On 27 July 2022 the FCA published the final rules for the Consumer Duty. The largely consistent direction will be welcomed by firms, many of whom will have already invested time and effort into preparing for the new rules. There's no doubt, however, that this is a change that will impact each business differently. In order to deliver value to customers and firms alike, implementation will require tailored approaches specific to each firm's own needs, and they'll need to consider the impact on their own business, and their interactions with other regulated and non-regulated third parties.
Now we have the final rules, they should provide focus and direction around what should be prioritised, and it will require firms to be smart, deliver on really careful planning and leverage their current arrangements to focus on the true gaps.
While the implementation deadlines may now seem further away, there can be no doubt as to the considerable work that will be required over the coming months. There's now no reason to delay impact and gap analysis work to enable every firm in the financial services sector to identify how the new Duty affects them. It's important that firms have decided how they'll prioritise work to evidence delivery against new expectations across the customer journey for new and existing products or services that are open to sale or renewal by end of July 2023.
All senior management teams should also be very mindful of interim dates that the FCA has set out, to ensure that firms have no doubt as to the expectations on them during the implementation period. Time is of the essence and firms need to be smart about leveraging existing good practice and maintaining the momentum of work to date. Careful, proactive planning will ensure firms are ready in time and enable a smoother transition.
While much of the direction of the draft rules and earlier consultation has been maintained in the final version, there are some stand out developments that firms need to aware of:
While the FCA’s final Consumer Duty rules apply right across the industry, there'll be impacts and considerations specific to each sector.
The insurance sector is already subject to requirements applicable to product governance, pricing and value, and will be able to rely on compliance with PROD 4 to demonstrate compliance with the products and services outcome and the price and value outcome. However, the other two outcomes extend materially outside current expectations of the Insurance Distribution Directive (IDD) or the General Insurance (GI) Pricing Practices reforms, and show an important shift toward firms having to be more proactive in their approach to customer outcomes across the entire life cycle of their products and services.
The insurance industry was expecting further clarification on the scope of the Duty in respect of commercial customers, particularly SMEs, from the FCA. The regulator’s position remains the same but glossary definitions and guidance provide some further indication of intent. In addition, the FCA has clarified how the rules apply to group insurance policies.
New FCA glossary updates include a 'Retail Market Business' definition, which clarifies what's not in scope (pertinent to insurance business): '(4) activities carried on in relation to contract of large risks for a commercial customer or where the risk is located outside of the United Kingdom.'
This brings some clarification on the application of the definition of large risk that includes aircraft and vessels. Insurance policies targeting owners of private aircraft and vessels/boats will fall within the scope of the Consumer Duty as the policyholders won't be a commercial customer.
There's also further clarification that the Consumer Duty doesn't apply to 'insurance group policy distribution'. The FCA states, however, that the Duty will apply to the manufacture of these products as the end-user is an individual in most circumstances. Therefore, by way of example, firms should still be mindful of their target market understanding of insurance products, such as sport club group policies, as the policyholder’s level of understanding will be different to a large corporate buying employee benefits group policies.
The FCA also provides further guidance on the information firms should consider providing to customer when declining insurance applications. The travel insurance signposting rules haven't been extended to other products, however firms should consider if they could direct declined applicants to other parties who could provide guidance or support in achieving their objectives.
Firms in the banking and lending sector will particularly welcome the extensions to the implementation period, given that the April 2023 date has caused significant concern since it was first announced. In the immediate term, careful planning and prioritisation will still be key – the new deadlines remain challenging – but this does at least provide some additional breathing space for firms to plan effectively. Beyond the main headlines, there's little new in the Policy Statement for firms in this sector, so it's more a case of 'full steam ahead' than having to think about taking a different track. But there are a few areas where the FCA has provided some additional clarification.
In response to some suggestions that loans given to businesses under the coronavirus bounce back loan scheme (BBLS) should be de-scoped completely, the FCA has clarified that while the Consumer Duty doesn't apply to the provision of BBLs, the perimeter for debt collecting is wider. BBLs are already subject to existing rules and guidance, including those on default and arrears in the Consumer Credit sourcebook (CONC), elements of the Systems and Controls (SYSC) sourcebook, and the Code of Conduct sourcebook requirements. Consequently, the FCA has determined that it would be inappropriate to take a different position to the scope of existing rules and guidance for BBLs. Firms involved in collections activity for these loans will therefore need to fully comply with the Consumer Duty, as originally proposed.
The FCA has confirmed that Consumer Duty rules don't apply to activities where an FCA sourcebook currently includes an exemption or optout allowing it, or certain aspects of it, to be disapplied to certain customers. The regulator gives the example of how the new requirements follow the position in mortgages and home finance: conduct of business sourcebook (MCOB) and don't apply to unregulated buy to let contracts or large business customers. Where only certain aspects of a sourcebook apply, the new requirements will apply only to the areas covered by those rules. For example, regulated buy to let mortgages are subject only to rules on financial promotion in MCOB and only those elements of the Consumer Duty relevant to customer communications will therefore apply.
It's also a case of no change regarding the protections for SMEs. The FCA has rejected the suggestions from some quarters that a single definition should apply across all sourcebooks and that larger SME customers should be out of scope. Instead, the regulator is standing firm and applying the Consumer Duty as per the approach in existing sourcebooks: if the SME meets the definition of a retail customer in those sourcebooks, the Duty will apply.
The FCA has also clarified its position on fair value assessments for products and services that don't have any costs for the consumer (eg, free-if-in-credit bank accounts or debt advice funded through other sources). It doesn't expect firms to do a value assessment for these products or services. However, a word of caution - manufacturers providing free products or services should still consider if their customers are paying in nonmonetary terms, and whether those costs are reasonable in relation to the product’s benefits. For example, customers may pay for their current accounts in the form of foregone interest, associated fees and charges or using their data.
The FCA recognises the challenges faced by firms purchasing mortgage and credit books in complying with the Consumer Duty. However, acknowledging the risk of regulatory arbitrage (firms selling off credit books to avoid having to undertake fair value assessments, for example), the regulator won't be waiving the new requirements for the purchaser. Instead, the FCA will require those selling such books to provide the information needed by the purchaser to be able to comply with the Duty.
Firms in this sector with a significant proportion of vulnerable customers would be wise to take notice of the FCA’s change of stance on communications needing to be understood by the 'average customer'. Firms will instead need to ensure their communications are likely to be understood by “the customers intended to receive the communication”, which implies more tailoring will be required.
The application of the final Consumer Duty rules for the investment management sector is similar to other sectors, in that the FCA hasn't departed significantly from its proposals in the two consultation papers, and has instead sought to provide more clarity and guidance on how its rules should be interpreted. Investment managers are likely to welcome the longer and phased implementation timetable: firms must apply the Duty to new and existing products and services that are open to sale (or renewal) from 31 July 2023 but have longer – until 31 July 2024 – to apply it to products and services held in closed books. However, this longer transition period is likely to come with higher regulatory expectations that firms comprehensively comply with the Duty’s rules from day one.
The FCA has provided clarification and/or further guidance on some important aspects of the Duty’s rules that are particularly relevant to investment management firms.
The regulator recognises the complexity that exists where products or services, eg, investment funds, are bought by both retail and non-retail customers, but doesn't consider that it would be appropriate to exclude such products or services from the scope of the Duty.
The Duty applies to all regulated firms in a distribution chain that can determine or materially influence retail customer outcomes. However, the FCA has provided additional guidance on what it means by 'material influence' and examples of where this is unlikely to apply. The Duty wouldn't apply, for example, to a firm whose role is limited to activities like operating within a mandate determined by another firm in the chain. The FCA also clarifies that firms are responsible only for their own activities and don't need to oversee the actions of other firms in the distribution chain.
For wholesale firms, the FCA clarifies that the impact of the Duty applies proportionately, and only to the extent that a firm is responsible for determining or materially influencing retail customer outcomes. The rules are also amended to exclude primarily wholesale instruments, where this won't have a negative impact on retail customers.
There's additional guidance to recognise that, where the distribution chain includes non-UK distributors selling to non-UK customers, UK manufacturers won't be able to gather the same amount of information as when only dealing with UK-based firms. In this case, they should use any available information to support their work under the Duty, but wouldn't be expected to obtain information from firms that aren't subject to the Duty.
The FCA has confirmed that it will apply to the manufacture and distribution of investment companies, including investment trusts.
The FCA has also clarified that firms aren't required to duplicate fair value assessments. Firms are responsible only for the prices that they control and aren't required to redo or challenge other firms’ value assessments. But distributors do have an important role in products getting to market and so must ensure that their or others charges across the chain don't cumulatively result in the product ceasing to provide fair value. Moreover, manufacturers should provide distributors with the results of their value assessment, but they don't have to include sensitive information such as breakdown of firms’ margins or risk-based pricing.
The FCA has also highlighted some important differences from the consultation proposals for investment managers.
The existing product governance provisions in PROD 3 apply as guidance to asset managers, and some firms in this sector follow the guidance as if it were rules. PS22/9 includes new application provisions (PRIN 2A.3) to clarify that firms aren't subject to both sets of rules (ie, PROD 3 and Consumer Duty product outcome rules). Firms that currently follow PROD 3 as guidance may choose whether to follow the rules in PROD or those under the Consumer Duty products and services outcome. Failing to comply with PROD would be taken as failing to comply with the products and services outcome.
Similarly, the FCA has confirmed that firms that meet the value rules in PROD 4 for non-investment insurance, or COLL 6.6, COLL 8.5 or COLL 15.7 for asset management, will meet the expectations of the price and value outcome.
And the FCA agreed that it would be unhelpful if firms took a different approach to assessing value under the Duty as Independent Governance Committees (IGCs) and Governance Advisory Arrangements (GAAs) do under the COBS 19 rules. So, while firms complying with COBS 19 are still required to meet the FCA’s expectations under the price and value outcome, the FCA has changed the Consumer Duty rules so that they must use assessments carried out by their IGCs/GAAs to see if their products provide fair value.