The new Consumer Duty: What financial services firms need to know

The Financial Conduct Authority (FCA) has recently published the final rules and guidance for its new Consumer Duty. It is designed to raise expectations for the standard of care financial services firms give their customers and this is reflected in the potentially severe sanctions it could impose on firms that breach these rules.

Consumer Duty – what are the new rules?

The rules include a new overarching FCA principle that financial services firms “must act to deliver good outcomes for retail clients”. This imposes a higher standard than existing principles 6 and 7, which require them to consider “the interests of their customers and treat them fairly” and “the information needs of their clients, and communicate information to them in a way which is clear, fair and not misleading”.

The guidance also introduces cross-cutting requirements for financial services firms to

• act in good faith towards retail customers
• avoid foreseeable harm to retail customers
• enable and support retail customers to pursue their financial objectives.

What is the scope for these new rules?

The FCA’s proposals are intended to apply to all retail customers of FCA-authorised firms, which will include financial services offered to SMEs.

It will apply to prospective customers as well as existing ones. While it won’t apply retrospectively to past conduct, it will apply to any existing product or service at the point of implementing the new rules. This includes closed products that aren’t being sold to new customers or renewed by current customers.

It’s also important to understand that financial services firms will be affected if they don’t have contact with the end consumer. However, the FCA has clarified that businesses will only be responsible for their own actions. That means they won’t be held accountable for the actions of other businesses in the supply chain if there aren’t any other contractual or statutory requirements.

Financial services firms will be expected to notify the FCA if they become aware that another business in the supply chain isn’t complying with the rules, though.

When does the new Consumer Duty come into force?

For open products and services, financial services firms must implement the new rules by the end of July 2023. For closed products, the rules come into force on 31 July 2024.

Firms will also have to comply with various interim deadlines, which include agreeing implementation plans at board level by 31 October 2022. Manufacturers must review open products and services by April 2023.

After the new Consumer Duty measures are implemented, the FCA will focus on detecting and taking action against any breaches. Right now, it’s unclear how aggressively such breaches will be dealt with. However, the FCA’s policy statement suggests that early detection and intervention will be prioritised over lengthy formal investigations and draconian sanctions.