“We want to innovate with our new consumer obligation, which will ensure that all companies consider the real impact of their services and the suitability of products on the consumer” Speech by Nikhil Rathi, Managing Director of FCA, delivered at the Peterson Institute for International Economics, July 14, 2022.
The UK’s Financial Conduct Authority has released its policy statement and final rules and guidance setting out how it intends to implement its new consumer duty in Policy Statement 22/9 and Final Directive 22/5.
The core elements of FCA’s proposals have not changed from those set out in its December 2021 consultation paper CP21/13, although there are some important clarifications. The accompanying non-manual guidance contains important clarifying changes and is essential to understanding FCA’s intentions. In response to feedback from numerous companies, professional bodies and advisors, the implementation timeline has been extended and is staggered. Of end of July 2023 the consumption obligation will apply to all new products and services and to all existing products and services that remain on sale or open for renewal. Of end of July 2024 the consumption obligation will also apply to all closed products and services.
THE PROPOSALS IN BRIEF
The UK regulatory regime under the Financial Services and Markets Act 2000 has always included a number of high level principles as well as detailed rules. The FCA currently has 11 Principles for business, while the Prudential Regulatory Authority has 7 Core Rules.
The consumer obligation will take the form of a new principle, Principle 12, as follows:
“A business must act to deliver good results to retail customers.”
Unlike the other Business Principles, the consumption obligation will be complemented by two other elements: the “Cross-Cutting Rules” and 4 Outcomes, which together further define the FCA’s expectations of businesses subject to the obligation to consume.
The FCA said the consumer duty sets a higher standard than existing Principles 6 and 7 (the requirements to treat customers fairly and to communicate in a clear, fair and not misleading way), so these principles will be disabled. whenever the consumer Duty applies.
The obligation applies to all activities of a company, from high-level strategic planning to one-on-one customer interactions.
EXPECTATIONS AND STEPS IN FCA IMPLEMENTATION
Although the FCA has, on the face of it, granted an additional three months for the implementation of new and open products and services, this is still extremely difficult for regulated companies. This is especially true because the FCA has set milestones that it expects companies to meet during this period and will monitor companies’ progress.
By end of October 2022 company boards must have agreed on their implementation plans and be able to demonstrate that they have reviewed and challenged the plans to ensure they are deliverable and robust to meet new standards. Companies should expect to be asked to share implementation plans, board documents and minutes with supervisors and be asked about their content.
Manufacturers must share with distributors by the end of April 2023 the information necessary to fulfill their obligations under the law (for example with regard to price and value) and must have identified the necessary changes to be made to existing open products and services. These changes and remedies must be implemented by the end of July 2023.
Companies must inform the FCA if, in the course of implementing the obligation, they plan to withdraw or restrict access to products or services. Companies must alert the FCA if they believe they will not be able to complete all the work needed to comply before the implementation deadlines. Companies should take a risk-based approach and prioritize implementation work that is likely to have the greatest impact on consumer outcomes, for example, reviewing the most complex products first or the most risky and the most important communications.
KEY AREAS TO FOCUS ON
The potentially global nature of the consumption obligation can make it difficult to know where to start. To some extent, FCA has contributed to this by identifying 4 key results.
The extent to which a company needs to make changes to its current products and processes in order to implement the consumption obligation will depend on its starting point in terms of current compliance with a number of existing obligations, many of which have been the focus of recent FCA initiatives.
The consumption obligation has a particular overlap with existing obligations such as:
- Vulnerable customers
- Just value
- Product governance and oversight
- Existing rules requiring companies to act in the best interests of customers, such as COBS 2.1.1R(1).
The FCA has helpfully clarified that companies to which the PROD section of the FCA Handbook applies and which comply with it will be deemed to comply with the consumer obligation. Companies that currently follow PROD as a guide may choose to treat these PROD requirements as the relevant rules going forward.
Similarly, businesses already subject to fair value rules and complying with them will be deemed to satisfy the price and value resulting from the consumption obligation. The FCA has helpfully clarified that companies are not required to remake or challenge the value assessments of other companies, but are only responsible for the prices they control, although this will have to be considered in light of the value overall that the customer will receive. For example, the FCA guidelines state that a financial adviser, being at the end of the distribution chain, will often have the clearest oversight of the client’s overall position and an overview of the total proposition, and should therefore consider the overall results provided for the client, including the overall cost.
Importantly, the FCA has also confirmed that the consumption requirement will not change the advice/guidance limit.
Regarding the objective of understanding the customer, the FCA said that where companies are already subject to regulatory and legal requirements to disclose complex information (such as disclosure requirements for UCITS funds) with which customers are likely struggling, businesses should consider what additional steps they can take. to support customer understanding.
The FCA stressed that it expects all companies to do more in the area of governance with respect to the consumer obligation, and leadership from boards and senior management will be essential to ensure the effective application of the consumption obligation. Additionally, in what is a new development for the FCA in its approach to implementing regulatory changes, a company’s governing body must at least annually review and approve a report on the results received by customers from details of the business and confirm whether the governing body is satisfied that the business is meeting the consumption obligation.
All senior managers will be responsible for ensuring that the company’s activities comply with the requirements of the consumer obligation on an ongoing basis.
In addition, the FCA will amend individual rules of conduct in its code of conduct source book by adding a new rule requiring all rules of conduct staff to “act to deliver good results to retail clients” when the activities of their business falls within the scope of the consumption obligation. Companies will therefore have to provide training for all staff subject to the rules of conduct to explain this additional rule and its implications.
SCOPE OF THE CONSUMPTION OBLIGATION
You would be forgiven for assuming that the consumer obligation will only apply when a business is dealing with a consumer, that is, someone acting for purposes outside of their trade, business or profession. However, the definition of “retail customer” for these purposes also includes “any person who is, or would be, the ultimate retail customer in the distribution chain, whether or not he is a direct customer of the business”. (This is an example where the scope of Principle 12 will be broader than the scope of Principles 6 or 7).
The FCA clarified that this means that the consumption obligation applies to all companies that have a material influence on or determine retail customer results. For example, an investment bank that designs a structured product for final sale to retail clients would be subject to the duty. In contrast, an investment bank providing wholesale instruments that a third-party firm uses independently as components of a retail product would not. Similarly, a fund manager of a fund restricted to institutional investors would not be subject to the obligation if a third party, without its involvement, invests in the institutional fund via a retail fund of funds.
Furthermore, the consumer obligation applies not only to consumers with whom businesses have a contract, but also to potential customers and may include customers who have been refused a product or service.
WHAT SHOULD COMPANIES DO NOW?
In order to meet the FCA’s end of October 2022 milestone for councils to have agreed implementation plans, as companies have not yet done so, they should urgently carry out a full assessment the application and impact of the consumption obligation in all areas. of their regulated activities. Given the sometimes confusing scope of the consumption obligation, this may not be straightforward.
Companies should also consider how their current products and services might need to be adapted in order to meet consumer obligation requirements, as well as map customer journeys to identify particular areas where results may be affected by poor processes or behaviors. .
Businesses need to consider the distribution chains they are part of, and manufacturers need to consider whether their distribution methods and monitoring are consistent with their obligation under the consumer obligation to deliver good results.
Finally, careful consideration should be given to governance and oversight – as always, the tone of leadership will be key to ensuring meaningful implementation, particularly where this may require a culture shift or a significant change in management. product design or distribution channels. The FCA sees Consumer Duty as a major cultural shift.