We want to see a higher level of consumer protection in retail financial markets, where firms are competing vigorously in the interests of consumers. We are proposing to introduce a new ‘Consumer Duty’, that would set higher expectations for the standard of care that firms provide to consumers. For many firms, this would require a significant shift in culture and behaviour, where they consistently focus on consumer outcomes, and put customers in a position where they can act and make decisions in their interests.
Scope of these proposals
These proposals apply to firms in relation to their regulated activities.
Our proposals relate to products and services sold to ‘retail clients’. This is a wide term that includes all clients other than professional clients (such as large corporate entities and government bodies) and eligible counterparties. So in most cases, where we regulate the provision of financial services to SMEs, these proposals would apply.
Our proposals extend to firms that are involved in the manufacture or supply of products and services to retail clients, even if they do not have a direct relationship with the end customer. We refer to the markets covered as ‘retail markets’.
In this Consultation Paper we use the terms ‘consumer’ and ‘customer’ to mean retail clients who are within the scope of these proposals, including those the firm does not deal with directly. We use ‘consumer’ when talking about the wider group of those who use financial services. We use ‘customer’ when talking about an individual firm’s customers or potential customers.
The Consumer Duty would require firms to:
- ask themselves what outcomes consumers should be able to expect from their products and services
- act to enable rather than hinder these outcomes
- assess the effectiveness of their actions
In essence, we want to see firms putting themselves in their customers’ shoes, asking themselves questions such as ‘would I be happy to be treated in the way my firm treats its customers?’, or ‘would I recommend my firm’s products and services to my friends and family?’.
The Consumer Duty would add to the range of regulatory tools we use to meet our strategic objective of making markets work well. Bringing together our consumer protection and competition objectives, it would help create an environment where consumers are better equipped to achieve good outcomes from financial services. To enable this, firms need to ensure that their products and services are fit for purpose and offer fair value, and that their communications and customer service enable consumers to make and act on well-informed decisions.
1.1. Why we are proposing a Consumer Duty
We know that due to the way that financial services markets operate, consumers don’t always get the products and services that meet their needs or the outcomes they might reasonably expect. Consumers’ ability to make good decisions can be impaired by various factors. These include their weaker bargaining position, asymmetries of information, lack of understanding or behavioural biases (as explained in the Consultation Paper (CP)). And firms may not always compete effectively to drive up quality and bring down costs in consumers’ favour.
These market conditions can be exploited by firms to consumers’ detriment, and the negative impact on consumers and their ability to make good decisions can be exacerbated by their circumstances. For example, where consumers are using digital and online services, these can provide greater choice and convenience, but can also introduce complexity and risk.
And consumers who are in vulnerable circumstances are at greater risk of harm. In our CP, we highlight that firms should take additional care to ensure vulnerable consumers receive outcomes that are as good as for other consumers. This aligns with our recently published guidance on the fair treatment of vulnerable consumers.
We see many good practices by firms in retail sectors. There are many firms that are already delivering the right outcomes for consumers – good products and services at fair prices, supported by high standards of customer service and clear communications. However, we also encounter too many firms that are not adequately considering the needs of their customers, and prioritising good consumer outcomes as an objective of their business activities. As set out in the CP, we continue to see practices that cause consumer harm, including:
- firms providing information which is misleadingly presented or difficult for consumers to understand, hindering their ability to properly assess the product/service
- products and services that are not fit for purpose in delivering the benefits that consumers reasonably expect, or are not appropriate for the consumers they are being targeted at and sold to
- products and services that do not represent fair value, where the benefits consumers receive are not reasonable relative to the price they pay
- poor customer service that hinders consumers from taking timely action to manage their financial affairs and making use of products and services, or increases their costs in doing so
- other practices which hinder consumers’ ability to act, or which exploit information asymmetries, consumer inertia, behavioural biases or vulnerabilities
Where these occur, consumers suffer harm. They may:
- find it harder to make an informed or timely decision
- buy products and services that are inappropriate for their needs, of inadequate quality, too risky or otherwise harmful
- incur greater monetary and non-monetary costs
- receive sub-standard treatment during their relationship with a firm
- find it harder to switch or get a better deal
1.2. Clearer, higher expectations of firms
Over the years we have used our range of regulatory tools – from market studies, to rules and guidance, and supervisory and enforcement actions – to set out and drive home our expectations of firms and improve consumer outcomes in markets. We will continue to act where we see harm, but we want to see firms avoiding this harm by ‘getting it right in the first place’.
To enable this, the Consumer Duty would set clearer and higher standards for the culture of firms and the conduct we expect of them. This would require all firms to focus on the actual outcomes experienced by consumers, and act in a way that reflects how consumers actually behave and transact in the real world, better enabling consumers to access and assess information, and to act to meet their needs and financial objectives.
The Consumer Duty would be a package of measures, comprised of a new Consumer Principle that provides an overarching standard of conduct, supported by a set of Cross-cutting Rules and outcomes that set clear expectations for firms’ cultures and behaviours. The Consumer Duty would give firms more certainty about the standards we expect of them and, correspondingly, the standards that consumers can expect of firms. Together this would help make competition work more effectively and markets deliver better consumer outcomes.
In summary, we want all firms to be putting consumers at the heart of their businesses, offering products and services that are fit for purpose and which they know represent fair value. We want financial services markets to be consistently effective in supporting the lives of consumers across the UK. Products, services, communications and engagement from firms should instil trust, enabling consumers to make effective and confident choices to advance their financial wellbeing and build positive futures for themselves and their families.
1.3. Benefits for consumers
This would give consumers confidence that the financial products and services they buy are designed to deliver the benefits they expect, and represent fair value. Consumers would receive clear and understandable information from firms that enables them to assess which products and services are most likely to meet their needs. They would receive a standard of customer service that consistently meets their needs, and they would not be hindered from acting in their own interests.
2. The wider context
In our 2018 Approach to Consumers document, we explained how we use our resources to protect consumers. We also committed to periodically review and adapt our regulatory toolkit, including how we use it and the impact of our interventions, to ensure we are achieving good outcomes for consumers.
In July 2018, as part of that commitment, we published a Discussion Paper on ‘A duty of care and potential alternative approaches’ (DP18/05). In April 2019, we followed this up with a Feedback Statement (FS19/02) summarising responses to the Discussion Paper and our next steps. These included reviewing our regulatory framework and how we apply our Principles. We set out our view that there is a need for a clear statement of expectations that goes beyond our existing Principles and rules, and provides a framework for the ongoing development of retail markets.
Our proposals for a new Consumer Duty are specifically designed to address this need. They also meet the requirement of the Financial Services Act 2021 for us to consult on the level of care firms provide to consumers, including whether we should make general rules providing for a duty of care. What constitutes a ‘duty of care’ may have different meanings, and our existing rules already create different duties of care for firms. The generally accepted legal meaning of a duty of care is an obligation to exercise reasonable care and skill when providing a product or service and this is, for example, reflected in Principle 2’s requirement that a firm must conduct its business with due skill, care and diligence.
The Consumer Duty is intended to, and does, set a higher standard of care and expectation beyond our current set of Principles and Rules. Consequently, we have not branded the Consumer Duty a ‘duty of care’. Nor do our proposals comprise of a ‘one-line duty’; rather, they are a package of measures that has been specifically designed to more effectively tackle the harms we see in financial services markets, and their causes.
3. A new Consumer Duty
We propose to set out the Consumer Duty as rules and guidance in the FCA Handbook.
We want firms, and in particular their senior managers, to be clear about the changes in culture and behaviour that we intend the Consumer Duty to bring about. To provide this clarity we are proposing that the Consumer Duty would have 3 key elements:
- A Consumer Principle, which sets a clear tone and uses language that reflects the overall standards of behaviour we expect from firms.
- ‘Cross-cutting Rules’ which develop and clarify the Consumer Principle’s overarching expectations of firm conduct, and set out how it should apply in practice.
- ‘Four Outcomes’: a suite of rules and guidance that set more detailed expectations for firm conduct in relation to 4 specific outcomes for the key elements of the firm-customer relationship.
We want to see firms acting on the Consumer Duty and also assessing the impact of their actions. Firms would be expected to monitor, test and (where necessary) adapt their policies, practices and processes so they can satisfy themselves, and demonstrate to us where required, that the outcomes for their customers are in line with our expectations.
In this consultation we refer to the body of rules we propose (the Consumer Principle, Cross-cutting Rules and the Four Outcomes) as the Consumer Duty.
4. The Consumer Principle
Through the Consumer Principle and the Consumer Duty as a whole, our aim is to set a higher standard of conduct for firms in relation to their retail market activities. This enhanced level of care would strengthen the existing requirement in our Principles, in particular Principle 6, that a firm must have due regard to the interests of its customers and treat them fairly. It would be an objective standard that would require firms to consider the reasonable expectations of their customer base as a whole, rather than achieving the absolute best outcome for each and every customer.
With the right underlying rules and guidance (as outlined in the CP), different forms of words could deliver this policy intent. In the CP we are seeking views on 2 options for the wording of the Consumer Principle, which we currently view as best expressing the change we want to see:
- 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’
Our expectations of conduct under the Consumer Principle would be further explained through the other elements of the Consumer Duty.
5. The Cross-cutting Rules
We propose that the Consumer Duty’s Cross-cutting Rules (described in our CP) would set out the key behaviours required by the Consumer Duty, and make clear that the Consumer Principle requires firms to:
- act in good faith
- take all reasonable steps to avoid foreseeable harm to consumers
- take all reasonable steps to enable consumers to pursue their financial objectives
Each of these is an essential element of the level of care firms should provide to consumers.
6. The Four Outcomes
The Four Outcomes represent the key elements of the firm-customer relationship: how firms design, sell and service products and services, and the key contact points along the customer journey. They are outcomes that describe the conditions needed for consumers to be able to obtain fair value in the products and service they buy, and each could therefore affect whether consumers receive fair value. The behaviour and actions of firms in relation to each of these outcomes are instrumental in enabling consumers to meet their financial needs and improve their financial wellbeing.
The Four Outcomes would build on the Consumer Principle and the Cross-cutting Rules. We set them out in detail in the CP, and summarise them here. The first 3 – Communications, Products and Services, and Customer Service – relate to what is provided by firms to consumers. The last element, Price and Value, relates to payments consumers make to firms.
Outcome: communications equip consumers to make effective, timely and properly informed decisions about financial products and services.
We want firms’ communications to consistently support consumers by enabling them to make informed decisions. We want consumers to be given the information they need, at the right time, and that they can understand, so that they can evaluate:
- the options available to them
- the costs, risks and benefits attached to those options
- which options offer fair value and would meet their needs
Principle 7 already requires a firm to pay due regard to the information needs of clients, and communicate information in a way which is clear, fair and not misleading. However, when this Principle was developed, the assumption to a large extent was that if consumers are provided with information, they will engage with it and act appropriately. We now have a deeper understanding of behavioural economics, and of consumers’ levels of comprehension. As a result, we know that providing information is not enough on its own to ensure that consumers can make informed assessments and decisions. Indeed, an overload of information can sometimes hinder decision-making.
So we now propose to reinforce and build on the concepts in the first part of Principle 7 – ‘pay due regard to the information needs of its clients’ – by requiring firms to focus much more on consumer outcomes. We propose to introduce rules that require firms to communicate in a way that, in addition to being fair, clear and not misleading, is understandable and facilitates informed consumer decisions. We also propose to require more of firms in testing that their communications are understandable, and adapting them where necessary to ensure they are supporting this outcome.
6.2. Products and Services
Outcome: products and services are specifically designed to meet the needs of consumers, and sold to those whose needs they meet.
We want the products and services that are sold to consumers to be fit for purpose. We want them to be designed to meet the needs of consumers, and targeted at the consumers whose needs they are designed to meet. These are essential requirements for products and services to be able to represent fair value for consumers. Whether they do represent fair value is also dependent upon the price at which they are sold, but we look at that aspect of fair value in the Price and Value outcome below.
Some products and services appear to be designed, whether intentionally or not, without considering the outcomes they achieve for customers. Some of these have features that:
- take advantage of behavioural biases (for example, the tendency of consumers to over-borrow and under-pay, as highlighted in our Credit Card Market Study)
- make it difficult for consumers to assess whether they are right for their needs (eg opaque charging structures)
- deter consumers from acting in their interests (eg barriers to exit)
We have also seen distribution strategies that do not always target products and services at those they are likely to be suitable for (eg higher-risk investment products sold to consumers without sufficient capacity for loss).
For some sectors, our Product Intervention and Product Governance Sourcebook (PROD) already sets requirements on the design, approval, marketing and management of certain products and services throughout their lifecycle. We want to build on these requirements to address the harm we see in relation to product/service design and distribution. We are proposing to introduce overarching requirements that will mean products and services sold to consumers have been designed to benefit them and perform as would reasonably be expected.
6.3. Customer Service
Outcome: customer service meets the needs of consumers, enabling them to realise the benefits of products and services and act in their interests without undue hindrance.
We want firms to provide a level of customer service that meets the needs of consumers throughout their relationship with the firm. Customer service should enable consumers to realise the benefits of the products and services they buy, and ensure they are not hindered from acting in their own interests.
Firms’ customer service levels do not always enable consumers to get the full benefit from products and services. We have seen customer service processes that are deliberately designed to create barriers to consumers taking action that would benefit them, or which cause harm to consumers through unnecessary cost, delay or stress.
Firms may sometimes lack a commercial incentive to deliver the level of customer service we want to see. And consumers may not be able to assess the quality of post-sale service at the time they buy products. So, we are proposing to set requirements for firms’ customer service arrangements to be of a standard that meets consumers’ reasonable needs and expectations. For example, it should be at least as easy to exit a product or service as it is to purchase it in the first place.
6.4. Price and Value
Outcome: the price of products and services represents fair value for consumers.
We want to ensure that products and services are fit for purpose and represent fair value, not just because they meet the needs of consumers as required under our Products and Services outcome, but also in relation to the price they are offered at. The Price and Value outcome proposal is designed to work together with the other 3 outcomes’ proposals to deliver fair value, supporting overall financial wellbeing.
When markets function well, with competition working effectively in consumers’ interests, consumers will be able to choose the product or service that represents the best value for them, bearing in mind its quality and other characteristics, as well as its price. Firms will be constrained by the value their competitors offer and will only win business if their product is good value for consumers. However, for a range of reasons, we know that markets do not always function well and that can result in consumers receiving poor value. For example, consumers can find value assessments difficult and firms can sometimes exploit this. We have seen a range of products across financial services markets that have not represented good value, and have had to intervene at different times to address this.
Consequently, we want to set out a clear and consistent expectation of how firms should assess whether the price of products and services offers fair value. Firms should be able to demonstrate that the benefits of their products and services are reasonable relative to their price. We want firms to actively put consumers at the heart of their business and assess the price of products and services at the design stage, and through ongoing monitoring.
We are not proposing to set the levels at which firms should price their products or services. Nor do we intend to use the proposed rule itself to introduce market interventions, such as price caps or other price interventions, as we have done for example in the rent to own and overdrafts markets. In future we may need to use our regulatory tools to make such interventions where markets are failing to deliver fair value. But the aim of our proposal is to require firms to give greater consideration to the price and the role it plays in relation to the fair value of products and services. This should reduce the need for us to make any such future market-wide inventions.
7. A private right of action
In Feedback Statement 19/02, we said we would consider the potential merits and unintended consequences of introducing a private right of action for breaches of our Principles, including any new Principle we might propose. We have heard opposing and equally strong views from a variety of stakeholders on this issue.
We view a private right of action as part of a wider range of mechanisms through which firms are accountable for their breaches of our rules, and consumers can access redress. This includes firms’ own complaints and redress arrangements, the FCA’s supervisory and enforcement activities, access to redress through the Financial Ombudsman Service or redress schemes, and recourse to the Financial Services Compensation Scheme (FSCS).
We will continue to take account of stakeholder input as we further consider this issue. We want this consultation to focus on our proposals for the Consumer Duty, and ensure that they would deliver the right outcomes for consumers. So, we are not making any specific proposals on a private right of action at this stage, but we set out in the CP the arguments that have been made for and against it. We are seeking stakeholders’ further views on how a private right of action could support or hinder the success of the proposals and their intended impact on firms, consumers and markets.
8. Who the consultation applies to
This consultation is likely to interest:
- regulated firms, including electronic money institutions, payment institutions and registered account information service providers
- consumer groups and individual consumers
- industry groups / trade bodies
- policy makers and regulatory bodies
- industry experts and commentators
- academics and think tanks
9. Next steps
This consultation has now closed.
After considering your responses, we will set out the proposed text for any new rules or guidance to implement our proposals in a subsequent consultation, along with a cost benefit analysis. This will also include our further consideration of a private right of action and the impact of the introduction of the Consumer Duty on the existing Principles. Lastly, as we recognise that how we supervise and enforce any new rules will be key to the success of the Consumer Duty, we will also provide further details in the subsequent consultation of how we intend to supervise and embed the Consumer Duty.
We published our second consultation on 7 December 2021 and we expect to make any new rules by 31 July 2022.