Written by Marnie Thomas, Solicitor

The UK Financial Conduct Authority (FCA) has introduced sweeping new regulatory obligations for financial services firms that serve UK retail customers, known as the “Consumer Duty”.

All firms regulated by the FCA must treat customers fairly. The new Consumer Duty is a major shift in the FCA regulation. Firms should put customers at the heart of what they do. They must be able to demonstrate how they have and continue to achieve good outcomes for customers.

In short, the Consumer Duty represents a substantial compliance challenge. Firms have until 31 July 2023 to prepare.

Overview of the Consumer Duty

The Consumer Duty is comprised of both an overarching principle and rules. The outcomes focused regulation is a change from the rules-based approach. It encompasses three main elements:

1. the “Consumer Principle” which requires firms to act to deliver good outcomes for retail customers;
2. three cross-cutting rules which require firms to:
   1. act in good faith;
   2. avoid causing foreseeable harm; and
   3. enable and support retail customers to pursue their financial objectives;
3. four consumer outcomes representing key elements of the relationship between customers and firms. These are instrumental in achieving good outcomes. Namely:
   
   1. products and services;
   2. price and value;
   3. consumer understanding; and
   4. consumer support.

What is the significance for firms and their senior managers?

The FCA have made it clear that firms will be expected to demonstrate that they understand the requirements of the Consumer Duty. They must be embedded within their organisation, operations, systems and controls. This change will need to be reflected from the top down. Under the Senior Managers & Certification Regime, each senior manager will be responsible and accountable for ensuring compliance with the Consumer Duty. Firms should also appoint a Consumer Duty “champion” at board level. Along with the chair and the CEO, this champion is to ensure that the Consumer Duty is discussed regularly and raised in all relevant discussions.

When will the Consumer Duty apply?

The Consumer Duty will not apply retrospectively to past business. It will apply to all new and renewed products and services from 31 July 2023. It will apply to closed book business from 31 July 2024.

By 31 October 2022, firms’ boards must have agreed plans for implementing the Consumer Duty. These plans should be developed to provide the FCA with assurance that the Consumer Duty will be implemented by the firm by 31 July 2023.

How to prepare?

Boards and senior managers will need to plan for this significant review and implementation exercise.

From a practical perspective, one of the biggest challenges for firms in complying with the Consumer Duty is likely to be the scoping out of “foreseeable harm” to customers. Best practice is for firms to review their business model. The characteristics of customers and their demands and needs for products and services are key.

Firms will need to review their terms and conditions, to ensure they comply with all aspects of the Consumer Duty. Documents will need to be updated before the product or service can be sold.

The requirements under the Consumer Duty are extensive. Firms may need to work hard to get to a point where they are comfortable that they comply.

How can we help?

Given the volume and complexity of the new rules and guidance, firms will need to develop a robust programme of work to ensure they are prepared for July 2023.

Our Company Commercial team is committed to ensuring that support is provided to all clients affected by the Consumer Duty, helping them to understand how the proposed changes will affect them and assist them in becoming compliant.

Please do not hesitate to contact us to discuss the new Consumer Duty and how it may impact your business.

Martin Varley is a Corporate and Commercial Partner and Marnie Thomas is a Corporate and Commercial Solicitor. They are both based in our Poole office.

Martin Varley – m.varley@hklaw.uk / 01202 725408

Marnie Thomas – m.thomas@hklaw.uk / 01202 437155

The information contained in this article is provided for informational purposes only and should not be construed as legal advice on any matter. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice based on their own particular circumstances.