The Consumer Duty applies to the regulated activities and ancillary activities of all firms authorised under the Financial Services and Markets Act 2000, the Payment Services Regulations 2017 and E-money Regulations 2011, in respect of products and services for prospective and actual retail customers.
Firms that offer such products and services must elevate consumer protection levels by establishing clearer and higher standards and prioritising customers’ needs in all their operations. The Financial Conduct Authority (FCA) unveiled its vision in July 2022, and in October 2022, we explained in our article, ‘FCA’s paradigm shift: a new Consumer Duty’, the requirements of the new Consumer Duty and the necessary steps for preparation.
This latest article provides a reminder of the timeline and what you need to consider for the final phase for closed products and services to ensure that your firm is prepared.
Contents:
Who are ‘retail customers’?
The ‘retail customer’ definition aligns broadly with the scope of the FCA Handbook or relevant
regulations in each sector. For example:
- for consumer credit, the Duty applies to all regulated credit-related activities;
- for deposit-taking activities, the Duty applies to consumers, micro-enterprises, charities with a turnover of less than £1 million and a natural person acting in a capacity as a trustee if acting for purposes outside their trade, business or profession (in line with the ‘banking customer’ test in the Banking Conduct of Business Sourcebook (BCOBS)); and
- for payment service or e-money providers, the Duty applies to business conducted with consumers, micro-enterprises and small charities (where the definitions of these terms are the same as for deposit takers, as noted above).
Consumer Duty timeline
Implementing the principles of Consumer Duty has proceeded on a phased basis, as recognised by the FCA, acknowledging that embedding it is a complex task. The first phase, applying to open products and services, became effective on 31 July 2023, and the second phase, for closed products and services, will take effect on 31 July 2024.
A phrase being used by the FCA about the Consumer Duty is “Not just once and done.” Alongside implementing open products and services in 2023, there remains a substantial amount of ongoing work and, more generally, continuous learning and improvement for firms.
Distinguishing between open products and services and closed products and services
Open products and services are new and existing products that were manufactured, marketed, or distributed to retail customers before 31 July 2023 and remain on sale or open for renewal after that date.
Closed products and services are those that are not marketed or distributed to retail customers on or after 31 July 2023 and not open for renewal.
Final phase: closed products and services
With attention now turned to the closed products and services there should be some lessons learned if you have already gone through the implementation phase for open products and services. However, closed products and services will have their own issues and challenges. For example, the level of information required for products in recent years may not have been considered when the product was manufactured, and some historical information may not be available.
If you have not done so already, you will need to produce an implementation plan, which should be robust, but achievable. The following steps should be taken in implementing the Consumer Duty:
- Scoping: Assessments of what falls within the scope of closed products for your business should have already taken place. If you are yet to undertake this task you should be able to leverage from the considerable work that would likely have been done to identify the scope of open products. This would also have the added benefit of providing consistency.
- Reviewing: You will need a process to review products and services to make sure that they still offer fair value. A range of information is relevant to this analysis such as the target market and distribution strategy, whether the product or service provides fair value or if it is comparatively high, the complexity of the product and whether there are any known issues or complaints.
Rather than reviewing each product and service, the FCA suggests aligning the treatment of similar products and services, i.e. those products and services that are intended to meet similar customer needs and where the customer base is similar.
The FCA has emphasised that firms should prioritise the review of products or services with a higher risk of consumer harm, such as where a firm has received complaints about a product, such as about price and value. - Strategy for product treatment: Strategies should be put in place to mitigate any risks you identify. Is an uplift sufficient to improve the product or service so that it complies with the Consumer Duty, or should the product be discontinued? A gap analysis would be helpful to make an informed decision here. Factors such as cost and the impact on existing customers will no doubt play an important part in the decision-making process. Ultimately the FCA expects firms to be able to explain how they decided on the most appropriate intervention, demonstrate how it has delivered good outcomes and, if not, what they have done further to address the issue.
Is the Consumer Duty retrospective?
The application of the Consumer Duty to closed products does not give it retrospective effect. The FCA has been clear that firms will not be judged under the Duty with the benefit of hindsight. However, the Duty applies to open and closed products and services on a forward-looking basis. A firm’s conduct will be judged on the rules that were in place at that time.
Conclusion
The implementation of the Consumer Duty so far has been a challenging task due in part to the fact that it must be considered throughout your organisational structure. With July 2024 being the final phase, you are likely to have already had to consider many areas from the initial (open book) phase, so that can be leveraged to streamline what is required and to maintain a consistent approach. Successful implementation is achievable with a robust plan aligned to your firm’s culture and risk appetite and with it being appropriately prioritised within your firm. Our financial services solicitors are on hand to provide prompt and experienced advice and assistance if you require it.
