Consumer empowerment through the new UK Consumer Duty: Will Australia follow suit?

Why a new Consumer Duty?

The introduction of the new Consumer Duty is driven by the need to strengthen consumer protection in retail financial markets, within a framework which incentivises vigorous competition in the interests of consumers, and within which consumers are empowered to make informed choices about financial products and services.⁴

The Consumer Principle does not change the nature of a firm’s relationship with its consumers. For example, it does not create a fiduciary relationship where one would not otherwise exist, nor require a firm to carry out any regulated activity (for example, provide advice) where it would not otherwise have done so.

The FCA conducted an extensive consultation process on the proposed Consumer Duty in two consultation papers (CP21/13 – Consultation Paper released May 2021; CP21/36 – Draft Rules and Guidance released December 2021). The Policy Statement and final rules were published on 27 July 2022, with an implementation timetable for businesses to meet, requiring that:

• by 31 October 2022 firms’ boards (or equivalent management body) should have agreed their implementation plans and be able to evidence they have scrutinised and challenged the plans to ensure they are deliverable and robust to meet the new standards;
• by 30 April 2023 manufacturers should aim to complete all the reviews necessary to meet the four outcome rules for their existing open products and services and share information with their distributors to enable them to meet their obligations under the Consumer Duty by this same date;
• by 31 July 2023, the Consumer Duty will apply to all new products and services and all existing products and services that remain on sale or open for renewal; and
• by 31 July 2024, the Consumer Duty will come fully into force and apply to all closed products and services.

The FCA has indicated that the Consumer Duty will be fundamental to its outcome-focused regulatory approach, which it believes can be applied more easily to technological updates and market developments than prescriptive rules in order to address consumer harm.⁵ Examples of consumer harms identified by the FCA include:

1. firms exploiting consumers’ behavioural biases, through misleading presentation of information or general lack of transparency in the information they provide;
2. firms selling products and services that are not fit for purpose, or not designed for the consumers they are being targeted at and sold to;
3. firms selling products and services that do not represent fair value;
4. firms providing poor customer support which presents an obstacle for consumers to take timely action to manage their financial affairs; and
5. firms exploiting consumer loyalties or tendencies to remain with the same product or brand.

By embedding the Consumer Duty into its authorisation, supervision and enforcement approach, it will enable the FCA to increasingly focus on the outcomes that consumers experience. The FCA has stated that this, combined with its more “data-led” approach, should enable it to intervene more quickly than it has done previously where it identifies practices that have an adverse impact on customer outcomes and more assertively before those practices become entrenched as market norms.⁶

The diagram below captures the key elements of the new Consumer Duty:

Consumer Principle

The Consumer Principle (Principle 12) reflects the overall standards of behaviour the FCA wants from firms, and is developed by the other elements of the Consumer Duty.⁷

Principle 12 sets out FCA’s expectations of firm conduct – to think more about consumer outcomes and put consumers’ interests at the heart of their activities. It is expected to prompt firms to ask themselves questions such as whether they are treating consumers as they would expect to be treated in their circumstances.⁸

Principle 12 focuses on consumer outcomes, and requires businesses to:

• deliver beneficial outcomes for consumers generally, by pro-actively acting to put consumers’ interests first;
• focus on the outcomes for consumers, and ensure the business’ behaviour is aligned with how consumers actually behave and interact with products. This is to be achieved by better enabling consumers to access and assess relevant information, and pursue their financial objectives;
• ensure that all relevant sectors of the business have a well-founded understanding of consumer behaviour and how the products and services function to provide the outcomes that would reasonably be expected by those consumers;
• when good outcomes are not being achieved, act to fix any shortcomings in processes, systems or behaviours; and
• continuously and periodically review and improve themselves to ensure their actions align with the delivery of good outcomes for consumers.

The underlying purpose of the Consumer Principle is not to compel firms to protect individual customers from poor outcomes nor is it that consumers will always end up with a good outcome. Further, it also does not impose an open-ended duty to protect consumers from all potential harms. For example, firms, insofar as they have complied with the Consumer Duty, are not expected to protect consumers from risks that are inherent in a product’s structure or design, such as investment risks.

Cross-Cutting Rules

The Consumer Principle will be underpinned by a set of ‘cross-cutting’ rules which set out how firms should act to deliver good outcomes for retail customers and the standard of conduct that the FCA expects under Principle 12. They require firms to:

1. act in good faith towards retail customers – this means conduct characterised by ‘honesty, fair and open dealing and acting consistently with the reasonable expectations of retail customers’. This is applicable to all stages of the customer journey and for the whole lifecycle of a product or service;⁹
2. avoid causing foreseeable harm to retail customers – while this does not require firms to prevent all harms, it does mandate firms to take proactive and reactive steps to avoid foreseeable harm and put in place appropriate harm mitigation measures.;¹⁰ and
3. enable and support retail consumers to pursue their financial objectives – including steps to facilitate retail customers to make informed decisions that are in their interests.¹¹

The cross-cutting rules are intended to work together as a package, meaning that poor conduct may result in a breach of one or more cross-cutting rule.

Compliance with the cross-cutting rules is likely to require a consideration of how the new Consumer Duty interacts with existing regulatory duties. Firms may use existing compliance mechanisms as a springboard to establish an appropriate compliance framework. However, given the broader nature and the heightened requirements under the Consumer Duty, compliance with existing rules may not be sufficient in all circumstances to prove compliance with all aspects of the new Consumer Duty.¹²

The FCA has confirmed that the Consumer Duty applies to all businesses that have a material influence over, or determine, retail consumer outcomes. For example, it applies to businesses that can influence material aspects of, or determine:

• how retail products or services are designed or operate, including their price and value;
• how retail products or services are distributed;
• communications issued to retail consumers; or
• consumer support provided to retail consumers.¹³

Whether a material influence exists depends on the actual circumstances. For example, a material influence would not include a firm whose role is limited to:

• operating within a mandate that is determined by another firm in the chain;
• supporting the work of another firm in the chain through the provision of factual information; or
• providing IT systems.¹⁴

The extent of a firm’s obligations under the Consumer Duty will depend on its role and the reach of its influence over retail consumer outcomes, even where the end consumers in the distribution chain is not a direct client of the business concerned.¹⁵

The Outcomes

The Four Outcomes represent the key elements of the firm-customer relationship, and build on the Consumer Principle and the cross-cutting rules:

(1) Products and Services

To be able to deliver good consumer outcomes, all products and services for consumers are expected to be fit for purpose, i.e. designed to meet the needs, characteristics and objectives of a target group of consumers and distributed in an appropriate manner. It should be noted that a firm can be both a manufacturer and a distributor.

The FCA is proposing to impose different obligations for firms, depending on their role in the distribution chain, as tabulated below.

(2) Price and fair value

The FCA wants all consumers to receive fair value. In the FCA’s view, value is about more than just price. It wants businesses to assess their products and services in their totality to ensure that the price a customer has paid for a product or service is reasonable compared to the overall benefit the consumer obtains. The FCA makes clear that low prices do not always mean fair value. Importantly, businesses must make an assessment of value when designing products or services and prior to offering them to consumers. They must also ensure that the price represents fair value for a foreseeable period of time and throughout the lifespan of those products or services. Appropriate action must be taken where a firm identifies that a product or service does not provide fair value.

In order to assess whether a product or service provides value, the FCA expects businesses to consider at least the following:

• the nature of the product or service, including any benefits to be provided or may reasonably be expected and their qualities;
• any limitations which form part of the product or service. For instance, any limitations regarding the scope of cover for insurance products; and
• the anticipated total price customers will pay. This includes all applicable fees and charges over the duration of the relationship between customers and firms.

If products and/or services are sold together as part of a package, it is important to ensure that fair value attaches to each component product or service as well as the overall package.

(3) Consumer Understanding

The FCA wants consumers to be provided with the necessary information at an appropriate time, with the information presented in a manner to facilitate their understanding.

Principle 7 requires businesses to communicate information in a way which is clear, fair and not misleading. Building on Principle 7, the Consumer Understanding principle extends the requirement for firms to:

• ensure that communications between businesses and consumers are designed to meet the information needs of consumers, readily able to be understood by consumers within the target audience, and assist consumers to make decisions that are well informed, effective, and timely;
• tailor communications and the communication channels used in light of the specific circumstances, including characteristics of vulnerability held by the consumers who are the intended recipients of the communication and the complexity of the product;
• when interacting directly with a specific customer, where appropriate, tailor communications to meet the information needs of that customer, as well as asking them if they understand what is being communicated and if the customer has any further questions; and
• test, monitor and adapt communications to support understanding and good outcomes for customers.

An important question the FCA is encouraging all businesses to ask themselves in the context of this outcome is ‘whether they are applying the same standards to ensure their communications are delivering good consumer outcomes as they do to ensure their communications help to generate sales and revenue’.¹⁸

(4) Consumer Support

The Customer Support rules are the overarching requirements set out by the FCA in terms of the level of support that businesses are expected to provide to consumers for the duration of their relationship with the firm. Firms should provide a level of consumer service enabling consumers to realise the benefits of the purchased products and services and ensure that they feel supported to pursue their financial objectives.

The rules under the Consumer Support outcome and the Consumer Understanding outcome are closely related. In particular, the FCA states that ‘[u]nder the consumer understanding outcome businesses should communicate with customers in a way that equips them to make effective, timely and properly informed decisions. Under the consumer support outcome businesses should enable customers to act on these decisions without facing unreasonable barriers’.¹⁹ Businesses should always remind themselves of their obligations under both outcomes in all consumer interactions.

An important question the FCA is encouraging all businesses to ask themselves in the context of this outcome is ‘whether they are applying the same consumer support standards to deliver good consumer outcomes as they do to help generate sales and revenue’.²⁰

Is a new Consumer Duty on the horizon for Australian regulators?

While there are examples of regulatory mechanisms which are comparable to aspects of the Consumer Duty and its effect on financial institutions and the wealth business, the Australian regulatory landscape does not yet include a holistic Consumer Duty regime.

In response to the Banking Royal Commission and the resulting increase in active regulation of the financial services industry, various measures focusing on consumer outcomes have been introduced. The current Australian framework imposes a range of obligations on regulated entities through various instruments. In addition to the general duty of financial services and credit licensees to act efficiently, honestly and fairly, this includes the following key obligations:

1. Mortgage Brokers Best Interests Duty (RG 273) which requires mortgage brokers to:²¹

• act in the best interests of consumers when providing credit assistance;²² and
• manage conflicts of interest by prioritising the interests of the consumer ahead of those held by the mortgage broker and his/her related third parties.²³

2. Financial Advisers Best Interests Duty (RG 175),²⁴ which requires advice providers to:

• act in the best interests of consumers when providing personal advice to retail clients through regulated conduct and disclosure requirements;²⁵ and
• prioritise the client’s interest where conflicts of interest arise.²⁶

3. Design and Distribution Obligations (RG 274), which imposes requirements on:

• Product Issuers to:

• prepare a target market determination (TMD) for its financial products, and make it available to the public;
• take reasonable steps in relation to the distribution of the product which aligns with the TMD;
• notify ASIC of significant dealings in a product which are inconsistent with the TMD within a specific timeframe; and
• review the TMDs regularly and maintain appropriate records.

• Distributers to:

• not engage in retail product distribution conduct unless a TMD has been made for the product, or is otherwise not required;
• take reasonable steps to ensure distribution is consistent with the TMD;
• notify the product issuer of any significant dealings that are inconsistent with the TMD; and
• maintain appropriate records, including the number of complaints received.²⁷

• Product Intervention Powers (RG 272), which provides ASIC with the power to take temporary action to intervene where it is satisfied that the financial and/or credit products 'have resulted in, or are likely to result in', significant consumer detriment.

Conclusion

The introduction of the Consumer Duty in the UK is indicative of a growing appetite globally by regulators to intervene and impose minimum requirements protecting retail consumers regardless of their sophistication. The Consumer Duty will set higher expectations for the standard of care firms give consumers than have previously existed and is compatible with, but does not replace, existing rules within the FCA Handbook.

The question for financial firms in Australia is whether they should expect the government to introduce an Australian version of the Consumer Duty. It may be worthwhile for Australian financial firms to proactively evaluate their business practices to determine what work will be required to allow them to comply with a consumer duty similar to that in the UK. At the very least, this exercise would also test compliance with the Australian obligations we identified above, whether or not a consumer duty is ultimately introduced.

If you would like to know more about the new Consumer Duty, please click through to:

• Global publication | January 2022 | The FCA’s latest consultation on the new Consumer Duty: What does it mean for firms?;
• Global Regulation Tomorrow Podcast: RT Plus - The Consumer Duty Series: Key takeaways from the FCA’s policy statement on Apple Podcasts; and
• FCA publishes policy statement on new Consumer Duty | Global Regulation Tomorrow.

Should any of the above raise any concerns or queries as to their application to your circumstances, our global financial services regulatory team and risk advisory specialists are available to assist.