FCA confirms finalised Consumer Duty rules

The Financial Conduct Authority (FCA) has published the final rules and guidance for its new Consumer Duty principle, which is expected to lead to a “major shift” in financial services and a “higher and clearer” standard for consumer protection.

Under the duty, firms will be required to act to deliver good outcomes for retail customers, with the clarification on FCA's expectations expected to lead to more flexibility for firms to compete and innovate in the interests of consumers.

The Consumer Duty is part of the FCA’s broader transformation to become a “more assertive and data-led” regulator, with the FCA to be able to quickly identify practices that don’t deliver the right outcomes for consumers and take action before such practices become entrenched as market norms.

Under the new rules, firms will be required to provide "timely and clear" information that people can understand about products and services, rather than burying key information in lengthy terms and conditions that few have the time to read.

They will also be required to provide products and services that are right for their customers, and to focus on the “real and diverse needs” of their customers, including those in vulnerable circumstances, at every stage and in each interaction.

Although the rules were initially expected to come into force from April, the FCA has confirmed that it will be giving firms 12 months to implement the new rules for all new and existing products and services that are currently on sale.

Additionally, the rules will be extended to closed book products 12 months later, to give firms more time to bring these older products, that are no longer on sale, up to the new standards.

In light of industry feedback, FCA has also provided further clarity in key areas, including on whether the duty applies to firms providing services to, or creating products used by, occupational pension schemes regulated by The Pensions Regulator (TPR).

Although it confirmed that for occupational pensions, the duty would not apply to pension schemes regulated by TPR, it acknowledged that respondents had raised an important issue where FCA authorised firms provide services to, or create products used by, TPR regulated schemes.

In light of this, it clarified that FCA authorised firms creating a product and operating pension schemes for occupational pension scheme trustees would need to comply with the duty if they can determine or materially influence retail customer outcomes.

It also amended the 'retail customer' definition to be clear that it includes the beneficiaries of trust-based pension schemes, where an FCA authorised firm provides services to a trustee.

Commenting on the new Consumer Duty, FCA executive director of consumers and competition, Sheldon Mills, said: “The current economic climate means it’s more important than ever that consumers are able to make good financial decisions.

"The financial services industry needs to give people the support and information they need and put their customers first.

“The Consumer Duty will lead to a major shift in financial services and will promote competition and growth based on high standards.

"As the duty raises the bar for the firms we regulate, it will prevent some harm from happening and will make it easier for us to act quickly and assertively when we spot new problems.”

Industry experts have also welcomed the new Consumer Duty, with AJ Bell head of retirement policy, Tom Selby, describing the policy as "a gauntlet laid at the feet of all UK financial services firms by the FCA".

However, Selby suggested that the FCA could receive "some flak" for its decision to delay the introduction of the new rules, "especially given much of the worst detriment in terms of things like high charges and poor service often sit squarely with firms no longer actively trying to win new business".

“The regulator might argue closed-book providers need more time to update antiquated systems, but that will come as little comfort to customers stuck in poor value products and receiving unsatisfactory service," he continued.

“The regulator has been absolutely crystal clear that the new rules are intended as a step up in standards, with firms required to aim for ‘good outcomes’ for customers when designing products, setting prices, providing support and communicating".

Adding to this, Aegon pensions director, Steven Cameron, backed the FCA's ambition to 'level up' all parts of the retail financial services industry, clarifying however, that despite the delay, timelines for the new requirements "remain tight".

Indeed, Cameron stated that the new duty will involve a fundamental industry-wide review to make sure products and services meet customer needs and offer fair value, explaining that such an all-encompassing review thoroughly will take time.

He said: "We’re pleased the FCA has listened to requests for an extended and prioritised timeline. Deferring the deadline for ‘open’ products and services, albeit by only three months till July 2023, is welcome but timelines remain tight.

"The extra year to implement changes for legacy books closed to new business is also helpful, particularly for firms with policies many decades old, with policy conditions written for a very different world.

"It’s in everyone’s interests, including consumers, that priority improvements are delivered first.

"To deliver on the new duty, every firm will need to understand changes in approaches of those before and after them in the distribution chain.

"This will be one of the greatest challenges ahead and close collaboration will be key. We hope through an iterative process that industry standard approaches will emerge in areas such as data exchange and presentation of ‘value assessments’.”

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