Consumer Duty: The Final Countdown
Four years on from the first discussion paper on duty of care and potential approaches, the Financial Conduct Authority (FCA) has published its final Policy Statement (PS22/9) and guidance (FG22/5) on its new Consumer Duty. Below outlines a legal perspective, written by Monica Gogna and Ayesha Corrine Singh .
The new Consumer Duty and the introduction of a new Principle for firms to “act to deliver good outcomes for retail customers”, reflects a fundamental mindset change by the FCA. Despite, the relatively long lead up to the publication of the final rules last month, the question remains whether firms across the financial services industry will be able to act quickly enough to adapt to this shift in mindset and to comply with the FCA’s requirement to deliver retail customers with better outcomes.
The FCA has stated that the introduction of the new Consumer Duty rules will lead to greater competition and innovation within financial services, with the focus on outcomes seen as a positive move towards ensuring a better level of protection for consumers. There is much merit in this, but for firms that operate across multiple regions, these rules will introduce a layer of complexity when it comes to cross-border product governance.
The expectations of the FCA and the requirements imposed by the new rules are high, firms should remember that the Consumer Duty is underpinned by the concept of reasonableness. This ensures that it is recognised that the frequency and nature of monitoring that the FCA requires will depend on individual circumstances such as the size of a firm and its relationship with the customer in the distribution chain. The FCA has made it clear it will apply the rules proportionately.
While much of the rules remain consistent with what was published in the 2021 December Consultation Paper (CP21/36) and should not greatly impact firms already on their implementation journey, it does provide some clarity and certainty on the FCA’s expectations.
An extension of time – but not by much
While there has been an extension to the implementation timetable to 31 July 2023 for new and existing products, it remains tight, and realistically firms will need to carry out the bulk of the work in the next six to nine months.
Yet there is some ‘good news’ from the FCA who recognised the challenges firms will face and as a consequence introduced a phased approach by extending implementation for new and existing products and services that are open to sale (or renewal) by three months from April 2023 to 31 July 2023 and giving firms an additional year to implement the new rules for products and services held in closed books (i.e., 31 July 2024).
However, even with this extension, firms are required to follow several key steps (detailed below), including the approval by the Board of the firm’s Consumer Duty implementation plan, by October 2022.?
The FCA’s key milestones and expectations over the next year
The FCA has set out key milestones it expects firms to comply with over the coming nine months before implementation next July:
Firms of all sizes will need to assess what is required of them to bring their existing products, infrastructure and frameworks in line with the expected standard. Yet, in line with the introduction of the new Principle, firms should take into account that whilst there will need to be a focus on required re-papering / re-documenting, the FCA’s key expectation is that firms should be prepared to demonstrate how the Consumer Duty is embedded at the heart of a firms’ strategy and business objectives.
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Is it a re-hash of existing rules?
Whilst there is no doubt that over the last decade or so, firms have already spent considerable time and resources to implement a number of key regulatory changes, including the implementation of MiFID II and in particular its product governance regime, firms need to recognise that the Consumer Duty brings in a need to take additional steps to ensure they will be fit for purpose under the new regime.
This will mean that firms should not approach these rules as a requirement for a simple ‘check-in’ of existing processes and policies. They will need to go further to ensure they meet the new expectations. For example, firms will now be expected to demonstrate at every stage of the regulatory lifecycle, how their business models, their actions, and their culture are focused on ‘good’ customer outcomes.
Both manufacturers and distributors will need to go further in their consideration of whether a product / service meets the objectives of the target market, regardless of whether they have a direct or an indirect relationship with the retail customer. This is likely to require a review of current existing distribution arrangements and in particular a focus on amending and executing any agreed service level arrangements to ensure they now meet the new Consumer Duty standards.
Where currently manufacturers are required to undertake a scenario analysis to assess the risks of poor outcomes for end clients, under the new rules greater responsibility is placed on manufacturers to ensure they are reviewing and testing the products / services and monitoring the customer outcomes on a continual basis. In addition to this, firms will need to demonstrate that by conducting this exercise they will then take appropriate action where such testing identifies any circumstance that may adversely affect a retail customer.
The communication channels between manufacturers and distributors will become even more important. There will be a need to address the imbalance that can at times occur between these parties in agreements to make sure that each party is able to adhere to the regulatory expectations now required of them – including the need to share information as appropriate across the product lifecycle.
Data is key
While not a new concept and a challenge already faced by many firms, information exchange between manufacturers and distributors will need to be enhanced. The quality of a firm’s data and management information will be the basis on whether a firm succeeds or fails in its implementation of the Consumer Duty. As part of the FCA’s transformation to become a data-led regulator, the focus will no longer be on firms demonstrating their adequate policies and procedures but will be focused on whether they can provide adequate data to demonstrate compliance – the burden of proof will now be on firms.
Accountability for compliance
It is clear that the new Consumer Duty is a major shift of mindset for financial services firms. It is intended to address a decades long journey by the regulator who has evolved through the treating customers fairly regime, the retail distribution regime, then MiFID II, to now believing it has achieved its aim of setting higher and clearer standards of consumer protection across the industry. By placing the burden of proof on firms directly, there is a clear indication that the regulator will no longer accept firms to point simply to their policies, processes and agreements but now expects firms to demonstrate compliance and demonstrate quickly. Firms will need to be prepared for a new robust approach by a regulator who will seek to address any concerns through a focus on outcomes for end clients.
If you would like to discuss any of the above further, or how Consumer Duty impacts your firm, please do get in touch.
The views reflected in this article are the views of the authors and do not necessarily reflect the views of the global EY organisation or its member firms.
Partner at Ernst & Young
2 年Thanks Monica. A really timely and relevant posting which has implications for investment advice in areas such as private assets, ESG and digital assets, as well as implications for how the EU might respond given this high-profile UK regulatory initiative. The legal implications will be significant...