Article Thinking ahead – finally, the new Consumer Duty

This article was published in August 2022 before the new Consumer Duty regulations were finalised. To view the most recent updates and resources, please visit our Consumer Duty hub.

 

Following on from his previous article on the new Customer Duty draft regulations, Steven Cameron gives an update on what’s changed in the FCA’s final regulations and guidance.  

After two rounds of consultation, the FCA has now published its final rules and non-handbook guidance on the new Consumer Duty. This will undoubtedly lead to major changes for all retail financial services firms. Here, I’ll focus on key considerations of the ‘new Duty’ for adviser firms and in particular what’s changed in the final rules and guidance.

Key points I will cover in this article

• A recap on the new principle and cross-cutting rules
• The new timelines and what to look out for next
• Key changes from the draft regulations and guidance
• The distribution chain and collaboration between manufacturers and advisers
• Updates under each of the four outcomes
• Preparing for questions the FCA may ask

The new principle and cross-cutting rules

The new Consumer Principle requires your business to ‘act to deliver good outcomes for retail customers’ supported by three cross-cutting rules requiring firms to:

• Act in good faith
• Avoid causing foreseeable harm
• Enable and support retail customers to pursue their financial objectives

There are also extensive rules and guidance on the four outcomes – products and services, price and value, customer understanding and customer support. There’s also a considerably greater focus on culture, governance and accountability.

However aligned the new Duty appears at high level to an adviser’s business, there will be many detailed areas of impact and a major emphasis on evidencing good outcomes.

New timelines

In response to intense industry lobbying, the FCA has extended deadlines beyond the originally proposed 30 April 2023. New products and services – as well as existing ones which remain on sale or open for renewal – must now comply by the end of July 2023. For closed products and services, it’s a year later in July 2024. These extensions and the two-stage approach will allow a more thorough implementation with prioritisation benefitting both firms and customers.

However, the FCA has set an earlier date of 31 October 2022 for firms’ Boards or equivalent management bodies to have agreed on an implementation plan. This creates a very tight timescale and the need for immediate action by all firms.

One of the biggest challenges with implementation is how different firms in the distribution chain will work together. The FCA has helpfully set an earlier 30 April 2023 deadline for manufacturers to provide adviser firms with relevant information on target markets and outcome of product value assessments.

Boards or equivalent management committees must produce their first annual report on compliance with the Duty by end July 2024.

The FCA will be checking firms’ progress during the implementation period. Later this year, firms will receive a first update focussing on expectations and priority issues. The second – in the first half of 2023 – will highlight good and poor practices identified with ongoing implementation. Look out for regional FCA events and sector specific webinars in the autumn, with further sector specific guidance also promised.  

Key changes from the draft rules and guidance

Trust-based pension schemes

The FCA has extended the scope of ‘retail customers’ to include beneficiaries of trust-based schemes being supported by FCA regulated firms. This avoids master trust members being out of scope while members of group personal pensions are covered. It does, however, mean members of master trusts and other trust-based schemes offered without the involvement of an FCA regulated firm don’t benefit from the protections of the new Duty.

There’s also a new requirement for firms with Independent Governance Committees (or Governance Advisory Arrangements) to allow for their IGC assessment of value for money of group personal pensions and investment pathways when considering the new Duty.

Culture, governance and accountability

The final rules and guidance place much more emphasis on culture, governance and accountability. Firms must appoint a new Duty ‘champion’ who alongside the Board Chair and CEO will make sure the new Duty is considered in all relevant discussions from strategy down. The FCA will also use the Senior Manager and Certification Regime to hold relevant individuals to account.

HR and people policies are also called out, highlighting approached to remuneration and bonus must be consistent with good consumer outcomes.

The distribution chain

In our consultation response, Aegon stressed one particularly complex aspect of implementation will be understanding and reflecting roles and responsibilities across the distribution chain. While the Responsibilities of Providers and Distributors for the Fair Treatment of Customers (RPPD) guidance is still referred to where a manufacturer has purchased a closed book of business, it can no longer be relied upon for broader new Duty purposes. But the FCA guidance now has considerably more detail here, accepting that distribution chains can be complex.

One key clarification is that generally, firms will be responsible and liable only for their own actions and omissions, not those of other firms. However, firms will need to reflect on the roles, responsibilities and actions of others in the chain – and inform the FCA if they’re aware of another firm in the distribution chain not meeting these responsibilities.

The Duty applies to the extent a firm is responsible for determining or materially influencing retail customer outcomes. Throughout, the FCA talks of proportionality, whether by size of firm or based on the extent of influence. So requirements should be less for non-advised and execution only services where, for example, firms can assume the client’s financial objective is as general as to ‘purchase, use and enjoy the full benefits of the product’.

Adviser firms which materially influence a product may be considered co-manufacturers, bringing in separate ‘manufacturer’ responsibilities which I’ve not covered here. Each individual firm will need to assess the requirements based on their precise business model and different services provided.

The four outcomes

Now that the final rules and guidance are available, I’ll highlight the key changes under each of the four outcomes.

Products and services

The FCA continues to set expectations across the combined grouping of ‘products and services’. Other than if co-manufacturing, this will relate to adviser firm ‘services’.  The implications will differ where holistic and ongoing advice is offered compared to transactional advice. Non-advised or execution only services are also covered although the proportionality test should mean the FCA expects less here. Specialist advice services such as on defined benefit transfers may also warrant specific consideration.

Adviser firms may wish to revisit how they describe their various service propositions, with each designed to meet the needs of consumers in the target market. Unhelpful references to ‘average customers’ in the draft rules have been removed.

As a reminder, the specific example of charging a high or fixed monetary adviser charge remains in the final rules. Here, the target market may need to exclude customers with small amounts to invest as the fixed charge may not represent value.

Advisers must regularly review they’re recommending products in line with intended target markets – and provide such information on request to manufacturers to support manufacturers’ reviews. If issues emerge, firms must act – including preventing further harm and informing others in the distribution chain. This will further add to information exchanges between advisers and providers. 

Price and value

This is one area requiring close collaboration across the distribution chain. Manufacturers must undertake product value assessments and share the outcomes of these with advisers by end April 2023. The format is left up to each manufacturer, which may create unhelpful inconsistencies for advisers. Manufacturers won’t need to share commercially sensitive pricing information but should provide a ‘high-level summary of the benefits to the target market, information on overall prices or fees and confirmation that the manufacturer considers that total benefits are proportionate to the total costs.’ Manufacturers should also allow for their selected distribution methods in value assessments which might take into account an element of likely adviser charging.

As well as assessing value for their services on a standalone basis, advisers must also assess whether customers will continue to receive fair value from the product after they’ve added in their own remuneration.  It would be helpful for the FCA to set out a worked example of how it expects advisers to do this, building on likely manufacturer information.

The final rules and guidance also clarify non-financial costs and benefits to customers including their time and effort and the ‘cost’ to them of allowing firms to use their data. Such costs don’t need to be quantified in money terms but should be considered qualitatively, perhaps similar to qualitative benefits under a broader financial wellbeing approach.

Customer understanding

Here, the new Duty introduces a high-level requirement for the overall package of communications to support good outcomes. But the many existing regulatory requirements must still be met in full. The FCA accepts that some EU regulations may be unhelpfully prescriptive and is open to constructive suggestions around possible future improvements.

If issuing bulk communications, the FCA has dropped references to ‘average’ customers. Instead, these should be designed and tailored so they’re likely to be understood by the intended customers. This should also allow for any characteristics of vulnerability likely within the target audience.  

Customer support

This outcome may be more relevant to those responsible for products once they’ve been purchased. Here, as with all outcomes, the new Duty places considerable emphasis on taking account of characteristics of vulnerability. The final rules include references alongside vulnerabilities to customers with protected characteristics.

Evidence and monitoring

The final rules confirm the FCA is placing a major emphasis not only on delivering good outcomes but evidencing this through Management Information (MI). The guidance does say appropriate MI will vary depending on the size, client base and types of products or services offered – so expectations of adviser firms will differ from those of manufacturers. Section 11 of the Guidance includes a long but helpful list of suggested MI.

Next steps

The extension of the final deadlines is good news. But the requirement for Boards or management bodies to have an implementation plan in place by end October means urgent action is required. The Feedback Statement and Final Guidance are very lengthy documents but do need scrutinised at firm specific level.

Helpfully, the Guidance now includes lists of key questions on each outcome and also on culture, governance and accountability. Search the Guidance for ‘Key questions for firms’. There are 39 examples and while not all may be relevant to adviser firms, they’re well worth a read as a sense check of where gaps lie and should help shape implementation plans.

At Aegon, we’ll continue to work with advisers as we collaborate on this major regulatory milestone, with a shared obligation to deliver good outcomes for consumers.

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 New Consumer Duty hub.