In December 2021, the United Kingdom’s Financial Conduct Authority (FCA) issued a consultation paper publishing a revised proposed new Consumer Duty that would govern FCA-regulated firms’ interactions with retail clients. The proposed new Consumer Duty would apply to, among others, US firms servicing retail clients in the United Kingdom (UK) and could also result in UK firms seeking to contractually impose aspects of the Consumer Duty upon US firms that are involved in the distribution chain for products offered to UK retail clients. 

According to the FCA, the Consumer Duty would set “a higher standard of care” that would result in “a higher level of consumer protection in retail financial markets.” The Consumer Duty would be comprised of three key elements:

(1) the Consumer Principle;

(2) three so-called “cross-cutting” rules that would apply to all areas of firm conduct and which reflect the FCA’s expectations of how firms will apply the Consumer Principle; and

(3) four outcomes which provide more detailed expectations for the key elements of the firm-consumer relationship. 

The Consumer Duty is targeted at interactions between firms and their retail client base and would apply to all firms in the distribution chain that can influence material aspects of the design, target market, or performance of a retail financial product or service. This would include firms that are involved in the design or operation of a retail product or service, the distribution of a retail product or service, or in the preparation of communications that are directed towards retail clients. While firms with direct retail client relationships would generally have greater responsibility under the Consumer Duty, product manufacturers, distributors, and platform providers would also be required to consider their obligations. 

It should be noted that “retail clients” would encompass a wider range of individuals than the corresponding definition of “retail customer” in the U.S. Securities and Exchange Commission’s (SEC) Regulation Best Interest (Reg BI). For some purposes, a retail client could include a small or medium enterprise, whereas a retail customer is limited to natural persons.

The Consumer Principle

The proposed Consumer Principle would require firms to “act to deliver good outcomes for retail clients.” Firms would be required to “consistently focus on consumer outcomes and putting customers in a position where they can act and make decisions in their own interests.” The FCA acknowledged in the consultation that it is not possible for all clients to receive a good outcome (i.e., clients may lose money on an investment even if the firm acts in compliance with the Consumer Principle). However, firms would be required to “act reasonably to deliver good outcomes.”

The proposed requirement that firms “act reasonably to deliver good outcomes” can be contrasted with the Reg BI’s duty that a broker-dealer act in a retail customer’s best interest at the time that the broker-dealer makes a recommendation to the retail customer. The FCA specifically rejected proposing that the Consumer Principle require firms to “act in the best interest of retail clients.” Among other things, the FCA expressed concern that a principle based on best interests could be confused with a fiduciary duty. 

The FCA noted that the heightened duty of care imposed by the proposed Consumer Principle overlaps with existing Principles 6 (A firm must pay due regard to the interests of its customers and treat them fairly.) and 7 (A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading.) of the FCA’s Principles for Business. It noted that Principle 6 and Principle 7 would be retained, but would only be applied in situations that fall outside the scope of the Consumer Principle. 

Cross-Cutting Rules

The cross-cutting rules are designed to develop the standard of conduct that would govern firms’ relationships with retail customers under the Consumer Principle. The rules – overarching rules that would apply to all areas of firm conduct – would require firms to:

(1) act in good faith towards all retail customers;

(2) avoid causing foreseeable harm to retail customers; and

(3) enable and support retail customers to pursue their financial objectives. 

In responding to industry comments on its initial consultation, the FCA noted in this consultation that firms would only be required to address harm when it is reasonably foreseeable. The FCA stated that firms would not be required to protect customers from “unforeseeable harm, all poor outcomes, or risks that the customer reasonably understood and accepted.” 

The FCA also provided further guidance as to the proposed requirement that firms “enable and support retail customers to pursue their financial objectives.” They noted that compliance with this rule would require firms to modify their approach based on a number of factors, including the account type that the client maintains with the firm and the firm’s knowledge of the client’s background, risk tolerance, and objectives. For example, the FCA noted that “a firm providing an execution only or non-advised service can assume their customers’ objective to be the enjoyment and use of the product and service they have purchased.” On the other hand, “a firm providing advisory or discretionary services would understand more about an individual consumer’s specific objectives and would need to act on that knowledge.”

Outcomes

The FCA is proposing a set of four outcomes, with associated rules, that they expect will help firms comply with the Consumer Principle and cross-cutting rules:

• Products and Services: The Consumer Duty would mandate that “all products and services for retail customers to be fit for a purpose.” To further clarify how firms can achieve this outcome, the FCA is proposing a number of specific requirements on product manufacturers[1] and distributors[2]. 

Among other requirements, manufacturers would be required to: (1) develop an approval process for products and services; (2) identify a target market for a product or service; (3) test the product or service to ensure it meets the needs of the target market; and (4) select appropriate distribution channels. 

Distributors would be required to: (1) develop distribution arrangements for each product or service distributed; (2) review distribution arrangements to ensure if they are appropriate; and (3) obtain information from the manufacturer about a product or service.

• Price and Value: Firms would be required to assess the price of the products and services they offer at the design phase and on an ongoing basis. They will need to ensure that the benefits of products and services are reasonable relative to their price.
• Consumer Understanding: Firms would be required to communicate information to retail customers in a way that is clear, fair, and not misleading. In doing so, firms would be required to tailor communications to take into account the complexity of the product and/or service, the communication channel used, and the customer’s sophistication, financial capability, and vulnerability. 
• Consumer Support: The Consumer Support outcome would set a minimum level of acceptable customer support that all firms must provide. Among other things, firms would be required to support customers by: (1) designing customer support in a way that does not create unreasonable barriers; (2) ensuring that customer support enables customers to fully use the products and services they buy; and (3) not making it mandatory that a customer use a specific communication channel.

We note that, unlike Reg BI, which applies only to broker-dealers, the Consumer Duty would impose specific obligations upon product manufacturers and platform providers as well as distributors. 

Next Steps

The FCA anticipates that the Consumer Duty will “require a significant shift in both culture and behaviour” of regulated firms that will result in a “fairer, more consumer-focused and level playing field.” The FCA is seeking additional comment on the proposed rules by February 15, 2022 and expects to finalize the new rules by July 31, 2022.

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