The FCA’s Consumer Duty initiative aims to increase the current level of consumer protection in the retail financial services market. The FCA has now published its second consultation paper (CP) (PDF 2.26 MB) on this topic detailing the proposed rules and guidance.
For details of the initial CP, please click here.
- The FCA opt for ‘good outcomes’ for the wording of its new Consumer Duty principle.
- The consultation response deadline is 12 February 2022 and the final rules are to be published by 31 July 2022. However, the FCA is only proposing a 9-month implementation period. This is unlikely to be long enough for the majority of firms - especially given the materiality of change and need for data and technological driven solutions to evidence good outcomes for consumers.
- The new principle, rules and guidance will sit within the FCA’s High Level Standards Principles (PRIN) sourcebook. They will essentially apply to all firms currently required to comply with a Conduct of Business (COBs) sourcebook.
- Cross-cutting intentions remain and are now supported with further detail about the FCA’s expectations.
- The four outcomes are also unchanged:
- Products and services: New product governance requirements to be introduced, which although they will sit in PRIN, are aligned in approach with existing Product Governance arrangements (i.e. PROD) applicable to some firms.
- Consumer Support (renamed from Customer Service in the initial CP): contains a focus on embedding the proposed outcome across the entire customer journey and relevant areas across the business and functions within a firm.
- Pricing and Value: develops the requirement for all firms to develop a framework to objectively assess pricing factors to determine the value products and services deliver.
- Consumer understanding (renamed from Communications in the initial CP) contains guidance to elaborate on existing clear fair and not misleading expectations and additional general requirements relating to outcomes.
- Private Right of Action (PRoA) is not being introduced as part of Consumer Duty – but will be kept under review by the FCA.
The second consultation paper on the Consumer Duty re-emphasises the FCA’s intention for a regime where “firms compete vigorously in the interests of consumers”. Whilst acknowledging the feedback received, the FCA is pressing on with its initiative, therefore the impact of its regulatory ambitions remains undiminished.
Consumer Duty Principle
The FCA has settled on “A firm must act to deliver good outcomes for retail customers” for the Consumer Principle. This was the option most supported by the majority of respondents and will become Principle 12 within PRIN. In reality, the choice of definition makes very little difference as with either, the FCA’s intention was to drive a change in firms’ behaviour with a focus on consumer outcomes. Interestingly, Principles 6 and 7 will be disapplied where Consumer Duty principle applies. Principles 6 and 7 will therefore only continue to apply to certain SMEs and wholesale business. The FCA emphasise the Consumer Duty Principle imposes a higher standard of conduct than Principles 6 and 7.
The cross-cutting rules approach remains, and are now accompanied by the draft Handbook rules for their implementation. Following minor amendments, firms must
- act in good faith toward retail customers
- avoid foreseeable harm to retail customers
- enable and support retail customers to pursue their financial objectives
In response to industry feedback, the key change from the first CP is the removal of “all reasonable steps”. This is a welcome move. The FCA acknowledges this was not the best way to achieve the aims of the Consumer Duty as firms may simply seek to focus on compliance with the rules rather than ensuring good outcomes for their customers.
The FCA has provided more clarity on their expectations:
- Products and services: Creating new product governance requirements, within PRIN, differentiating between manufacturing and distribution roles which are aligned to the FCA’s existing approach in PROD. In simple terms, it’s PROD-lite. Whilst proportionate for firms not currently subject to PROD, firms that have products or services in both PRIN and PROD regimes will need to decide whether to operate a single product governance framework and policy.
- Pricing and Value: Requirements added for all firms to develop a framework to objectively assess pricing factors to determine the value products and services deliver. Critically, however, the FCA does not propose to set detailed requirements for the fair value assessment. Instead, it proposes to set out the factors firms must consider, as a minimum, to assess value. This is similar to the approaches we have seen the FCA adopt elsewhere (e.g. GI pricing practices case study).
- Consumer support (renamed from Customer Service): Firms to consider customer support in a wider context. The paper includes examples/guidance demonstrating this approach. Whilst the intention has not changed, the FCA has softened the wording away from ‘undue hindrance’ language used in the first paper to ‘unreasonable barriers’.
- Consumer understanding (renamed from Communications) Additional guidance proposed to elaborate on the ‘clear fair and not misleading rule’ and additional general requirements relating to outcomes. The FCA details that the proposals build on, and go further than, Principle 7 by requiring firms to focus much more on consumer outcomes and understanding throughout the customer journey. As a result, firms will need to monitor and, where appropriate, test and adapt their communications so they can demonstrate they have acted to deliver good outcomes and support consumers and their understanding.
Case Study: GI Pricing
The FCA’s new rules on General Insurance (GI) Pricing Practices have introduced measures aimed at ensuring firms across the market offer fair value products – similar to those proposed in the Consumer Duty consultation. The measures are underpinned by detailed product governance requirements, which demonstrate the FCA’s approach to how firms should consider value when launching or reviewing products. KPMG has been working with a wide range of GI and Protection providers to enhance and update their product and pricing governance frameworks throughout 2021. Key lessons included:
- The need to form an overarching pricing and assessment of value framework to be applied as consistently as possible across all products and services, with a broad range of inputs from across product, brand & marketing, operations, digital and claims.
- The need to underpin the approach with robust insight ensuring product value is regularly assessed from a customer perspective, supported by key performance metrics and minimum value thresholds.
- Evidencing how the distribution arrangements support the intended value and maintaining strong oversight of distribution chains.
- Documenting key decisions relating to pricing and product value, ensuring these clearly demonstrate consideration of customer outcomes and have been approved by an appropriate level of governance.
- Achieving a genuine and objectively robust balance between the firm’s commercial interests and those of the end retail customer.
Expansion of existing High Level Standards sourcebook
All new rules, requirements and guidance will form part of the FCA’s High Level Standards Principles (PRIN) sourcebook. This is a straightforward and simplified approach rather than seeking to fully integrate into existing handbooks with a significant volume of changes. All existing requirements to remain in place. The FCA commits to use the implementation period to identify whether there are any areas of the Handbook that may require amendment, in light of the Consumer Duty.
By placing the new requirements within the High-Level Standards sourcebook, the FCA communicates the significance of the rules and guidance and the importance that the FCA attaches to it.
Private Right of Action (PRoA)
The FCA have deferred further consideration on a PRoA pending evaluation of whether the proposed measures, once embedded, are delivering the desired outcomes thereby negating the need for a PRoA.
The FCA has also set out in the paper: its expectations of firms monitoring consumer outcomes, how the FCA will regulate and supervise the Consumer Duty: and how its Senior Managers and Certification Regime will be developed to accommodate the new Consumer Duty.
KPMG professionals are conducting fuller analysis of the proposals and will publish more detailed commentary, analysis and insight early in the New Year. You can also access our previous papers with analysis on the drivers and potential impacts of the Consumer Duty by clicking here.
KPMG will be holding another Consumer Duty webinar on 25 January 2022 to discuss the evolving proposals. To register for the event, please click here.
As you start thinking about the implications, please do get in touch with one of the contacts below to explore further.
The article provides a short summary of key takeaways from KPMG’s recent webinar on the FCA’s Consumer Duty proposals.
The article provides a short summary of key takeaways from KPMG’s recent webinar.
What is the FCA seeking to achieve with its Consumer Duty in developing products and services for distinct target markets?
What is the FCA seeking to achieve with its Consumer Duty in developing products.