CONSUMER DUTY: ARE YOU PREPARED?

The Financial Conduct Authority’s (FCA) new Consumer Duty, due to be implemented in July 2023, is being described by some financial industry experts as “the most important regulatory intervention in a decade.”

The reason for this statement is that the FCA is creating a new Principle for Business (PRIN). These principles form part of the FCA’s HighLevel Standards and they are described in the FCA Handbook as follows:

“The Principles are a general statement of the fundamental obligations of firms and the other persons to whom they apply under the regulatory system. They derive their authority from the FCA’s rule-making powers as set out in the Act1, including as applied by the Payment Services Regulations and the Electronic Money Regulations, and reflect the statutory objectives.”

A breach of a PRIN could potentially result in a fine from the FCA. For example, TSB Bank plc recently breached PRIN 2 for failing to exercise due skill, care, and diligence, and PRIN 3 for not taking reasonable care in organising and controlling its affairs responsibly and effectively, with adequate risk management systems, in the retail banking sector. The FCA imposed a financial penalty of £29.75 million.

Whilst this is a particularly extreme example, it highlights the fact that you must NOT breach these Principles of Business, and watch out if you do!

As of 31 July 2023, there will be a new Principle 12 which sets out that “A firm must act to deliver good outcomes for retail customers.”

Principle 12 is considered to impose a higher and more exacting standard of conduct than current PRIN 6 – “A firm must pay due regard to the interests of its customers and treat them fairly.” and PRIN 7 – “A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading.” Failure to comply with Principle 12 may lead to FCA enforcement action resulting in fines and associated damage to reputation.

The Consumer Duty is structured to consist of three core elements: y Principle 12 y The Cross-Cutting Rules y The Four Outcomes

Principle 12 reflects the overarching, high standard of behaviour required of firms by the FCA. The Cross-Cutting Rules then further develop the FCA’s expectations for firms in delivering good consumer outcomes, by applying the following requirements: y Firms must act in good faith toward retail customers y Firms must avoid foreseeable harm to retail customers y Firms must enable and support retail customers to pursue their financial objectives

Principle 12 and the Cross-Cutting Rules are then supported by the Four Outcomes which consist of rules and guidance setting out more detailed expectations for firm conduct in four particular areas: y The products and services outcome y The price and value outcome y The consumer understanding outcome y The consumer support outcome

The next date to be aware of is the end of April 2023, when the FCA has advised: “Manufacturers should aim to complete all the reviews necessary to meet the four outcome rules for their existing open products and services and have shared with distributors to enable distributors to meet their obligations under the Consumer Duty.” Therefore, if you have not heard from the product/service manufacturer by then, and if you are unsure of what your obligations are, we suggest you contact your financial product/service manufacturer to understand how you are going to meet your obligations under the Consumer Duty.