The framework that the proposed Consumer Duty initiative introduces comprises of (1) a Consumer Principle (i.e. a statement to reflect the overall standard of behaviour the FCA expects from firms), (2) cross-cutting rules (i.e. the common themes that capture the FCA’s overarching expectations of firms) and (3) four outcomes (i.e. suite of rules and guidance setting more detailed expectations for firm conduct for four specific outcomes representing the key elements of the firm consumer relationship). The FCA is consulting on the possibility of one of the following statements being the Consumer Principle:
- Option 1: ‘A firm must act to deliver good outcomes for retail clients’.
- Option 2: ‘A firm must act in the best interests of retail clients’.
The wording of option 1 places an emphasis on firms focussing on consumer outcomes (i.e. the neighbour principle) and not simply on processes. In other words, option 1 emphasises that the essence of the consumer protection operational objective is for firms to assess the impact of their actions (e.g. business strategy and execution of the same) on consumers. Option 1 seeks to express an obligation on firms that goes further than the commonly known ‘treating customers fairly’ principle. Arguably, option 2 is not too distinguishable from the existing TCF principle however the FCA adds that option 2 places the onus on firms to reasonably and objectively demonstrate that they act in the best interests of consumers. Supplementing the proposed Consumer Principle, the FCA sets out the following proposed cross-cutting rules:
- Firms must take all reasonable steps to avoid causing foreseeable harm.
- Firms must take all reasonable steps to enable customers to pursue their financial objectives.
- Firms must act in good faith towards customers.
In our view, the cross-cutting rules seeks to further embed the ‘neighbour principle’ (e.g. act in good faith) as a mandatory requirement for regulated firms. For example, you will note the use of the word ‘must’ as opposed to ‘should’ – the latter denoting a recommendation and the former an obligation. The cornerstone of the Solomonic temple which is the Consumer Duty is the four outcomes.
These are as follows:
- Communications – firms must design its processes (e.g. marketing and communication strategies) to ensure that consumers are given the information they need, at the right time, and the said information is presented in a way the average customer in the target customer base can understand.
- Product and Services – firms’ products and services must be fit for purpose and designed to meet the needs of consumers in the firm’s target customer base.
- Customer Service – firms’ customer service strategy should be appropriate vis-à-vis the needs of its customers throughout the customer lifecycle. Firms should not design its customer service strategies to, for example, hinder customers from protecting their own interests (e.g. placing strategic barriers to cancellation).
- Price and Value – firms’ price strategy must represent fair value. The benefits of firms’ products and services offered to consumers must be reasonable relative to their price.
We recommend that firms formalise and document their product and/or service strategy to be able them to articulate and evidence the rationale behind product and service specifications and how fair outcomes for target customers were given consideration at the design stage, and are reflected in the outcomes monitoring and product/service development process.