Final rules published for the new Consumer Duty – what should be on your radar?

Extended implementation period

The good news is that, in response to industry feedback, the FCA has acknowledged the need to allow firms more time to properly implement the new rules and guidance and has extended the implementation period.  

If not already doing so, firms should prioritise implementation of the Consumer Duty in relation to new and existing products and services that are open to sale or renewal for retail customers. The deadline for doing so is now 31 July 2023. In addition to the hard 31 July 2023 deadline, the FCA has set out its expectation that manufacturers should share key information with distributors three months ahead of the implementation deadline, to enable all firms to comply in time. 

Whist much of the heavy lifting required to adapt policies, procedure and governance will have been completed during this initial implementation period, firms have a further 12 months (until 31 July 2024) to review closed books and ensure the duty has been applied in full to products and services no longer open to new customers. 

Enhanced governance and accountability 

The FCA has held fast on its decision not to implement a private right of action (PROA) for breach of the Consumer Duty. However, in response to continued pressure from consumer-focused organisations it has made a number of amendments to the final rules and guidance, intended to “help replicate the benefits of a PROA”. 

1. By the end of October 2022, firms’ boards (or equivalents) are expected to have agreed their plans to implement the Consumer Duty. Boards must be able to evidence they have scrutinised and challenged these plans to ensure they are deliverable and robust to meet the new standards.
2. Firms are required to appoint a board level champion, ideally an independent non-executive director, who, along with the Chair and the CEO, will ensure that the Consumer Duty is discussed regularly and raised in all relevant discussions.
3. Firms must notify the FCA if they become aware that another firm in a distribution chain is not complying with the duty. 
4. If the subject matter of such a notification falls within scope of an SMF manager’s responsibilities, that manager is expected to ensure that the firm reports the matter to the FCA. Where the subject matter falls outside the manager’s responsibilities, but it cannot be assumed that a notification has been made, the expectation is that the SMF manager will check whether the firm has notified the FCA.
5. Where foreseeable harm is identified, the new rules require firms to specifically consider remediation, including providing redress.

In addition to these enhancements, the FCA has developed its guidance on governance and accountability expectations. For example, the non-handbook guidance includes lists of questions the FCA expects boards to be asking on a regular basis, and which firms can expect to be asked by the FCA.

There is no “average customer”

The draft rules, published in December 2021, included a definition of and reference to the needs of the “average retail customer”. Feedback highlighted that this was confusing and does not reflect what the FCA is trying to achieve by introducing the Consumer Duty. Consequently, this concept has been removed from the final rules.

The FCA now emphasises that firms should consider the customers they actually serve rather than a hypothetical average customer. With regard to the communications objective, firms should ensure their communications are likely to be understood by the customers intended to receive the communication. More broadly, the final rules require firms to consider the needs of customers in their target market. 

Regulatory expectations

The FCA appears to be committed to working collaboratively to properly embed the new duty and has committed to delivering a series of round tables and sector specific webinars. 

• Portfolio firms can expect an initial communication from the FCA later this year, setting out clearly identified priority issues specific to the portfolio to which they are aligned. Further communications will be circulated in the second half of the implementation period, highlighting good and poor practices that have been observed by the FCA. 
• Larger firms, with a dedicated supervisor, should expect regular requests from the FCA to review their implementation plans, progress reports and the results of monitoring.

Investigation and enforcement risk

Post implementation, the FCA will shift its focus to detecting, triaging and taking action against breaches of the new duty. The vigour with which such action will be taken is unclear. The FCA’s policy statement seems to suggest that, at least in the early stages, the FCA will prioritise detection and early intervention ahead of more lengthy formal investigations.

In addition to introducing a new sixth Individual Conduct Rule relating to the Consumer Duty, the FCA has also provided much more detailed guidance about what conduct may amount to a breach.

In keeping with its wider data strategy, the FCA will be using “data and insights” to identify outliers and poor practice.

We are unlikely to see formal investigations initiated within the next two years, unless extreme cases of non-compliance (or a failure to implement the Consumer Duty requirements) are identified. However, things done or not done during the implementation period can be expected to have a significant impact on the likelihood of a firm being subjected to enhanced regulatory scrutiny or investigation further down the line. Now is the time to get it right. 

The FCA’s commitment to a “bolder approach” to communicating its expectations for the Consumer Duty, together with its enthusiasm for measuring success against the metrics outlined in its three year strategy, mean that firms will need to continually review FCA guidance against their own implementation plans to avoid falling foul of the regulator’s expectations.