The British Financial Conduct Authority wants to impose yet another duty on firms that service 'retail clients,' a term that encompasses all clients other than professional clients (such as large corporate entities and government bodies) and eligible counterparties. The cost for firms is likely to be high.

The FCA, in its own words, wants to require firms to: "(i) ask themselves what outcomes consumers should be able to expect from their products and services; (ii) act to enable rather than hinder these outcomes; and (iii) assess the effectiveness of their actions." Its 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 direct relationships with end customers. They also extend to every stage in every firm's activities, all the way from vague strategic planning at the top to day-to-day interactions with HNWs and other retail customers.

The initiative is another step in the FCA's slow crawl towards heavy involvement in the creation of new financial products - something from which its predecessor shied away. It is also a slight admission that its market studies, rules, guidelines and enforcement actions have not been enough to force firms to try, in its own words, to "get it right in the first place." As with many other initiatives, the FCA exhibits a disconcerting habit of sometimes describing the proposal as though it is already in place and functioning, writing that "the Consumer Duty is intended to, and does, set a higher standard of care and expectation beyond our current set of principles and rules."

On the subject of product governance, the FCA's Product Intervention and Product Governance Sourcebook (PROD) already imposes similar requirements on the design, approval, marketing and management of certain products and services throughout their lifecycles, but PROD does not apply to all retail markets that the FCA regulates, whereas the new duty will. The FCA refers to its objective here, in characteristically stilted language, as "cross-sectoral requirements reflecting the key obligations in PROD, positioned under the Consumer Duty."

The new duty, the regulator hopes, will include a new 'consumer principle' (presumably to go with the FCA's existing 'principles for business' to be found in PRIN 2.1) that provides an overarching standard of conduct and a set of "cross-cutting rules and outcomes" that support it by setting clear precepts (the FCA calls them "expectations," presumably because it is expecting to impose them) to influence firms’ cultures and govern their behaviour.

Cross-cutting rules

At section 3.25 of the consultative paper, the regulator expresses its desire to make the Consumer Duty’s cross-cutting rules force firms to behave in three important ways.

• They ought to take all reasonable steps to avoid causing foreseeable harm to customers through their conduct, products and/or services. To do this, they ought to take proactive steps to forestall harm if they can, trying not to exploit customers’ weaknesses, behavioural biases or lack of knowledge. This diktat sounds to all the world like a ban on advertising, especially as the regulator also wants firms to not to disguise the benefits and risks of their products and services through omission or by burying key terms in documents that they know that customers will not read.
• They ought to take all reasonable steps to enable customers to pursue their financial objectives, "empowering" them to make choices for themselves and remain ultimately responsible for their decisions and actions. Firms ought to create an environment in which consumers can act in their own interests, rather than dictate to them. They should also take reasonable steps to understand their behavioural biases to help them make good decisions.
• They should act in good faith. Honesty and fair dealing are the watchwords here.

CP21/13 proposes to embed a concept of reasonableness into all elements of the new duty, including the Consumer Principle. This is likely to be disastrous, opening the door to all manner of inconsistent regulatory interpretations of firms' conduct.

Four Outcomes

Another part of the new rule is to contain some rules and guidelines that the FCA calls its ‘Four Outcomes.’ These are designed to dictate the conduct of firms regarding the main elements of their relationships with customers. These outcomes relate to: (i) communications; (ii) products and services; (iii) customer service; and (iv) price and value. Again, the regulator talks of "setting expectations" in this area, whatever that means, in some rules.

In its own words, the FCA expresses the four ideas as follows.

"1. Communications equip consumers to make effective, timely and properly informed decisions about financial products and services.
"2. Products and Services are specifically designed to meet the needs of consumers, and sold to those whose needs they meet.
"3. 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.
"4. The price of products and services represents fair value for consumers."

In setting the last proposal the FCA does not want to fix prices for products or services (or, in its own circumlocutory words, "the proposal is not to set levels at which firms should price their products or services"). Nor does it intend to cap prices or interene in the pricing process. Only time will tell what this phrase is doing in its plan for the new rule.

The regulator has no specific proposals to govern the interaction between its existing principles and the new duty, the places at which the new rules ought to appear in its rulebook and whether the new duty should be accompanied by a private right of action, i.e. consumers taking firms to court for dereliction of duty. It is, however, hard to see anybody from a firm welcoming class actions of this sort. Comments on CP21/13 should be in by 31 July.