UK Financial Conduct Authority Publishes Final Rules and Guidance for New Consumer Duty07/27/2022The U.K. Financial Conduct Authority has published its final rules and guidance for the new Consumer Duty, which is intended to establish clearer standards for consumer protection across the financial services industry. The FCA conducted two consultations, one in May 2021 and another in December 2021 (following its earlier Discussion paper and Feedback Statement in 2018/2019). The final rules and guidance take account of the feedback received to those consultations.
The new Duty will apply to all regulated firms, including those in the payments and e-money sector, across the distribution chain, that can influence material aspects of the design, target market or performance of a relevant product or service. This will include regulated products and services, as well as unregulated products and services which are ancillary to them. The new duty applies only when products are offered to prospective or actual retail customers and certain small and medium enterprises. "Retail customers" for these purposes may vary by activity (e.g., deposit-taking activities, insurance, investments etc.) but will generally align with the scope of the FCA's sectoral sourcebooks for the particular activity in question (e.g., BCOBS, ICOBS, COBS and MCOB). Where SMEs are concerned, the Duty will also align with the scope of application of the sectoral sourcebooks.
The Duty will apply from July 31, 2023 for new products and services and existing ones which are open to sale or renewal. It will apply from July 31, 2024 for closed products or services. The rules will only apply on a forward-looking basis (even in the case of existing products), so will not cover actions taken before the Duty comes into force. The FCA has set out key expectations of firms during the implementation period before the rules come into force. For example, by the end of October 2022, boards should have agreed implementation plans which they can share with supervisors. By the end of April 2023, in-scope manufacturers of financial products will need to share with distributors the information necessary for them to meet their obligations under the Duty.
Amendments to the Duty, as consulted on
Some changes have been made to the rules as consulted on in December 2021. The main modifications in the final version of the Duty include the following:
- Additional guidance to clarify the scope of firms captured by the Duty. The meaning of firms that can "materially influence" a relevant product or service will not include, for example, those whose role is limited to operating within a mandate determined by another firm in the chain, or simply providing factual information to support another in-chain firm.
- Proportionality in applying the Duty. Unless regulatory rules or contractual obligations stipulate otherwise, firms will not be expected to oversee the actions of other firms in the distribution chain. However, firms will be obliged to notify the FCA if they become aware that another firm in the distribution chain is not fulfilling its Duty.
- Reversion to the original formulation of the second cross-cutting rule, that firms should avoid causing foreseeable harm. In the December 2021 consultation, the FCA had proposed simply to require firms to "avoid foreseeable harm" but following concerns that this may expose firms to liability for actions outside of their control, the FCA reverted to the original wording.
- Amendments to the term "average customer" to be replaced with references to customers in the target market for the product concerned or that were intended to receive the communication in question. It is hoped that this will protect vulnerable consumers who may not meet the standard of the average customer.
- Clarification that firms are not subject to both the Product Governance sourcebook and the product and services outcome under the Consumer Duty. Where firms follow PROD 3 as guidance, they may choose whether to follow the rules in PROD or those under the products and services outcome.
- As proposed in the December 2021 consultation, the FCA will not introduce a private right of action for breaches of the Duty, but it has introduced strengthened governance, accountability and redress requirements which it considers will provide some of the benefits of a PROA. This approach aligns with the current position – typically, a PROA for damages would be available for a breach of FCA rules, but not for Principles for Business.
Details of the final Consumer Duty
The final Consumer Duty comprises:
1. A new Consumer Principle (Principle 12), which requires firms to "act to deliver good outcomes for retail customers".
Principle 6 (to pay due regard to the interests of customers and treat them fairly) and Principle 7 (to pay due regard to the information needs of clients and communicate information in a clear, fair and not misleading way) of the FCA Handbook will be disapplied where the Duty applies (but will continue to apply where the Consumer Duty does not).
2. Three cross-cutting rules, which require firms to:
- Act in good faith
- Avoid causing foreseeable harm
- Enable and support retail customers to pursue their financial objectives
3. Four outcomes which firms should achieve:
- Products and services should be fit for purpose
- Fair price and value
- Consumer understanding, so that consumers make informed decisions about financial products and services
- Consumer support, so that consumers realize the benefits of the products and services they buy and are supported in pursuing their financial objectives
The FCA hopes that the new regime will lead to better outcomes for consumers. The FCA was arguably under pressure to improve outcomes for consumers after being criticized for its handling of major investment firm failures in recent years which have caused millions of pounds of losses to consumers.
The rules will not at this time apply to cryptocurrency investments or loans from buy-now-pay-later firms, as these industries are not currently regulated by the FCA. The U.K. Government is consulting on bringing stablecoins used as payment within the regulatory perimeter as part of reforms set out in the UK Financial Services and Markets Bill. The U.K. Government has also announced plans to require firms offering BNPL products to be FCA-approved and will consult on draft legislation to this effect by the end of 2022. It remains to be seen precisely how these changes will be implemented and the extent to which the Consumer Duty may apply to such firms in the future.
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