Consumer Duty: A force for good if done right

In its scale, breadth of scope and ambition, the Financial Conduct Authority's (FCA) proposed new Consumer Duty is perhaps its most important regulatory intervention in a decade.

In its scale, breadth of scope and ambition, the Financial Conduct Authority's (FCA) proposed new Consumer Duty is perhaps its most important regulatory intervention in a decade.  The FCA rightly describes the Duty as a ?fundamental shift? in its approach to regulation, marked by a greater focus on the outcomes consumers experience, with firms required to actively assess and evidence the extent to which they are acting to deliver good outcomes for their retail customers.

UK Finance has supported the intent behind the Duty since its inception. Done right, it will enable the FCA to identify harmful practices more quickly and intervene before they become entrenched as market norms. However, our response to the FCA's first consultation expressed major concerns that its proposals were unclear as to the products and services to which the Duty would apply, the harms the Duty was intended to address and the steps firms were expected to take to prevent their occurring.

The FCA is to be commended for the changes it made in its second consultation on revised and refined proposals, which have reduced the risks of unintended consequences. We nonetheless still have reservations about the Duty's proposed application to firms? back books, the role of the Financial Ombudsman Service (FOS) and a lack of proportionality in how firms will be able to evidence their compliance with the four desired outcomes.

Even in the Duty's improved state, such a fundamental rewiring of conduct regulation'spanning the provision of all regulated financial products and services to retail customers?will be a significant undertaking for firms and not without risks for consumers. In particular, the subjectivity of central concepts such as ?good faith,? ?foreseeable harm and ?value? could lead to the Duty being implemented inconsistently across firms and markets.

These risks will be exacerbated if implementation of the Duty is rushed. The FCA currently proposes to give firms just nine months to interpret its finalised requirements, assess their full suite of products and services against them and undertake change programmes, alongside changes to governance processes and IT systems that underpin them.

This would be a tall order at the best of times, but especially so while firms continue to devote significant resources to supporting their customers through the financial impact of the pandemic. For lack of time to seek, firms might understandably opt for the lower-risk option of restricting access to some products and services?or even withdrawing them entirely?particularly where the requirements of the Duty are unclear.

The FCA, too, has much to do before the Duty can take effect. In particular, it must ensure its ability to supervise the Duty consistently and fairly and address tensions and inconsistencies between the Duty and existing legislative and Handbook requirements.

As we argue in our response, at least two years are needed for all parties to prepare for and implement the Duty. The desire to introduce it quickly is understandable, but any time saved would be a false economy. We all'the FCA, consumers and firms?want the Duty to succeed, but it will only do so if we resist the temptation to cut corners.

UK Finance's Matthew Conway will be chairing a discussion on the next steps for the consumer duty as part of our Regulatory Roadmap III webinar series. Click hereto sign up.

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