New Consumer Duty: could the FCA’s proposed outcomes based approach to regulation better support innovation?

By Rachel Waggott, Head of Regulatory Affairs, Innovate Finance

The Financial Conduct Authority (‘FCA’) has published its second consultation on the proposed Consumer Duty (CP 21/36), which, if implemented correctly, could spark a pro-innovation and competitive transformation across the retail financial services sector.

This blog sets out a high-level summary of the proposals, elements that will be critical for success, and next steps.

FCA proposals: consumer principle, cross-cutting rules and four outcomes

The three limbs of the FCA’s proposals are:

• A new Consumer Principle (replacing Principles 6 and 7 for retail business) that "a firm must act to deliver good outcomes for the retail consumers of its products".  The disapplication of Principles 6 and 7 is a welcome move to avoid duplicative, and something Innovate Finance called for in our earlier consultation response. Firms will need to assess and evidence the extent to which and how they are acting to deliver good outcomes.
• Cross-cutting rules that set out the FCA's overarching expectations for all areas of firms' conduct. Firms must:
  • Act in good faith toward retail customers;
  • Avoid foreseeable harm to retail customers; and
  • Enable and support retail customers to pursue their financial objectives.
• Four outcomes that provide more detailed expectations for the key elements of the firm-consumer relationship. Detailed expectations relate to:
  • Products and services;
  • Price and value;
  • Consumer understanding; and
  • Consumer support.

The second consultation also drops the proposals around a Private Right of Action - as called for by Innovate Finance in our response to the first consultation (on the grounds it would be create a disproportionate cost for startups and scaleups and create inconsistent interpretation between courts and FCA) - however, it does not preclude the FCA from introducing this at a later point in time.

Elements that will be critical for success

An outcomes-based approach to consumer protection has the potential to provide the flexibility to continue to support innovation in financial services. A focus on outcomes rather than tickbox compliance may better suit digital customer experiences, enable tailored responses to different levels of customer risk, and achieve better outcomes for consumers.

To unlock the potential benefits, the FCA will need to provide sufficient clarity and guidance to firms, and Innovate Finance will be encouraging the regulator to incorporate support in implementing the Consumer Duty as part of the ‘Regulatory Nursery’ and the future ‘Scalebox’.

A consistent view and interpretation of the Consumer Duty shared by both the FCA and the Financial Ombudsman Service (‘FOS’) will be crucial, so that firms and consumers have confidence in the redress mechanism.

It will also be necessary for the FCA Supervisory and Enforcement teams to have sufficient resources and training to monitor and evaluate the success of the Consumer Duty, so that any regulatory interventions are proportionate and timely. The issue of resources and training is particularly important as the regulator will be juggling the implementation of the Consumer Duty alongside its ambitious, internal transformation programme.

Next steps

Innovate Finance will be submitting a response to this consultation paper, and we invite interested parties to share their views with us ahead of the 15 February 2022 deadline.

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