Consumer Duty: hitting the ground running

The publication on 27 July of the FCA’s policy statement on the new Consumer Duty, has proved particularly timely, given the pressures consumers are facing in terms of cost of living, inflation and interest rate rises.

Championing investors interests
The original discussion paper - ‘a duty of care and potential alternative approaches’ was issued back in 2018 (DP18/05) – a world away from the financial realities facing the market in 2022. Two hefty consultations followed concluding in mid-February 2022. However, the publication of the policy statement on 27 July has come at a time when the need to protect consumers, demonstrate fair value and support investors’ best interests has been exercising policymakers’ minds with particular urgency.

The FCA reiterated its support for the core principle of consumer protection in this year’s business plan and strategy, and it is clear that the ‘Duty’ is going to be the centrepiece of its drive to champion investors’ interests in increasingly uncertain and challenging market conditions.

Industry pushback
The proposals, as consulted upon, were not without their critics. There was pushback from some corners of the industry against the perceived tightness of the proposed implementation period (originally mooted at nine months), and the cost of implementing such a wide ranging regulatory change programme. Some also questioned whether the new rules might ultimately result in additional charges for consumers and be a tricky obstacle as the UK sought to become a more internationally competitive jurisdiction. It was clear that the new regime, though a priority for policymakers, would represent a substantial change and one which would affect swathes of industry applying across the distribution chain.

The policy statement was therefore reviewed by firms with great anticipation to check the extent to which this robust feedback had been reflected. There were improvements in terms of the implementation timeframe, clarifications in terms of PROD 4 and COLL equivalence and further details on some unclear definitions. The increased timeline (pushed back from April 2023 to July 2023 for new and existing products and July 2024 for closed-book products) is a particularly important example of how the feedback has been taken on board.

New challenges
There are some new challenges however: the benefits of the newly extended timeframe are arguably checked somewhat by the requirement that firms’ boards have now agreed and signed off their implementation plans with the deadline for this now having passed at the end of October 2022. This means that firms have had to hit the ground running to ensure their plans go through all the necessary governance hoops, which for may will have proved challenging especially for larger firms with long lead times for preparation and syndication of board papers.

Broadly speaking however the substance of what is being proposed is unchanged. Firms will need to show how they are acting to deliver good outcomes for retail customers (known as the ‘consumer principle’). There are a series of cross-cutting rules which firms will need to follow: acting in good faith, avoiding foreseeable harm and supporting customers to pursue financial objectives. There are also a series of prescribed outcomes relating to products and services, price and value, consumer understanding and consumer support. Firms will need to demonstrate how they are delivering outcomes against each of these and the FCA will take a close interest in how firms are monitoring and reporting.

There are also new requirements for boards. They will be required to sign off on an annual report attesting to the extent to which the firm is delivering good outcomes. It is also expected that boards will appoint a ‘champion’ to ensure that the principles of the Duty are reflected in board discussion, and evidenced across governance, strategy, leadership and people. This should also be reflected in terms of executive incentives.

No time to lose
While the timelines may be the most noteworthy example of how the Duty has evolved to reflect industry views, it nevertheless remains a substantial package of reform. All firms across the distribution chain which can influence consumer outcomes will now be in the midst of reviewing the policy statement and progressing with implementation programmes, and there is no time to lose.

The journey towards implementation has started, and it has started at quite a pace.