What are the implications?

The Consumer Principle will become Principle 12 within the FCA's Principles for Businesses (PRIN) sourcebook. Its inclusion within PRIN emphasises the importance the FCA places on the Consumer Duty. The FCA emphasise Principle 12 imposes a higher standard of conduct than Principles 6 and 7. As a result, Principles 6 and 7 will be disapplied for retail businesses where Principle 12 applies. Principles 6 and 7 will therefore only continue to apply to certain SMEs and wholesale business. However, firms will still be expected to consider existing guidance on Principles 6 and 7 when considering their obligations under the Consumer Duty.

The regulatory intention is for firms to not focus simply on processes, but on the impact of their actions on consumers. This focus needs to extend beyond individual products or service lines, encompassing the business model, proposition and operating model, to consider whether there are any inherent design flaws within it that could lead to poor customer outcomes.

The FCA also accepts that it is not possible to secure good outcomes or act in a client's best interests at all costs. There is an acceptance of reasonableness in the practical application of the underlying rules, together with an inherent understanding that most firms have director and shareholder obligations. 

Firms should be mindful that Principle 12 is not a re-packaging of Principles 6 and 7 but imposes a higher and more exacting standard of conduct. Firms will need to take into account the limits of Principle 6 and 7 as they do not cover all FCA expectations under the Duty. 

The Consumer Principle concerns ‘retail’ customers, however there could still be scoping challenges for some firms. Distinguishing between who qualifies as a retail customer in certain circumstances for certain products may not be straightforward. More significantly, firms will have to determine whether to apply the Principle to all customers creating a consistent standard across both cohorts or solely to retail customers, running parallel processes and controls. Either choice brings costs and benefits.

Whilst the Duty does not remove consumers’ responsibility for their actions, firms are responsible for enabling and empowering consumers to make decisions in line with their needs and objectives. To do this effectively, firms will need to understand and take account of a products target market, consumer behavioural biases and the impact of vulnerability on consumer needs and choices.

The three cross-cutting rules set out how firms should act to deliver good outcomes for retail customers. These rules and the associated non-handbook guidance articulate the standards of conduct the FCA expect under the Consumer Duty Principle, setting out how firms should act to deliver good outcomes for consumers. The rules apply throughout the customer journey and lifecycle of the product.

The FCA want the cross-cutting rules to work together as a package, and poor conduct will often breach more than one of the cross-cutting rules. For example, a failure to explain the risks of a product is unlikely to be acting to avoid foreseeable harm or enabling and supporting customers to pursue their financial objectives. Equally compliance with the four outcomes alone will not ensure the standards required under the Duty are met. The cross-cutting rules help define the overarching standards of conduct firms should follow in areas not explicitly dealt with through the four outcomes.

Firms must act in good faith at all stages of the customer journey and during the whole lifecycle of a product from design and distribution. The requirement to act in good faith does not create a fiduciary relationship where it does not already otherwise exist between the firm and the customer.

Examples where a firm would not be acting in good faith include:

• Consumer understanding — promoting products or services in a way that misleads customers about the benefits or risks, for instance by disguising the risks or burying key terms in documents or web pages they know customers are unlikely to read.
• Consumer support — operating systems or processes that are known to frustrate or prevent customers enjoying the use of their products. For example, website or mobile phone applications designed to manipulate or subvert consumers’ choices through harmful leading questions.
• Products and services — Using algorithms, including machine learning or artificial intelligence, within products or services in ways that could lead to consumer harm. For example, where applying algorithms embed or amplify bias and lead to outcomes that are systematically worse for some groups of customers, unless differences in outcome can be justified.

This demonstrates the interconnectedness of the Consumer Duty elements and how firms will need to consider their activities through the lens of each component of the Consumer Duty rather than in isolation.

The FCA want firms to take proactive and reactive steps to avoid causing harm to customers through their conduct, products or services where it is in their control to do so. The FCA expect all firms to collect enough information to be able to act to avoid foreseeable harm.

What is foreseeable is dynamic and firms will need to ensure its monitoring takes this fluidity into account. The regular reviews the FCA require under the Consumer Duty are expected to provide firms with the opportunity to identify any new or emerging harms and respond accordingly to appropriately to address them. Consideration of information gleaned from complaints, internal MI, regulatory publications and press coverage may also provide sources of emerging harm and analysis of these data should be considered through this lens too.

FCA guidance sets out areas which firms should consider in order to act to avoid foreseeable harm under each of the outcomes. In relation to consumer support outcome, firms should:

• Consider information available on customer behaviour and feedback to identify whether customers, or groups of customers, are encountering inappropriate barriers or unreasonable additional costs as part of firms' customer service provision.
• Put things right when mistakes occur.
• Be accessible when customers have questions.

If a firm identifies that retail customers have suffered foreseeable harm as a result of its actions, it must act in good faith and take appropriate action to rectify the situation, including providing redress where appropriate.

This rule does not mean the need for all products should be entirely risk free, the FCA recognise that many involve risk and that if such a risk materialises a consumer may suffer an adverse outcome. For example, defaulting on a mortgage could result in repossession. Neither does it mean firms are required to protect customers from risks that they reasonably believed the customer understood and accepted. However, it will be a firms responsibility to clearly demonstrate how it reached this conclusion. FCA guidance explains this will depend on factors such as:

• The type of product.
• The adequacy of the product design.
• Pricing.
• Communications.
• Associated customer services.
  

This rule is concerned with the financial objectives of the consumer in relation to the financial product or service and applies throughout the customer journey and lifecycle of the product. Consumers can only take responsibility where they are enabled and supported to make informed decisions in their interests through firms creating the right environment. The FCA want firms to proactively and reactively focus on putting consumers in a better position to make decisions in line with their needs and financial objectives. The conclusions a firm will reach about its customers’ financial objectives will depend on the nature of the relevant products or services. The actions a firm might need to take to enable and support customers to pursue their financial objectives would be determined by what is within a firm’s control, based on their role and knowledge of the customer.

For example:

• A firm providing advisory or discretionary services would understand more about the consumer's specific objectives and would need to act on that knowledge. For instance, an advice firm should know a consumer has the objective to retire by a particular age or to make sure a dependant is provided for.

Further, all firms can support consumers in pursuing their financial objectives by:

• Considering the characteristics of the consumers that their communications are aimed at and tailoring them accordingly so that they are likely to be understood (consumer understanding).
• Ensuring that the channels of support they provide work effectively and do not act as a barrier to customers utilising their products, cancelling or switching to another provider should they wish to (consumer support).
• Designing products or services with clear and straight-forward features so they can be understood by consumers in the target market (product and service design).

The choice of wording for this outcome emphasises that the FCA wants firms to focus not just on giving customers information about products and services but that they are understandable to the average consumer. Demonstrating that firms need to consider more deeply what 'clear, fair and misleading' really means from a customer perspective.

The rules state that a firm must ensure that:

• it supports retail customer understanding so that its communications meet the information needs of retail customers;
• they are likely to be understood by the average retail customer intended to receive the communication; and
• equip retail customers to make decisions that are effective, timely and properly informed.

To meet the FCA's expectations in relation to vulnerable customers, firms will need to understand how they can still generate comparable outcomes, regardless of how customers chooses to interact. This requires firms to understand who they are communicating to, but also the 'what' and the 'how' they are communicating. This could lead to a proliferation of communication content, approaches and/or reconfiguration and re-drafting depending on more specific client circumstances or specific vulnerabilities. 

The proposals build on, and go further than, Principle 7, by requiring firms to focus much more on consumer outcomes and understanding throughout the customer journey. Firms need to proactively consider the degree to which their communications, intentionally or otherwise, take advantage of consumers behavioural biases and may potentially result in poor customer outcomes. To achieve the stated outcome, firms will need to conduct more testing with retail customers to objectively assess the degree to which their communications are designed to deliver the desired effect and empower customer to make informed decisions. This outcome is also likely to impact the more detailed product literature, disclosure and associated terms and conditions. This could lead to a challenging trade-off between useful features and benefits of the underlying products or services which cannot be easily articulated such that they are readily understandable by its customers.

Notwithstanding existing regulatory communication obligations, the FCA suggests areas which enhance the effectiveness of a communications for firms to consider during production or review:

• Layered: key information (including any action required/ consequences of inaction) provided upfront with cross-references or links to further detail.
• Engaging: Using devices to make key information clear and engaging e.g. headings, layout, bullet points, tables, graphs, diagrams.
• Relevant: include the appropriate level of detail for each communication taking into account what consumers need to know, the kind of decision to be made and avoiding unnecessary disclaimers.
• Simple: Present information in a logical manner avoiding jargon or technical terms where possible. If there is no alternative, these terms should be explained in plain language.
• Well timed: Firms should communicate with consumers in a timely manner and at appropriate touch points throughout the product lifecycle.
  

0.4 Consumer Support

The FCA is seeking to achieve an outcome where the support provided by firms is "designed and delivered to an appropriate standard such that consumers do not meet unreasonable barriers when they want to pursue their financial objectives”. As part of those “unreasonable barriers” the FCA include unreasonable additional costs.

This outcome sets overarching requirements in relation to the support firms provide their customers. However, the FCA expect these to be read alongside other elements of the FCA handbook that cover specific aspects of consumer support, such as complaint handling.

The FCA wants to ensure the effort and attention that firms put into pre-sales activity is replicated in the firm's after-sales care. The FCA has identified 'sludge practices' in customer service processes where they are consciously designed to hinder consumers from taking action that would benefit them (e.g. switching to a more appropriate product). However, even where cumbersome processes are unintentional, they can have the same impact and lead to poor outcomes. For example, customer experience situations where the process to apply online is frictionless, but conversely, the process to leave, cancel or transfer is comparatively cumbersome. With this outcome the FCA expects that — “in general, it should be at least as easy to exit a product as it is to enter”.

As intended, this approach extends the reach of product governance to more ancillary and supporting activities such as client servicing and claims. The broader remit and scope move away from firms considering product governance too narrowly. It seeks to move firms towards a more holistic assessment of the appropriateness of the overarching proposition and holistic outcomes from a customer perspective over the lifetime of the product. This is more akin to proposition governance.

Firms would need to reassess all their product servicing arrangements to see the degree to which they create a barrier to a customer being able to freely interact with the product or service — appropriately balancing the impact on the firms. This would range from more general customer service, through to claims handling, complaints and switching or cancelling the product or service. Similar to product and service, firms will need to conduct outcomes testing and gather appropriate management information on their customer service activities to ensure that they can evidence how they are delivering against the FCA's stated outcome.