In the latest issue on the new Consumer Duty, Xcina Consulting examines how the crosscutting rules and outcomes underpin the new Principle 12.
Principle 12 states that “a firm must act to deliver good outcomes for retail customers”.
Cross Cutting Rules
Three cross-cutting rules underpin the new Principle 12. The FCA considers that many firms have failed to step back and consider whether their actions might cause harm to consumers, overlooking risks the regulator believes they ought to be aware of.
“Good faith” and “foreseeable harm” are acknowledged as non-exact concepts, so in the final non-handbook guidance, the FCA has given additional examples of foreseeable harm and firms acting in good and bad faith. The FCA states that foreseeability is “dynamic”: the FCA expects firms to scan for new or emerging risks, including complaints, MI, press reporting and the FCA’s supervisory publications. In response to feedback, the FCA has confirmed that a firm that becomes aware of an individual’s financial objective when acting on a non-advised basis is only required to “consider” how to support that customer in progressing towards it.
A firm is not required to take actions beyond its permissions or the scope of its services. The final guidance also indicates that the cross-cutting rules apply on an individual basis where firms produce a bespoke service, advice, or tailored communication. In contrast, in the context of product design, communications design and support, the crosscutting rules apply on a target market basis. This distinction had not been evident in the draft guidance.
Products and services
The FCA concedes that the language in its draft rules did not provide firms with sufficient certainty that, where they were already complying with the product governance rules in PROD, this would satisfy the products and services outcome under the Duty.
The FCA considers that these existing rules meet its expectations and has strengthened the wording granting equivalence. Additionally, asset management firms currently following PROD 3 as guidance can choose whether to follow PROD or the products and services outcome.
Many firms operating under PROD have pointed out the limitations of that regime, particularly around manufacturers’ ability to obtain information from distributors about sales of a product. A new rule now requires distributors to provide this information when engaging in an activity covered by the Duty.
In terms of implementation, firms that wish to rely on their compliance with existing PROD 3/4 requirements should have less to do by April 2023 – provided they are confident they are meeting that standard.
Those firms would do well to seek assurance that their existing policies are adequately implemented within their businesses: it is likely that the FCA will increase its focus on PROD compliance once the Duty takes effect.
Price and value
Again, the FCA has confirmed that for firms subject to the assessment of value rules in COLL and PROD, compliance with these rules will satisfy the price and value outcome. Responding to feedback, the FCA has confirmed that it does not necessarily expect firms to quantify nonmonetary costs and benefits. Still, they should provide at least a qualitative consideration of these factors.
Firms providing free products or services do not need to undertake value assessments but should still consider whether individuals pay in non-monetary terms and whether such costs are reasonable relative to the product’s benefits.
Differential pricing between new and existing customers remains possible, provided firms can demonstrate that upfront discounts are communicated clearly and that both groups receive fair value. Similarly, the Duty does not prevent cross-subsidies between products or firms selling similar products at different prices across various brands, provided each can be shown to offer fair value. But in those circumstances, it may be challenging to demonstrate fair value in practice.
There is no guidance, for example, on weighing each element considered within a value assessment. Nor is it clear, given that firms are required to consider competitors’ pricing, how to avoid a “race to the bottom” started by one firm pricing aggressively to chase market share.
The FCA reiterates that individuals can only take responsibility for their actions if they have the necessary information to make informed decisions at the right time. This makes firms’ communications central to individuals’ ability to pursue their financial objectives and secure good outcomes. The final rules require firms to test communications where this is appropriate.
Testing is key to demonstrating customer understanding. It must be formulated to give firms assurance that individuals can identify and understand the information they are given. Firms have discretion here, and it is likely that testing should be targeted at communications with the greatest potential for harm if they are misunderstood, either because of the financial risks to recipients or the number of people likely to receive (and potentially misread) them.
Where firms are subject to other legislative or regulatory disclosure requirements, the final guidance confirms that they should continue to comply with these but also consider what additional steps they can take to support customer understanding – e.g. by explaining key information in a cover letter. The FCA recognises that some disclosure requirements are highly prescriptive, e.g. those stemming from the CCA or UCITS/PRIIPs. The FCA is open to receiving evidence that these prescriptions do not support customer understanding, based on which it might be prepared to make changes in future.
The FCA also clarifies that it will not penalise firms where they cannot communicate directly with individuals where, for example, they have opted out of receiving certain types of communication. There is a general shift across all four outcomes away from requiring firms to consider the average customer towards an approach focused on the known characteristics of a firm’s customer base and target market. The FCA repeats the statistic quoted in its CP21/36 that one in seven adults is believed to have literacy skills at or below those of a 9 to 11 year old. The FCA argues that firms must consider this when designing mass-market communications for more straightforward products to ensure the average consumer can understand them. Signposting support (e.g. to debt charities) where a product’s target market is likely to contain a high number of vulnerable customers is also encouraged.
This needs to meet customer requirements throughout the product lifecycle. This includes customers with non-standard issues and those with vulnerabilities or disabilities. Monitoring customers’ experiences is critical. The FCA is not prescriptive here.
It is acceptable to design a product with digital-only support if that can meet the needs of the relevant target market – if so, an additional non-digital channel of communication would be unnecessary – though in that case, a firm should be transparent with customers from the outset that only online support is on offer.
The FCA also suggests that in-person support might still be required for technical or sensitive issues. Firms in this scenario would also need to consider how to prevent harm from occurring if a customer’s support needs to be changed, for example, a customer in financial difficulties or losing internet access. This illustrates the range of scenarios the FCA wants firms to consider.
Helpful Resources on Consumer Duty
Be sure to contact Xcina Consulting if you have any questions about the Consumer Duty.
The final piece on the Duty from Xcina Consulting will be published soon.