Going into 2023, the new Consumer Duty remains at the top of the FCA’s policy priority list, with an implementation date of 31 July 2023. Since the final rules and non-handbook guidance were published in July 2022, the FCA has issued a series of further communications – providing additional clarity in its expectations. It has also highlighted connections to the new Consumer Duty in other policy statements and consultation papers.
In this article, our Pensions Director, Steven Cameron, summarises key points from these recent publications.
Latest news and updates on New Consumer Duty
1. Quarterly consultation
Every quarter, the FCA consult on proposed amendments to its handbook. Chapter 8 of this latest consultation proposes ‘clarificatory’ changes to rules to make sure they deliver as intended. Specifically, it seeks to clarify the application of the new Consumer Duty.
- To firms approving or communicating Financial Promotions – clarifying which parts of the new Consumer Duty apply if a firm is carrying out no other regulated activity.
- To firms in the temporary marketing permissions regime – extending the clarification on financial promotions to such firms.
- To occupational pension schemes – this makes a technical change so that FCA regulated firms offering services (such as member communications or customer support) to any form of occupational scheme, even defined benefit schemes, are subject to the new Consumer Duty where they can materially influence beneficiary outcomes.
- With regard to the ‘closed product’ definition – it clarifies that a closed product is one which is not being marketed or sold to new customers and for occupational schemes, those which are not open to new members.
- For non-retail financial instruments – to close a possible loophole which might have unintentionally exempted certain investment funds.
- Where an exemption applies in a sectoral sourcebook – clarification on how this works.
These amendments are very specific and detailed and primarily make sure the rules apply as we might have expected. The biggest surprise for me is the clarification that the new Consumer Duty can apply if a regulated firm is providing services which can materially influence outcomes for defined benefit scheme beneficiaries.
2. Portfolio strategy letter
The latest portfolio strategy letter for financial advisers and intermediaries was issued on 2 December 2022. It promises us a separate portfolio communication specifically on the impact of the new Consumer Duty on financial advisers and intermediary firms ‘in the coming months’. With deadlines fast approaching, I hope this will appear sooner rather than later and contain no surprises. In the meantime, the portfolio letter includes references to the new Consumer Duty including:
- Where an ongoing service is offered, it should be appropriate to the client’s circumstances, delivered as stated in the agreement and at a cost that is fair value.
- How the new Consumer Duty’s higher expectations for the standard of care will mean many firms require a significant shift in culture and behaviour, with a consistent focus on consumer outcomes, supporting customers make decisions in their own interests.
- A reference to FCA concerns that customers may not be receiving all information regarding their investments including suitability reports when a review is carried out.
- Ongoing monitoring of implementation of the new Consumer Duty may include cross-firm work to explore at sectoral level. Here too, the FCA specifically mentions assessing ongoing services.
3. Sustainability Disclosure Requirements and investment labels
This consultation seeks to avoid firms being able to ‘greenwash’. It sets out proposals on what firms will be required to disclose, as well as on terms firms will be allowed to use only if certain conditions are met. The FCA notes how these align with the new Consumer Duty’s requirement for firms to act in good faith and for consumers to be provided with information they need, at the right time, presented in a way that enables them to make informed, effective decisions.
The new disclosures will have to be clear, concise and understandable to target customers. The FCA expects that in line with the new Consumer Duty, these communications will need tested with consumers as they’ll be an important input to decision making.
4. Broadening access to financial advice for mainstream investments
In this consultation, the FCA is proposing a new simplified advice model called ‘core investment advice’ which firms with advice permissions may use. It is designed to support individuals who may have more saved in cash than they need, to invest the excess in a new stocks and shares ISA. The FCA has a specific target to reduce the number of individuals with higher investment risk tolerances holding more than £10,000 in cash.1
As well as rules on the advice service, there are also proposed limitations on the investments within the stocks and shares ISA used for core investment advice, targeting mainstream investments and excluding any which represent high risk. This means the new Consumer Duty has implications for the ‘products’ or investments within the ISA as well as the advice service. Throughout the consultation paper there are 36 references to the new Consumer Duty, including:
- Target markets – the new approach is restricted to advising individuals on investing sums up to the ISA limit of £20,000 and the FCA expects the target audience to have lower risk tolerance.2
- Delivering value – the FCA refers to the need to make sure charges deliver value bearing in mind the maximum investment is currently set at £20,000.2
- Designing the advice service, including whether transactional or ongoing – while an ongoing service is not ruled out, the FCA explains why this might be hard to justify under the new Consumer Duty requirements as core investment advice is for new ISAs only and can’t be used for topups.
- The need to consider any special or additional needs for customers with characteristics of vulnerability.
I’m pleased the FCA is consulting on opening up new routes to support customers who may not be well served by the existing advice definition. While the consultation is narrow in focus, there are some hints that this could be extended in future to a more modular approach to advice. The consultation paper also confirms the holistic review of the advice/guidance boundary will launch in Q1 2023. I do hope this paves the way to allow regulated firms to offer a new form of more personalised guidance to support customers in wider scenarios. New forms of advice and guidance, if commercially viable, should enable firms to do more to help deliver the good customer outcomes the new Consumer Duty demands.
5. Improving outcomes in non-workplace pensions
This Policy Statement includes 14 references to the new Duty. It sets out two new requirements for firms offering non-workplace pensions:
- For non-advised customers, a standardised investment strategy or default fund.
- For all customers, new cash warnings to those holding more than 25% of their fund in cash for more than 6 months.3
The introduction of a default fund for non-workplace pensions is designed to support individuals who are not taking advice and who don’t want to engage with investment choices. Avoiding the need for an ‘open’ choice of funds by presenting the default option appropriately may stop some from being put off entirely from taking out a pension. It should also mean they are investing in a broadly appropriate manner. Together these will help such customers better meet their financial objectives.
The new cash warnings are designed to avoid foreseeable harm from the likelihood of cash savings losing value in real terms because of inflation. This is particularly relevant today with such high rates of inflation. But I do have some concerns that the degree of prescription could pose future challenges if interest rates rise and / or inflation falls dramatically.
For example, might it not be misleading to show how much real value will be lost projecting forward 10 years at the then current inflation rate if we expect this to fall? Also, is it currently, and will it continue to be right to assume 0% interest on cash savings? Together these could significantly overstate the risk of losing value in real terms.
The non-workplace pensions rules are perhaps the first tangible example of how the FCA will use a blend of the outcomes based, ‘top down’ new Consumer Duty rules with detailed, sector specific ‘bottom up’ rules and regulations.
The new Consumer Duty is here to stay
The new Consumer Duty may not have been implemented yet, but it is very much here for the long-term. For such a wide-reaching new principle, there will be many areas where FCA expectations, firm interpretations and implementation will continue to evolve. With this in mind, it could be well worth attending a local FCA event as well as watching out for further FCA publications and podcasts. I expect the new Consumer Duty to feature in every new initiative from the FCA. Indeed, that’s already happening and it’s now becoming so well established that the FCA is beginning to drop the ‘new’ and simply referring to ‘the Consumer Duty’.
To keep up to date with the latest new Consumer Duty news and access further resources and insights, including our in-depth guide to the final rules, visit our Consumer Duty hub.