Consumer Duty still ‘Woolly’

With the release of their second consultation, the FCA is pushing ahead with its new Consumer Duty, describing it as a ‘reset’ and a ‘fundamental shift in industry mindset’. Firms should have good customer outcomes at the heart of all they do but, whilst the latest consultation adds more detail to FCA expectations, we are concerned that their proposals are still somewhat theoretical and woolly.

The final rules are expected by July 2022, with an implementation period running until April 2023. The draft regulations and guidance set out expectations for both manufacturers and distributors, including many areas where working together will be required to understand aspects such as target markets and new value assessments. All firms including adviser firms should get ready to undertake a substantial gap analysis exercise.

 We retain concerns that the inherent subjectivity of the Duty will ultimately lead to confusion both for consumers and firms in terms of their expectations of a good outcome and, without clarity on what the FCA’s expectations of the Financial Ombudsman Service (FOS) are, and how, or if, they will be codified, we would be concerned that this could lead to a significant rise in cases brought against firms through no fault of their own.

 As an example, one area where firms may seek further clarification is the extent to which the new Consumer Principle impacts Principles 6 and 7 in the FCA Handbook, addressing communications with customers. The FCA states in CP21/13 that it has not yet reached a firm view about whether or not to dis-apply these two Principles where the new Consumer Principle applies.

In the regulator’s view, where firms are complying with the Consumer Principle, they will in general also be complying with these two Principles as well as the treating customers fairly outcomes. In terms of not being expected to go beyond what is reasonable, firms may also wish to ensure there is some further guidance on this, for example identifying ‘good’ and ‘poor’ practice in particular settings.

We are confident that the vast majority of firms in our sector are already operating at, or above, the FCA’s expectations.

Our concern, as we set out in our initial response, is that there are clearly firms operating within the market who are either choosing not to follow the rules or struggling to meet their current obligations under them. Introducing new rules and regulations at significant cost to well-run firms will have little to no impact on the firms which are already not meeting their obligations.

In order for these reforms to be worthwhile and impactful, the consumer duty needs to empower the FCA to finally drive the bad actors out of the market through effective supervision and enforcement and with clear plans from the FCA about how they will do this. It is still unclear to us whether or not this will actually be the case.