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In July 2022, the UK Financial Conduct Authority (FCA) published (containing FCA 2022/31 Consumer Duty Instrument 2022), alongside , confirming its plans to introduce a Consumer Duty and setting a 12-month period for firms to implement the new rules.

The aim of the Consumer Duty is to set higher level and more transparent standards of consumer protection , including firms in the wholesale market, even if they do not have a direct relationship with retail customers. For this purpose, the FCA has opted for adopting an approach based on outcomes rather than prescriptive rules.

This regulatory analysis focuses on what actions need to be taken by payment services providers (PSPs) to be compliant with the new Consumer Duty requirements. It also highlights the timeframe for the implementation of the consumer duty obligations and the FCA’s cost-benefit analysis.

Background

On July 17, 2018, the FCA published a , in which the authority considered the possibility of introducing a “new duty” for firms within financial services when dealing with consumers. The new duty was defined as both “a duty of care and a fiduciary duty”, where “a duty of care is a positive obligation whereas a fiduciary duty is largely a prohibition”.

In May 2021, the FCA published a , and identified various situations and practices that may contribute to positioning consumers in a weaker position in their relationship with firms, including:

• “Sludge practices”, defined as “an excessive friction that hinders consumers from making decisions in their interests, by taking advantage of their behavioural biases”.
• Weaker bargaining position, asymmetries of information, consumer inertia, lack of understanding or behavioural biases.

The FCA uses academic literature (references are included in ) “behavioural biases” as “specific ways in which normal human thought systematically departs from being fully rational”. According to of April 2013, biases can lead people to misjudge situations; for example, depending on the manner in which information is presented, consumers may change their opinion in a way less favourable to them.

Those kind of practices from firms, as stated in , may cause harm to consumers, such as:

• Making it more difficult to reach informed/timely decisions.
• Buying products which are not appropriate for them.
• Sustaining higher costs.
• Receiving low-quality services from firms.
• Finding it difficult to switch and obtain a more favourable deal.

In December 2021, the FCA provided answers to the feedback received in response to CP21/13 and introduced a cost-benefit analysis, as detailed below.

Consumer Duty unfolded

sets out the following three elements of the Consumer Duty:

• Consumer Principle (), which establishes that “a firm must act to deliver good outcomes for ”, including both direct and indirect clients of the firm. Indirect clients are the ones with whom the firm does not have a direct relationship.

As long as the firm can prove that it has complied with the Consumer Duty, the “good outcome” is limited to the scope of the firm’s role and does not translate, for example, into the firm ensuring that an investment brings good results.

Principle 12 prevails over , which establishes that “a firm must pay due regard to the interests of its customers and treat them fairly”, as well as , under which, “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”. As explained in the , Principle 12 implies higher and stricter requirements of firms and has a broader application in relation to a firm’s retail market business than the requirements provided by the requirements in Principles 6 and 7.

• , which operate together, provide that a firm must:
• Act in good faith, requiring firms to adopt an honest, fair and open behaviour. According to the FCA, the following cannot be deemed acting in good faith: not taking into consideration retail customers’ interests; trying to reach their objectives by “manipulating or exploiting retail customers”; taking advantage of a retail customer or their situations; and “carrying out the same activity to a higher standard or more quickly when it benefits the firm than when it benefits the retail customer, without objective justification”. ()
• Avoid causing foreseeable harm to retail customers, which may be caused by both act and omission. This does not mean that a firm has a responsibility to prevent all harm, as long as a firm reasonably believes a retail customer understands and accepts the product’s inherent risk.()
• Enable and support retail customers to pursue their financial objectives, including providing appropriate information to the consumers and ensuring that the consumers are given the possibility to switch and/or exit the product with no unreasonable impediments. ()
• Four outcomes which set more detailed expectations for firms’ business conduct in the following areas:
• , for example “a must maintain, operate and review a process for the approval of: a product; and significant adaptations of a product”.
• .
• .
• .

Costs

The FCA has the following costs for firms to meet the Consumer Duty requirements:

• Total one-off direct costs ranging between £688.6m () and £2.4bn ().
• Annual direct costs ranging between £74.0m and £176.2m ().
• Indirect costs for potential loss in profits due to changes firms make to their product; these costs, , should be borne by the customer.

Total one-off direct costs and annual direct costs include costs incurred to adapt firms’ policies, train staff, maintain IT infrastructure and monitor compliance.

Benefits

In response to the comments received on its cost-benefit analysis, the FCA that it is not possible to quantify the benefits of the Consumer Duty due to its preventive nature. However, the FCA added that it does not expect the duty to limit competition and innovation, as its application presupposes . The FCA that “reasonability” has an objective meaning and “will also be assessed on the facts and so will involve judgements from firms at the time”. For this purpose, the following factors : the nature of the product or service being offered or provided; the specificities of the retail customer(s); and the firm’s position in relation to the product or service.

The FCA that the duty will drive competition by promoting higher standards across the industry, higher levels of consumer protection and by encouraging firms to compete at these higher standards.

The FCA its new Consumer Duty to benefit consumers by:

• Offering products and services which better correspond to their needs.
• Reducing the need to seek compensation or redress.
• Saving time.
• Decreasing psychological stress.
• Decreasing the number of situations where individuals can be harmed.
• Making them more confident and increasing their participation in financial markets.

FCA’s expectations from PSPs – Who is accountable for implementing the Consumer Duty?

identifies firms authorised under the and as being subject to the Consumer Duty. Specifically, it applies to all consumer credit activities and to business conducted with retail consumers that are micro-enterprises and small charities with a turnover of less than £1m.

The definition of “retail customer” for payment services is provided in the under “retail consumers” at point 2(e), which refers to

In the , the duty applies to all the entities involved in the distribution chain (for example, the e-money issuer is responsible for the agent and the distributor that carries out activities on its behalf) and “to the PSP activities [that] can determine or have a material influence over retail customer outcomes”. The FCA “material influence” as the ability to make or influence decisions with respect to any of the following:

• “The design or operation of retail products or services, including their price and value.
• The distribution of retail products or services.
• Preparing and approving communications that are to be issued to retail customers.
• Engaging in customer support for retail customers.”

The FCA currently payment and e-money firms from the Senior Managers and Certification Regime (SM&CR), which provides that all the senior managers are responsible for the ongoing application of the consumer duty. However, the FCA expects these firms “to ensure that they have senior management oversight and accountability for the Duty, and to ensure that their staff are acting in accordance with the requirements of the Duty”.

FCA’s approach and enforcement action

The FCA that it will communicate its expectations to firms, consumer organisations and stakeholders, especially during the implementation period, for which timeframe is set out below, of the consumer duty.

The FCA will also monitor and support firms during the implementation period and, when the duty is in force, will identify practices that do not meet its expectations and will take action, such as requirement or variation of permission powers.

In case of serious misconduct by firms against the duty, the FCA will investigate and, when deemed necessary, will use its deterrent and remedial powers, such as issuing fines against firms and requiring actions to compensate harms suffered by customers as result of not complying with the duty.

In April 2022, the FCA a set of metrics, which will be further developed and updated throughout 2022/23 to assess its accountability. These metrics include four expected from firms: fair value; suitability and treatment; confidence; and access. The first two themes are similar to of the Consumer Duty; in particular, they apply in the following manner:

• Fair value – to establish whether consumers receive fair prices and quality.
• Suitability and treatment – to establish whether consumers are being sold suitable products and services and receive good treatment

Deadlines and next steps

:

• October 31, 2022: firms should have implementation plans to comply with the new standards.
• April 30, 2023: should have completed reviews to meet the results rules. Manufacturers are “that create, develop, design, issue, operate or underwrite a product or service”. Regulated activity or activities connected to providing a payment service or issuing e-money to be services being manufactured.
• July 31, 2023: rules start to apply to new and existing products or services that are open to sale or renewal.
• July 31, 2024: implementation deadline for closed products or services. A is a product “where there are existing contracts with retail customers entered into before July 31, 2023 and which is not marketed or distributed to retail customers (including by way of renewal) on or after July 31, 2023”.

More detailed outcomes and data are expected by the FCA, including at sector level, to assess the compliance status across the concerned industries. The FCA will collect data from firms and will use publicly available sources, as well as its existing data.

Conclusion

The FCA has identified, via reviews of the financial markets, poor practices (such as sludge practices) and situations where the consumer is in a lesser position in respect to the firm, such as a weaker bargaining position, asymmetries of information, consumer inertia or lack of understanding or behavioural biases. These practices and situations have led the FCA to develop a new Consumer Duty, which will enter into force on July 31, 2023, with the intention of applying a more outcome-focused approach than prescriptive rules to ensure customer protection. In the meantime, firms have been required to develop implementation plans by October 31, 2022 and to complete reviews by April 30, 2023.

The Consumer Duty sets the FCA’s expectations from firms, such as acting in good faith and preventing foreseeable harms to consumers. The FCA has stated that it will monitor the status of compliance with the duty and it will engage with firms during the implementation period to support them. However, after the entry into force of the duty, it will take actions, including issuing fines, where it deems that firms have breached their obligations under the duty.