FCA sets destination for Consumer Duty

The FCA’s intention to create a regime where “firms compete vigorously in the interests of consumers" continues unabated. Although the implementation date has been extended and phased, the content is fundamentally unchanged.

Following two consultations, the FCA has now published its final rules on Consumer Duty signalling the start of a hectic implementation period for firms. Click here for our previous summaries.

• The implementation period has been extended by three months giving firms a twelve-month rather than nine-month implementation period (for current products). Therefore, firms will need to implement changes by end of July 2023.
• Recognising the additional complexity and challenges of applying the Duty to legacy products, firms have been given a further twelve months to implement the Duty on any closed book products (or stopped services), (i.e. end of July 2024).
  
• Despite the extension and phasing, the FCA have ensured that there will need to be focus on implementation immediately by expecting boards to have scrutinised and agreed implementation plans, by October 2022, to ensure they are deliverable and robust.
• The FCA has made numerous amendments to the underlying rules to improve clarity and remove unintended consequences. For example, the FCA has amended the rules to exclude primarily wholesale instruments from the scope.
• All non-Handbook guidance has been formally captured and published as Finalised Guidance (FG22/5). This includes additional clarifications relating to key topics such as how to apply the duty’s scope to different types of customers, relationships between manufacturers and distributors, the role of the board, and developing a fair value framework.
• Finally, the FCA has set out its intended approach to the Duty, including generating awareness, its approach to authorisations and, importantly, its supervisory and enforcement strategy.

It is no great surprise that the FCA has not made any significant changes to the substance of the Consumer Duty following its second consultation. Following an unprecedented level of industry engagement and feedback, the FCA’s maintains its commitment to all core elements and intention of the Consumer Duty but has showed that it was listening by making a number of changes to its rules as well as providing additional guidance.

The FCA has listened to the feedback about the challenging implementation period proposed in its prior consultation. The FCA has replaced the proposed 9 months and confirmed a 12-month implementation period. This gives firms until 31 July 2023 to make the required changes. Additionally, the FCA has agreed to a further 12 months regarding the application of the Duty to closed products or services (i.e. those are no longer being sold or marketed). This is a pragmatic approach by the FCA — still intent on introducing its ‘step change’ as soon as possible but recognising the additional complexity and challenges of applying the duty to closed products.

Whilst the extension and phasing provide some breathing space, it is still unlikely to satisfy some firms given the materiality of change and need for data and technological driven solutions to evidence good outcomes for consumers.

The FCA has set out its expectations for actions firms should take during the implementation period. However, in an unprecedented move, this includes milestones for when it expects firms to have finished planning their implementation work, reviewing their existing open products and services, and remedying issues identified to ensure they are fully compliant. This is the first time FCA has taken such an assertive approach and is designed to reduce the risks and challenges. The most striking of those is an expectation that by the end of October 2022, firms’ boards should have scrutinised and agreed their implementation plans and be able to evidence they have ensured they are deliverable and robust. Firms will be asked to share plans with the FCA and should expect to be challenged on them. This is a very demanding timescale — especially as we enter holiday season.

The FCA has amalgamated the Consumer Duty non-Handbook guidance and formally captured it as Finalised Guidance (FG22/5). The FCA has also provided additional clarification on its expectations with examples and guidance relating to key topics such as how to apply the duty’s scope to different types of customer, relationships between manufacturers and distributors, the role of the board, and developing a fair value framework (see here for our article on a practical tool-kit for assessing fair value of products and service).

The FCA plan to utilise its current portfolio approach (where the FCA groups firms that share a common business model). For each portfolio, the FCA will develop a strategy to embed the Duty and tackle the key areas of harm — both across portfolios as well as portfolio specific.

The FCA has also set out its plan to deliver a range of supervisory work with (and for) firms including roundtables and webinars, regular communications, and multi-firm supervisory work on high priority portfolios/ issues and develop a series of metrics to measure progress. Larger firms with named supervisors (fixed firms) can also expect that the FCA will request and regularly review implementation plans and assess progress with implementation.

KPMG professionals are conducting fuller analysis of the proposals and will publish more detailed commentary, analysis and insight shortly. You can also access our previous papers which provide analysis on the drivers, FCA’s supervisory approach and potential impacts on our Consumer Duty hub.