One of the significant signposts for financial services professionals this year is 31 July, when a new Consumer Duty will come into effect requiring firms conducting regulated activities to show they are delivering good outcomes for their retail customers. This article is by Andrew Marra (Associate), Sona Ganatra (Partner), Chris Finney (Partner), Peter Finch (Partner) and Mardi MacGregor (Legal Director) with the financial services team at Fox Williams LLP.
In six months the Financial Conduct Authority’s (FCA) new Consumer Duty rules will take effect for firms’ open products/services and for the individuals that administer them.
Implementing the Duty is one of the FCA’s biggest priorities this year however, following its recent review of firms’ plans to implement the Duty (here), the regulator has expressed concern that some firms are ill-prepared.
It referred to some firms’ current plans as either giving “little detail on who is leading the overall implementation programme and [who] is responsible for it” or providing “limited information about how the Consumer Duty will be embedded into their firms’ culture and people approach”.
It is clear that the FCA will be ready – and will want – to take quick and decisive action against firms and individuals for failing to comply with the new rules. That includes using its supervisory or intervention powers, and for more egregious cases, opening enforcement investigations as soon as the implementation period ends on 31 July 2023.
It is therefore critical that firms (and senior managers working for those firms) have properly embedded the new rules throughout their organisations and addressed any deficiencies in their approach to implementing the Duty by this date.
So, what does the introduction of the Duty involve?
The new consumer principle
For firms, there will be a new Consumer Principle, Principle 12, which will require them to “act to deliver good outcomes for retail customers”. Effectively, firms will be required to:
- Pro-actively act to deliver good outcomes for customers generally and put customers’ interests at the heart of their activities
- Focus on the outcomes customers get, and act in a way that reflects how consumers behave and transact in the real world, such as better enabling them to access and assess relevant information, and to act to pursue their financial objectives
- Ensure they have sufficient understanding of customer behaviour and how products and services function to be able to demonstrate that the outcomes that would reasonably be expected are being achieved by those customers
- Where they identify that good outcomes are not being achieved, act to address this by putting in place processes to tackle the factors that are leading to poor outcomes
- Consistently and regularly challenge themselves to ensure their actions are compatible with delivering good outcomes for customers
Individual conduct rule 6
For individuals, the FCA has strengthened the requirements around governance and accountability by introducing a new individual conduct rule to ensure senior managers and executives are held accountable.
Individual Conduct Rule 6 will require all conduct rules staff to “act to deliver good outcomes for retail customers” where the activities of the firm fall within the scope of the Duty.
It is essential that individuals falling within scope are taking, and continue to take, active steps to ensure that the interests of consumers are central to their firm’s culture and purpose and are embedded throughout their organisations by 31 July 2023 and beyond. This will require individuals to:
- Ensure delivering good outcomes is at the heart of firms’ strategy and business objectives
- Ensure implementation plans remain on track, and that the work to review and improve the firm’s products and services is sufficient to meet the Duty standards
- Assure themselves that their firm is complying with their obligations under the Duty and to ensure the firm has identified any potential gaps or weaknesses in its compliance and any action needed to remedy this
- Set the tone from the top to employees by embedding a culture in which good outcomes for consumers is central. People management policies and practices, including performance management, pay and bonuses will be critical to doing so
- Appoint a champion at board level (or equivalent governing body) who, along with the Chair and the CEO, ensures that the Duty is discussed regularly and raised in all relevant discussions
- Promote senior management accountability for delivering good consumer outcomes within their areas of responsibility (every senior manager should be clear about what they are responsible and accountable for, and how they are ensuring that the business of the firm complies with the requirements of the Duty on an ongoing basis)
- Provide adequate and regular training to individuals at all levels in firms so they understand their obligations under the Duty and how they can act to deliver good outcomes for customers
It should be noted that Individual Conduct Rule 6 applies to the extent that it is reasonable and proportionate. In other words, the scope of a person’s job and their seniority may affect the scope of their obligations under the Rule.
In practice, the more senior a person is and the more relevant their role is to the Duty (e.g. a CEO for instance), the more the FCA will expect from them in delivering good outcomes for customers.
For individuals looking to take up positions that will need FCA approval (e.g. when applying to hold senior manager functions), it should be noted that the FCA will also be considering evidence of their understanding of, and actions taken to comply with, the Duty as part of the approval process.
It is therefore important that individuals thinking of going through this process have a good understanding of the Duty and the steps they will take to enforce it in their organisation.
Senior managers should expect to be asked about the role that they will play in delivering good outcomes for customers when they are seeking approval from or engaging with the FCA.