FCA raises bar with ‘new consumer duty’

Rajiv Agarwal is compliance director of Equifinance

A ‘new consumer duty’ proposed by the Financial Conduct Authority (FCA) in its recent consultation paper promises to be an effective weapon to help prevent consumer harm from products and services sold to retail clients.

Apparently, this proposal fast-tracks the FCA’s initial thoughts from its 2018 discussion paper, which spoke of placing a ‘duty of care’ requirement on all firms, as defined in primary legislation, through a different approach within its own rule-making powers.

In doing so, the FCA also acknowledged concerns about setting out a statutory duty of care, especially the difficulties of consistent application of a single duty to a range of scenarios, such as where a firm does not engage directly with clients and sells its products via regulated intermediaries. In such cases, a duty of care, arising from primary legislation, will usually fall on professional advisers rather than product developers.

Subject to wider industry feedback and a further paper – to be published by the FCA towards the end of this year – the proposed framework is set to overlay the current principles and outcomes that form part of the regulatory provisions for treating customers fairly (TCF), by achieving a higher degree of consumer protection via a combination of a new consumer principle, amplification of conduct standards expected under the new principle through ‘cross-cutting’ rules, and four consumer outcomes.

The FCA is yet to decide on the nature and exact wording of the new consumer principle, and is keen to hear from firms and consumer bodies as to whether the new principle should have ‘good outcomes’ or ‘the customer’s best interests’ as its primary focus.

A decision whether the new principle should replace the current Principles 6 and 7, or be added to the 11 principles, will also be made following industry feedback.

On the face of it, the four outcomes proposed under the new consumer duty mirror the six under the TCF provisions – except the ‘fair value’ outcome – which currently supplement Principles 6 and 7. As such, adding the new principle with a parallel set of outcomes which overlap with the current framework will confuse rather than clarify regulatory expectations, unless the it finally replaces these two principles, at least for retail clients.

The new outcome relating to ‘fair value and price’ of products and services is a welcome addition to the requirements, though more clarity will be necessary on this for different types of firms.

For example, an assessment of fair value of loan products for deposit-takers and non-bank lenders will be based on totally different parameters, with further differences between first and second line mortgages.

A clearer regulatory steer will help define the scope of fair value that can be determined by firms within their products and services, based on different considerations, and further details from the FCA will indeed be welcome on this in the next round of consultation.

The ‘fair value’ outcome appears to be the most distinguishing feature of the new principle, and it signals the FCA’s intent to clamp down on any instance of unfair pricing resulting in consumer harm in future, without the need for a more direct intervention to cap the price of products and services – as has been done in the past with high-cost short-term credit and bank overdrafts. The regulator has, however, not ruled out a broader price intervention by using the powers it has had since April 2013.

Having already implemented a new set of conduct rules and the individual duty of responsibility through the Senior Managers and Certification Regime (SMCR) to ensure a culture that drives best outcomes for consumers, the new consumer duty would help the customer-focused and proactive approach to regulation that the FCA is trying to embed.

However, the regulator should ensure that the new rules and guidance do not duplicate or create an additional layer of regulation, with overlapping and potentially confusing obligations placed on firms.

Finally, if the FCA replaces – rather than superimposes – the current TCF principles and outcomes with a new, clearer and more direct regulatory framework that also addresses any gap in the existing provisions, the new regime will be a significant step in the FCA’s aim of becoming a more forward-looking regulator.

As part of this initiative, it will be important for the regulator to provide sufficient granularity on the application of the new consumer principle and each of the proposed outcomes for firms to be able to clearly interpret and adopt, depending on the nature and complexity of the products and services offered by them.