The U.K. Financial Conduct Authority is proposing to introduce a new Consumer Duty for regulated financial services firms. The objective of the proposal is to set a higher, clearer standard of conduct for the retail market activities of regulated firms. The proposals represent a welcome change of focus, with a stronger emphasis on customers’ interests and outcomes.
Responses to the FCA’s consultation can be submitted until 31 July 2021. Once the FCA has assessed the feedback, it will consult on the detail of the new rules or guidance, including how the FCA intends to supervise the proposed Consumer Duty, consideration of a private right of action and the effect of introducing the Consumer Duty on the current Principles for Business. The FCA has committed to making new rules by 31 July 2022, although the implementation timeframe is not known at this stage. This client memorandum discusses the FCA’s proposals and the significant implications for financial services firms.
The scope of the proposed Consumer Duty is wide. It would apply to all authorized firms when undertaking regulated activities that involve the sale of products or services to retail clients. The term “retail client” means any client that is not an eligible counterparty or professional client. The FCA does not discuss whether, under the proposed Consumer Duty, a retail client could opt up to be a professional client (i.e. an elective professional client) and therefore disapply the proposed protections under this regime. It is hoped that clarification on this point will come in the next consultation. The FCA does confirm that professional and eligible counterparty customers will continue to benefit from the existing protections under the Principles for Business. The proposals include firms that are involved in the manufacture or supply of products and services to retail clients, even if they do not have a direct relationship with the end customer because it would apply where a firm can, through its regulated activities, influence material aspects of the design, target market or performance of a product or service that will be used by consumers. Electronic money institutions, payment institutions and registered account information service providers would also be in scope.
The FCA proposes that the Consumer Duty would comprise a package of measures involving an overarching principle, three cross-cutting rules and four outcomes. This is a different, somewhat more detailed approach than that taken for the existing Principles of Business. The FCA confirms that it has not requested Parliament to amend legislation to introduce a statutory duty because it still believes that this is not justifiable. Furthermore, the new measures would not apply retrospectively.
The FCA’s goals to better protect consumers are valued. However, the creation of a regime which runs parallel to that of the far more sophisticated and nuanced common law case law system for retail activities is a concern, particularly in the absence of any case law, in the regulatory sphere, which might operate in such a way as to provide legal certainty in the context of this broadly couched duty. The point is not that the intention behind the new regime is flawed, but that the methodology which is currently proposed to underpin it invites uncertainty, which could chill business activity and deprive consumers of some of the opportunities they seek.
The proposed new Consumer Principle would be an objective standard that requires firms to consider the reasonable expectations of their customer base (i.e. not on an individual basis). The FCA is seeking feedback on two different formulations of the Principle, either:
The remainder of the proposed Consumer Duty package would set out the FCA’s expectations on how firms should conduct themselves to achieve this new principle. Firms would be responsible for judging whether their actions are serving consumers’ interests and result in good outcomes. This would mean firms would need to exercise more judgement about how their behaviors, policies and processes, at every level of the organization, attain the desired outcomes, and would be obliged to monitor, test and adapt on an ongoing basis. The FCA explains that firms could be requested to demonstrate to it the results of their monitoring and testing, and the FCA could use such data to identify and act on practices that are leading to unfavorable outcomes.
“The implementation of the Consumer Duty would create a paradigm shift in our expectations of firms in retail markets” Financial Conduct Authority
The proposed Consumer Principle is intended to be a higher standard than the FCA’s existing Principles for Business, including Principle 6, which requires firms to pay due regard to the interests of its customers and treat them fairly. The FCA notes that it wants firms to challenge themselves to ensure that their actions match the interests of their customers. In our view, the proposed Consumer Principle, in either form, is as high level and open to interpretation as the other “treat customers fairly” Principles (i.e. Principles 6 and 7), despite the additional detailed guidance provided by the FCA. As such, it will likely result in a degree of legal uncertainty.
The Consumer Principle will be supported by three cross-cutting rules, which will require firms to:
The requirement to take reasonable steps to avoid causing harm will cover a firm’s conduct, products, and services. Where possible, firms would need to take proactive steps to avoid causing harm. To ensure customers can make good decisions, firms would need to take reasonable steps to recognize consumers’ behavioral biases and use their knowledge of how consumers behave. The good faith requirement would involve honesty, fair and open dealing and consistency with the reasonable expectations of consumers.
The FCA intends the concept of reasonableness to apply across the Consumer Duty package as an objective standard of conduct and states that it will stipulate the factors that influence what is reasonable. For example, the FCA would consider it reasonable that firms offering more complex products and services take extra care to promote, and monitor, consumer understanding. Also, the role of a firm in a distribution chain will determine what is reasonable.
These are the outcomes that firms should aim to achieve when conducting regulated activities with retail customers. The four outcomes are:
In its consultation, the FCA is also asking views on whether a private right of action should be introduced where a firm is found to have breached the Consumer Principle. The Financial Services and Markets Act 2000 grants the FCA the ability to decide whether individuals have a right of action for damages caused by a breach of a rule. In practice, the right applies to many of the existing rules, but it does not apply for breaches of the Principles of Business. The FCA has consulted on whether the right should be introduced for the existing Principles and provides a summary of the advantages and disadvantages of such a move. The FCA would like views on how a private right of action would benefit or hinder the Consumer Duty.
 See CP21/13: A new Consumer Duty, published on 14 May 2021.
 Section 29 of the Financial Services Act 2021 (which provision comes into effect on 1 July 2021) requires the FCA to consult about whether it should make general rules providing that authorized firms owe a duty of care to consumers. The FCA must consult and publish an analysis of responses before 1 January 2022 and make general rules before 1 August 2022.
 It is unusual for the FCA to comment on the non-retrospective nature of rulemaking in consultations. This development may be related to the widespread public criticism of the FCA and PRA joint Consultation Paper No. 20/11 in July 2020 on the complaints scheme for financial regulators, which many commentators considered to have had retrospective elements and whose implementation had to be mothballed by the FCA.
 The existing Principles for Business are at times controversial, since they are high-level and vague. They have often been deployed by the regulators as an enforcement tool in situations in which no rule or guidance can be found, to penalize behavior which the FCA (or its predecessor the FSA) has taken objection to on broader grounds. Some of the leading examples include the market movements on Euro MTS caused by a bank's rapid sale and purchase strategies and the regulatory response to LIBOR manipulation. By introducing yet another new principles-like requirement, the FCA adds a further level of uncertainty to financial services businesses. Although it is clearly stated that the introduction of the requirements will not be retrospective, the innovative way in which the existing principles have been used and the repeated ex post facto deployment of the Principles for Business to attack behaviors which the FCA has previously either allowed or did not object to, produces an environment in which uncertainties and enforcement risk for firms are increased.
 The FCA, and its predecessor the Financial Services Authority, have provided detailed guidance over the years on what they expect under the “Treating Customers Fairly” initiative that is so closely linked to Principle 6. There are six outcomes that firms must endeavor to achieve, which focus on, among other things, ensuring retail clients receive clear information, that the advice provided to a retail client is suitable and that the products and services provided to a retail client take into account the clients circumstances.