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A pertinent question without an immediate answer. It’s tempting for financial services firms to assume it will depend on how the FCA assesses what is or is not a good outcome. However, that betrays a misunderstanding of how the Consumer Duty rules work and may leave firms focusing on the wrong areas when assessing the robustness of their implementation.

FCA Principle 12 imposed a new obligation on firms to “act to deliver good outcomes for retail customers”. Principles are enforceable rules but Principle 12 is special: PRIN 2A.2.26 provides “The cross-cutting obligations (the rules in PRIN 2A.2) exhaust what is required under Principle 12.” This makes enforcing Principle 12 very different from enforcing other FCA Principles. For other Principles more detailed provisions in the FCA rules and guidance are not exhaustive of what is required by the Principles. The Consumer Duty is fundamentally different – it is the only Principle that cross-refers to another set of rules that we are told is exhaustive of what the Principle requires. 

This means that the interpretation and application of the words in Principle 12 itself will be largely irrelevant, or at most symbolic. This is because to establish a breach of Principle 12 the FCA will first need to prove a breach of the “cross-cutting” rules in PRIN 2A.2. 

These all important cross-cutting rules are themselves drafted at a very high level and in a principles-like fashion. They provide that firms must:

• act in good faith towards retail customers (which includes honesty, fair and open dealing and acting consistently with the reasonable expectations of retail customers);
• avoid causing foreseeable harm to retail customers (foreseeable harm may be caused by both act and omission, in a firm’s direct relationship with a retail customer or through its role in the distribution chain even where another firm in that chain also contributes to the harm); and
• enable and support retail customers to pursue their financial objectives.

Conversely, the much more detailed rules and guidance in the “outcomes rules”, on which much of the attention of firms was engaged during the implementation of the duty, are not exhaustive. “The outcomes rules at PRIN 2A.3 to PRIN 2A.6 help to define what is required by Principle 12 and PRIN 2A.2 but do not exhaust those rules.” (PRIN 2A.2.27 G) So it is the cross-cutting rules that will take centre stage in enforcement of Principle 12 itself. 

For example, many of the more detailed rules on product governance might be said to flesh out what firms need to do to “avoid causing foreseeable harm to retail customers”. Yet even where a firm has complied with all of the “products and services” rules and guidance in PRIN 2A.3, that will not prevent the FCA seeking to allege a breach of the obligation to avoid causing foreseeable harm to retail customers or to act consistently with the reasonable expectations of retail customers in relation to a firm’s manufacture of a financial product. It is on these questions that enforcement of the Consumer Duty will turn.

When assessing the robustness of firm’s implementation of the Consumer Duty rules the focus should not just be on product governance arrangements, fair value assessments and the arrangements firms have put in place to monitor the outcomes they are delivering for consumers. Important though these are they will not provide a complete answer to compliance with Principle 12. That lies in the firm having documented and being able to demonstrate that they have:

• a clear, systematic assessment and articulation of retail customers’ financial objectives and “reasonable expectations” and all the potential sources of “foreseeable harm” that may arise in the context of the products and services they provide; and 
• taken all the reasonable steps to deliver in line with customer objectives and expectations and to minimise the risk of such harms. 

Linklaters is at the forefront of helping clients to navigate the Consumer Duty. Further details can be found on its website here.