to third parties. Prioritise actions, based on the findings of the gap analysis.
- Develop and test the value assessment framework. Gather data on the fees and charges customers pay throughout their relationship with the firm and any additional benefits provided as part of the product. Leverage insight on how to assess factors including quality of service and non-financial costs.
- Develop and test a risk-based framework to identify customer communications that require review. Commence review of highest risk communications. Consider whether it is possible to consolidate or reduce the overall communications library as part of the review.
- Design and develop the consumer outcomes monitoring framework, including a focus on vulnerable customers and other customer cohorts. Investigate how differential outcomes could be measured between different groups of customers to embed into overall monitoring framework.
Read our other insights on the Duty
We have produced a wide range of thought leadership on the Duty. Our previous blogs set out the key implications of the Duty for:
- asset and wealth managers (see also the results of our client survey)
- retail banks and consumer credit firms
- non-bank payment firms
- Internal Audit
You can also read our insights on the lessons learned from the insurance and asset management sectors on assessing value.