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The New Consumer Duty – scope of the new rules and next steps for Financial Institutions

By Grace Fox | March 6, 2023

What is a ‘consumer’ when considering the new Consumer Duty and how much more time do firms have to prepare?
Financial, Executive and Professional Risks (FINEX)

The implementation deadlines are fast approaching, and Financial Institutions have a challenging task ahead.

The application of the Consumer Duty

In FG22/5, the final non-handbook guidance for firms on the Consumer Duty, the Financial Conduct Authority (FCA) state that ‘the Duty applies to the regulated activities and ancillary activities of all firms authorised under the Financial Services and Markets Act 2000 (FSMA), the Payment Services Regulations 2017 (PSRs) and E-money Regulations 2011 (EMRs), in respect of products and services for prospective and actual retail customers’1.

A ‘retail customer’ is broader than ‘consumers’, which in consumer protection legislation refers to individuals acting for purposes outside their trade, business, craft or profession.2 We will later explore the implications of this.

What is a retail customer?

The FCA have detailed that the ‘retail customer’ definition aligns broadly with the existing scope of their handbook or relevant regulations in each sector as follows:

  • For deposit-taking activities, the Duty applies to consumers, micro-enterprises, charities with a turnover of less than £1 million and a natural person acting in a capacity as a trustee if acting for purposes outside their trade, business or profession (in line with the ‘banking customer’ test in the Banking Conduct of Business Sourcebook (BCOBS)).
  • For insurance, the scope follows the position in the Insurance Conduct of Business Sourcebook (ICOBS). The Duty does not apply to reinsurance, contracts of large risk sold to commercial customers or other contracts of large risk where the risk is located outside the UK. Nor does it apply to activities connected to the distribution of group insurance policies or the extension of these policies to new members.
  • For investments, the Duty applies to business conducted with a customer who is not a professional client, as set out in the Conduct of Business Sourcebook (COBS).
  • For payment service or e-money providers, the Duty applies to business conducted with consumers, micro-enterprises and small charities (where the definitions of these terms are the same as for deposit takers, as noted above).

What is "retail market business"?

This is defined by the FCA in their policy statement as “the regulated activities and ancillary activities to those activities, payment services, issuing electronic money, and activities connected to the provision of payment services or issuing of electronic money, of a firm in a distribution chain (including a manufacturer and a distributor) which involves a retail customer…”3 It then sets out various activities that are excluded.

What about prospective customers?

It is worth noting that the Duty will not only apply to actual retail customers, but to prospective customers. The FCA give the following examples of where the Duty would apply:

  • when approving or communicating a financial promotion
  • when answering a question from a prospective customer
  • where a prospective customer applies for a product or service

How does the Duty apply across the distribution chain?

The Duty applies across the distribution chain, from product and service origination through to distribution and post-sale activities. By the ‘distribution chain’, the FCA state that they mean all firms involved in the manufacture, provision, sale and ongoing administration and management of a product or service to the end retail customer.

In addition, the FCA have introduced a rule requiring firms to notify them if they become aware that another firm in the distribution chain is not complying with the Duty. The FCA have also introduced a rule requiring a firm to notify other firms in the distribution chain if it thinks they have caused, or contributed to, harm to retail customers. However, unless there are regulatory requirements or contracts require it, firms are responsible only for their own activities and do not need to oversee the actions of other firms in the distribution chain.

How much more time do we have?

By 30 April 2023: Manufacturers should have completed all the reviews necessary to meet the outcome rules for their existing open products and services so they can share with distributors to meet their obligations under the Duty, and identify where changes need to be made.

31 July 2023: Implementation deadline for new and existing products or services that are open to sale or renewal.

31 July 2024: Implementation deadline for closed products or services.4

The FCA have subsequently advised they have identified a few areas where clarification is needed on how the Duty applies and they are therefore consulting in the December 2022 Quarterly Consultation Paper (QCP) on changes to make certain points clearer in the rules.5

What does this mean for in-scope firms?

The in-scope firms will have to consider the Consumer Duty throughout their processes and organisational structure. The implications for firms in the coming months will prove a challenging task and require careful planning, with consideration not just of their own actions and omissions, but those of others within the distribution chain.

Particularly in this cost-of-living crisis, Financial Institutions and their insurers should be mindful of the potential increased risk of claims to the Financial Ombudsman Service (FOS) and it will be important that the intention of the new regulatory approach and expectations by the FCA is reflected in the FOS’ application to future complaints. It is also worth noting that the FCA have confirmed that the Consumer Duty does not apply retrospectively, with the FCA and FOS working on the basis that conduct should be judged on the rules and standards in place at that time.6

As ever, the best advice is to ensure you are apprised of the obligations not only to your retail customers, but to your insurers in the event that you may wish to advance a claim for indemnity. Talk to a WTW broker on how we can assist in navigating these obligations.


1 FG22/5 Final non-Handbook Guidance for firms on the Consumer Duty

2 Consumer Rights Act 2015

3 Feedback to CP21/36 and final rules

4 Consumer Duty

5 Quarterly Consultation

6 Consumer Duty – information for firms


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