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The FCA signals “paradigm shift” in expectations of firms in retail markets with its consultation on a New Consumer Duty (CP21/13)

  • United Kingdom
  • Financial services and markets regulation
  • Financial services disputes and investigations
  • Financial services

09-06-2021

The FCA’s consultation paper CP21/13 “A new Consumer Duty” for financial services firms in retail markets proposes higher expectations for firms’ standards of care towards consumers.  We consider some of the foreseeable outcomes if the FCA’s proposals are implemented.

Foreseeable outcomes

Increased compliance workload for firms

The FCA states that “a firm would need to consider the Consumer Duty at every stage of its processes and at every level of its organisational structure”.  The FCA makes it clear that this would include embedding compliance with the consumer duty in product design and distribution, with the requirement for testing, ongoing monitoring and the reporting of compliance data to the FCA. 

The regulation of pricing and value

The FCA’s proposals include greater scrutiny of pricing.  The FCA states that it does not propose to set the levels at which firms should price their products or services, yet its stated object of ensuring that “the price of products and services represents fair value for consumers” appears to amount to the regulation of pricing.  Of the examples the FCA provides of the sort of harm they wish to prevent,[1] it is notable that 50% appear to have price at their core.

Increased costs for firms and increased prices for consumers

The FCA asks firms to comment on the costs of implementing changes to embed the consumer duty.  While the extent of work required may vary from firm to firm, it is foreseeable that the costs of implementation may be significant across the retail market and that ultimately, these costs will be passed on to consumers through higher prices.  Increasing costs and regulating prices is a recipe for driving firms out of the retail market and thus reducing competition and consumer choice.

Increased complaints and litigation

The FCA is consulting on whether to introduce a private right of action, under which customers can sue for damages for breaches of the consumer duty.  As litigation is costly for customers and firms and could result in the FCA and the courts coming into conflict over the interpretation of the FCA’s consumer principle and related rules and guidance, the arguments for introducing a private right of action may appear to be weak.  Whether or not a private right of action is introduced, the new consumer duty is likely to be seen as a business opportunity for claims management companies and, while the FCA has made it clear that the consumer duty will not apply retrospectively, firms can expect to receive nebulous complaints asserting a breach of the consumer duty in the future.

Better consumer outcomes?

Few would argue that the proposals for the consumer duty are not well intentioned but it is far from clear that these proposals will result in better consumer outcomes.  The proposed consumer duty will not address consumer harm resulting from firms, products or activities that sit outside of the regulated perimeter (eg in the instance of London Capital and Finance).  It is also unlikely to move the dial where nefarious actors set out with the intent of causing consumer harm (eg investment scams).  The FCA has faced criticism for not doing enough to tackle these issues.

Summary of the FCA’s proposals 

The Consumer Duty package comprises:

  • A Consumer Principle which provides for a higher standard of conduct that is currently expected from the firms in relation to their retail market activities.  It will require firms to understand the outcomes consumers can expect from the firm’s products and services, take actions to enable those outcomes and then assess the effectiveness of those actions.  The FCA is seeking views on two potential options for the wording of the principle, being either “a firm must act in the best interests of retail clients” or “a firm must act to deliver good outcomes for retail clients
  • A set of Cross-cutting Rules which develop and explain how to apply the Consumer Principle, including:
    • acting in good faith
    • taking all reasonable steps to avoid foreseeable harm to consumers
    • taking all reasonable steps to enable consumers to pursue their financial objectives
  • Four Outcomes which set detailed expectations for firms’ culture and behaviour in relation to the key elements of the firm-customer relationship, including:
    • communications
      firms’ communications must consistently support consumers by enabling them to make informed decisions about the firm’s products and services;
    • products and services
      must be specifically designed to meet the needs of consumers and targeted at the consumers whose needs they are designed to meet
    • customer service
      must meet the needs of consumers and enable them to get the full benefit from the products and services they purchase throughout their relationship with the firm
    • price and value
      products and services must be fit for purpose, represent fair value within their market and must support the overall financial wellbeing of consumers

Scope of the proposal

  • The proposal applies to firms in relation to their regulated activities.  It relates to products and services sold to “retail clients”, including most small and medium-sized enterprises, but excluding large corporate bodies, government bodies and eligible counterparties
  • It covers firms involved in “retail markets”, which includes firms involved in the manufacture or supply of products and services to retail clients, even if they do not have a direct relationship with the customer

Up Next

  • The second consultation with proposed new handbook text is expected by the end of this year, with the new rules brought in by 31 July 2022

How Eversheds Sutherland can help

If you would like further guidance on how the consultation and proposals will impact your business, or support in submitting a response to the Consultation Paper, please get in touch.


[1] Paragraph 2.13