Introduction

The FCA is introducing a new higher and more exacting standard of conduct for regulated firms.

Principle 12, ‘the new Consumer Principle’ comes into force on 31 July 2023, and requires that

‘A firm must act to deliver good outcomes for retail customers’.

reflecting the outcomes focus of a new Consumer Duty (“the Duty”) to retail customers that will be applicable to all products open for sale (or renewal).

The Duty replaces Principle 6 that:

“A firm must pay due regard to the interest of its customers and treat them fairly”

and also Principle 7 that:

“A firm must pay due regard to the information needs of its clients and communicate information to them in a way which is clear, fair and not misleading.”

The new standard of conduct is higher and more exacting because ‘Good’ rather than ‘fair’ sets a different, higher standard because what amounts to a “good outcome” will depend, in part, on the characteristics of a range of needs within a firm’s target market of retail clients; it does not mean that a firm must identify the individual needs of each customer.

Implementation timetable

The Duty may not take effect until 31st July 2023 but there is an implementation timetable that requires that:

– By the end of October 2022 firms’ boards (or equivalent management body) should have agreed their implementation plans and be able to evidence they have scrutinised and challenged the plans to ensure they are deliverable and robust to meet the new standards. Firms should expect to be asked to share implementation plans, board papers and minutes with supervisors and be challenged on their contents

– Manufacturers should aim to complete all the reviews necessary to meet the four outcome rules for their existing open products and services by the end of April 2023 so that they can:

o Share with distributors by the end of April 2023 the information necessary for them to meet their obligations under the Duty (eg in relation to the price and value and products and service outcomes)

o Identify where changes need to be made to their existing products and services to meet the Duty and implement these remedies by the end of July 2023

Embedding the Duty is a complex task. The FCA expects firms to make full use of the implementation period to embed the Duty across their businesses. Firms will need to ensure their implementation plans are robust and firm’s executives and boards (or equivalent management bodies) should maintain oversight of the plans and work to implement them.

Sources of law and other new rules

The Duty is to be applied in accordance with:

– PS22/9 FCA Policy Statement and the final Handbook rules for ‘A new Consumer Duty’, published 27th July 2022 with forward-looking effect from 31 July 2023, but with retrospective effect as regards non-vested fees and charges

– FG22/5 Final non-Handbook guidance for firms on the new Consumer Duty, published July 2022

– FG21/1 Guidance for firms on the fair treatment of vulnerable customers, published February 2021

– PS22/10 ‘Strengthening our financial promotion rules for high-risk investments and firms approving financial promotions, published 1st August 2022, with effect from 1st December 2022

– Policy Statement PS22/2: PRIIPs – Scope Rules and amendments to Regulatory Technical Standards (PS22/2). The rules make significant changes to what must be contained within the key information document (KID) as required by the PRIIPs Regulation and associated revised Regulatory Technical Standards (RTS) applicable from 1st January 2023

All to be aligned with The Government’s Future Regulatory Framework (FRF) review regarding the transfer of retained EU law takes place over the coming years, publication date unknown as well as with all other relevant FCA rules and guidance.

Good outcomes

What is required to deliver ‘good outcomes’ is explained and defined by the FCA’s new overarching cross-cutting obligations and outcome rules and guidance that require firms to:

– act in good faith towards retail customers;

– avoid foreseeable harm: and

– enable and support retail customers to pursue their financial objectives

The rule in Principle 12 is to be interpreted in accordance with the standard that could reasonably be expected of a prudent firm carrying on the same activity in relation to the same product and taking appropriate account of the needs and characteristics of retail clients. It does not create a fiduciary relationship nor require a firm to provide advice, but if a firm determines or has a material influence over retail customer outcomes it is accountable notwithstanding that the retail customer may not be its client due to the indirect nature of their relationship.

One of the general principles to which the FCA must have regard is the general principle that consumers should take responsibility for their decisions, in accordance with section 3B FSMA. The FCA does not expect firms to protect their customers from risks they understood and accepted.

The FCA does take the view that it is appropriate to require a high level of protection for retail customers for reasons including that they typically face a weak bargaining position in their relationship with firms; they are susceptible to cognitive and behavioural biases; they may lack experience or expertise in relation to products offered through retail market business and that there are frequently information asymmetries involved in retail market business.

Accordingly a firm must have a reasonable belief that its retail customers understand the risks inherent in a product and what is reasonable, will depend (among other things) on the nature of the product, the adequacy of the product design, communications and customer services.

Avoiding causing foreseeable harm to retail customers includes, amongst other requirements, ensuring all aspects of the design, terms, marketing, sale of and support for its products avoid causing foreseeable harm.

The conclusions that a firm can properly reach about the financial objectives of retail customers will depend on the type of product it provides. A firm which provides an execution only service or a non-advised service can assume (unless it knows or could reasonably be expected to have known) that the financial objectives of retail customers are to purchase, use and enjoy the full benefits of the product in question.

A firm which provides advisory or discretionary services is entitled to rely on the objectives that retail customers have disclosed unless it knows or could reasonably be expected to know that information disclosed is manifestly out of date, inaccurate or incomplete,

Here is a list of the other outcomes the FCA wants to achieve with its new Duty.

– “We want all products and services for consumers to be fit for purpose”

– “We want all consumers to receive fair value”

– “We want firms’ communications to support and enable consumers to make informed decisions about financial products and services. We want consumers to be given the information they need, at the right time and presented in a way they can understand”

– We want firms to provide a level of support that meets consumers’ needs throughout their relationship with the firm. This means firms’ customer service should enable consumers to realise the benefits of the products and services they buy and ensure they are supported when they want to pursue their financial objectives”

– “The Duty requires firms to focus on the needs of customers in vulnerable circumstances and customers with protected characteristics under the Equality Act 2010”

– “The higher standard of the Duty and the shift to focusing on customer outcomes will require a significant change in many firms’ culture. In CP21/36 we set out proposals for firms to monitor and regularly review the outcomes for their customers to ensure that they are consistent with the Duty, including whether any specific groups were getting worse outcomes”

Closed books

From 31 July 2024 the Duty will also apply on a forward-looking basis to existing products held in closed books.

– As regards vested rights in closed books, firms will be held accountable only against the standard that prevailed at the time they were open.

– As regards non-vested fees or charges in closed books, the new Duty will apply and remedial steps may need to be taken, for example, to change non-vested fees or charges, provide additional support or information, or to offer forbearance, such as a pause in payments, to help mitigate harm.

RW Blears support

Appendices to this memorandum (under development and to be made available only to clients of RW Blears LLP) include:

– Appendix 1: A template memorandum for managing partners to issue to their partners and staff explaining the impact of the new Duty and the need for product fair value assessments.

– Appendix 2: A template Target Market Assessment in line with the new Duty as well as MiFID 11; product value assessment and design and delivery of customer support.

– Appendix 3: A template letter to distributors and financial intermediaries setting out what is required of them.

– Appendix 4: A template Consumer Questionnaire to be completed by the financial adviser for a consumer which addresses those aspects of the Duty that relate to the potential vulnerability of their clients.

– Appendix 5: A template KID for a VCT share offer

– Appendix 6: A template KID for an EIS fund

– Appendix 7: A template KID for a GP/LP fund

– Appendix 8: An explanatory note in relation to the new regime for KIDs

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