UK Financial Services Consumer Regulation Reset: The “Consumer Duty”
Financial Service

UK Financial Services Consumer Regulation Reset: The “Consumer Duty”

The UK Financial Conduct Authority (the FCA) is introducing sweeping new regulatory obligations for financial services firms that serve UK retail customers, referred to as the “consumer duty” (the Duty). The Duty represents a major effort by the FCA to reset expectations for consumer protection, increasing the standard of care that firms must give customers, and amounting to, “a significant shift in culture and behaviour by many firms.”1 It is, in other words, a substantial compliance challenge. Firms have until July 31, 2023, to prepare.

E-money institutions (EMIs), payment institutions (PIs) and registered account information service providers (RAISPs) will be subject to the Duty, as will other firms currently subject to the FCA’s Principles for Businesses, including investment firms, asset managers, consumer credit lenders, and banks, among others.

The Duty will apply to new and renewing products and services from July 31, 2023, and to closed book business from July 31, 2024. In the meantime, all in-scope firms that provide services either directly or indirectly to, or in respect of, UK consumers will need to prepare to comply with the Duty.

EMIs, PIs, and RAISPs, to which the Principles for Businesses have only applied since August 2019, may need to take particular care because the Duty will impose a significant step up in applicable conduct obligations. It is also a further move away from rules-based regulation for EMIs, PIs, and RAISPs towards outcomes-based regulation—a more nuanced and arguably more complex standard from a compliance perspective.

We discuss below the main features of the Duty and some of the steps that firms may need to take to prepare for it.

Overview of the Duty

Under the FCA’s final rules and guidance, which were published in July 2022,2 the Duty will require firms to design their products and services proactively in order to deliver good outcomes for customers, taking account of how consumers actually behave. The following rules and guidance will give effect to this:

  • an overarching principle in the FCA’s Principles for Businesses—the “Consumer Principle”—that will require firms to act to deliver good outcomes for retail customers;
  • cross‑cutting rules that will require firms to act in good faith, to avoid causing foreseeable harm, and to enable and support retail customers to pursue their financial objectives; and
  • a suite of rules and guidance relating to specific outcomes regarding products and services, price and value, consumer understanding, and consumer support.

The FCA has made clear that the new rules do not change the nature of a relevant firm’s relationship with its customer; it does not, for instance, create a fiduciary relationship where one does not already exist. The FCA has also explained that it will interpret the obligations on in-scope firms under the Duty, “in accordance with the standard that could reasonably be expected of a prudent firm carrying on the same activity in relation to the same product and services, taking appropriate account of the needs and characteristics of customers in the relevant target market.”3 In other words, the FCA will apply an objective standard to assessing compliance with the Duty.

Those points notwithstanding, the requirements under the Duty are extensive and firms may need to work hard to get to a point where they are comfortable that they comply.

How to Prepare?

In-scope firms will need to review their business model and the products and services they provide. That review should take account of, among other things, the nature of the product or service being offered, the characteristics of the customers in the relevant target market, and the firm’s role in relation to the product or service. This will involve substantial resource commitment and the FCA expects firms to take an evidence-based approach to making that assessment.

This raises several practical questions for firms, including how to determine the type and range of data that they will need to obtain to make those assessments. Customer research, product testing, and/or internally derived data may all be relevant, depending on the nature of the product or service. Firms may also find it necessary to validate their own thinking in these areas through benchmarking against other firms’ practices and procedures. Firms should be ready to share their data and associated methodologies with the FCA.

The nature of a firm’s obligations will depend on its role in relation to the product or service being provided. This is relevant because the Duty will apply across the distribution chain for relevant products and services. The FCA defines “distribution chain” for these purposes as, “all firms involved in the manufacture, provision, sale and ongoing administration and management of a product or service to the end retail customer,” where those firms have a material influence over, or determine, retail customer outcomes.4

In many cases, each relevant firm in a distribution chain will bear obligations under the Duty in addition to those to which it is already subject. The FCA calls out distribution chains in the payments sector for specific illustration, referring to the responsibility of EMIs to ensure that they comply with the Duty in relation to distribution activities carried on by their agents and distributors. Firms involved in other arrangements such as payment aggregation and acquiring, BaaS, white-labeled products and services, credit institutions that safeguard the funds of PIs or EMIs, payment initiation service providers, and account providers will also need to consider their obligations under the Duty.

Geographic Scope

Although the Duty will apply only in respect of activities carried on from the UK, firms that operate cross-border distribution chains will need to determine whether the involvement of non-UK firms in the chain—firms that will not be subject to the Duty—could lead to poor outcomes for customers. Some firms may, therefore, need to review and potentially amend or terminate relationships with non-UK service providers in order to ensure they comply with their obligations under the Duty.

Governance

Driving through cultural change, and preparing for the Duty more generally, will require board-level engagement. This is not least because the FCA will require boards to review and approve a report on the relevant firm’s compliance with the Duty at least annually. The FCA also expects firms to appoint a board-level champion, ideally an independent non-executive director, to help ensure that the Duty is discussed regularly and raised in all relevant discussions.

The FCA is amending its individual accountability rules in line with the Duty. Under the Senior Managers and Certification Regime (the SM&CR), each senior manager will be responsible and accountable for the role they play in ensuring compliance with the Duty. The FCA is also introducing a new individual conduct rule to ensure that all employees of firms (except for ancillary staff) act to deliver good customer outcomes in accordance with the Duty.

Importantly for PIs, EMIs, and RAISPs, the FCA expects even firms that are not subject to the SM&CR and its conduct rules to ensure that they have senior management oversight and accountability for the Duty, and that their employees act in a way that is consistent with the Duty.

More Information

For more information on that or any of the other regulatory obligations referred to in this alert, and how to approach compliance, please contact Wilson Sonsini attorneys Josh Kaplan and Chris Hurn.


[1] FG22/5, para. 1.40. 

[2] FCA, Policy Statement PS22/9, A new Consumer Duty Feedback to CP21/36 and final rules, and Finalised Guidance, FG22/5, Final non-Handbook Guidance for firms on the Consumer Duty July 2022, July 2022. 

[3] FG22/5, para 4.13. 

[4] FG22/5, paras 2.12 – 2.13. 

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