We are interrupting our series of Consumer Duty briefings to address the FCA’s surprise proposals to amend the Consumer Duty in the middle of the implementation period. The proposals, if adopted by the FCA, would amount to a fundamental change which would require firms to re-do their scoping exercises and could bring firms previously considered out of scope within the scope of the Consumer Duty.

Our hope is that either the FCA does not adopt these changes at this stage or that, if it does, it extends the implementation period to give firms time to analyse and, if necessary, adapt – or even adopt – implementation plans to manage what could amount to a substantial increase in the scope of the Consumer Duty.

What are the proposals?

The proposals are found in Chapter 8 of the FCA’s Quarterly Consultation Paper (“QCP”)[1] published on 2 December 2022.

The FCA describes the proposals as “clarificatory amendments” but the proposals would, if adopted, do far more than clarify the existing rules: they would change the rules which firms are in the middle of implementing. Two at least of the five proposals would fundamentally change the scope of the Consumer Duty.

The five proposals are to:

1. extend the scope of the Consumer Duty to cover firms which are approving or communicating financial promotions (including EEA fund managers in the Temporary Marketing Permissions Regime (“TMPR”));
2. limit the scope of the exclusion for non-retail financial instruments;
3. amend the scope of the Consumer Duty so that it does not apply to activities “excluded” from FCA rules (as opposed to activities “not included in” FCA rules);
4. amend the “retail customer” definition in respect of occupational pension schemes (“OPS”);
5. amend the “closed product” definition.

Whilst proposals #4 and #5 may be helpful clarifications, proposals #1 and #2 amount to substantive changes to scope and would require firms to re-do their scoping exercises. Proposal #3 will require careful consideration. All proposals are considered in detail below.

The FCA QCP closed on 9 January 2023. We expect responses to the consultation to make the point that now is not the right time to make substantive amendments to the Consumer Duty rules. If the FCA were to adopt the proposed amendments, it is unclear when the final rules would be published. Given that firms are working towards a deadline of April 2023, there is now insufficient time for the FCA to consider the responses to its consultation and complete the internal procedures that are necessary for it to adopt new rules whilst giving firms time to consider and adapt to the changes within the existing implementation period.

Proposal 1: Apply the Consumer Duty to firms which approve or communicate financial promotions addresses to, or likely to be received by a retail customer

This proposal amounts to a significant scope change. It would require firms to re-do the scoping exercises and could brings parts of the business, or indeed entire firms, that have been de-scoped into scope of the Consumer Duty.

As we explained in Part 1 of our Consumer Duty series, based on the current rules, a firm is in scope of the Consumer Duty if it is carrying on “retail market business”. This new concept requires there to be a regulated activity. Firms have legitimately de-scoped activities that do not meet the definition of “retail market business”. However, the FCA now proposes to bring into scope additional activities of which fall outside that definition: approving or communicating financial promotions addressed to, or likely to be received by, a retail customer.

The FCA has put forward consequential amendments to its rules on the application of the Consumer Duty to reflect this proposed increase in scope. This will require careful consideration as they change the basis on which firms will have carried out their scoping exercises.

Proposal 2: Limiting the application of the exclusion for "non-retail financial instruments"

Also as explained in Part 1 of our series on the consumer duty, the FCA has provided a number of exclusions from the definition of “retail market business” including an exclusion that is intended to take primarily wholesale products out of scope of the Consumer Duty. One limb of this exclusion takes out of scope products that have a minimum denomination or minimum investment of £50 000.

The FCA now proposes to limit this exclusion so that it cannot be used to take investment funds out of scope, albeit firms may have legitimately de-scoped funds with a minimum investment of £50 000 already.

Both these proposals, if adopted, could mean that parts of a business that a firm has descoped and indeed entire firms that have ruled themselves out of scope of the Consumer Duty could find themselves in scope of extensive new rules with very little time left to analyse and implement those rules.

Proposal 3: Amending the scope of the Consumer Duty so that it does not apply to activities "excluded" from FCA rules

As currently drafted, the Consumer Duty rules do not apply to activities “not included in a rule which sets out the scope of protections offered to retail customers by COBS, ICOBS, MCOB, BCOBS, CMCOB, FPCOB, PROD or CONC” (PRIN 3.2.8R). The FCA proposes to change this rule to activities “excluded from a rule…” in the specified FCA sourcebooks. There are various consequential amendments made to the scoping provisions in PRIN 3.2 to reflect this change.

Were this change to be adopted, firms would need to reconsider the basis on which they have de-scoped activities: there is a clear difference between activities that are expressly excluded from FCA rules and activities which are not expressly included in those rules.

Proposal 4: Amending the "retail customer" definition in respect of OPS

This amendment changes the definition of a “retail customer” to include, where a firm carries out activities in relation to an OPS, any person who is or would be a beneficiary of that OPS (as opposed to the current definition which refers to a beneficiary “in relation to investments held in” that OPS. This amendment is intended to make it clear that defined benefit OPS are prima facie in scope of the Duty, although the FCA has helpfully pointed out that, in practice, it does not expect there to be many instances where a firm can materially influence the retail customer outcomes in relation to defined benefit OPS. This change is unlikely to make a significant difference to firms’ scoping exercises.

Proposal 5: Amending the definition of "closed product"

This is another proposal which is unlikely to make a significant difference to firms’ scoping exercises, particularly as the rules on closed products do not come into force until July 2024. The changes are intended to make clear that closed products are products which are not “distributed” in the ordinary sense of the word (ie closed products are products which are not marketed or sold to new retail customers or are not available for renewal by existing customers). The change also makes it clear how the definition of a “closed product” applies to OPS.

Firms, even those that have descoped themselves on the basis of a rule that could be amended, should carefully monitor what the FCA does next.

The consultation closed on 9 January 2023 and the FCA will need to consider the responses carefully before it publishes the feedback and its proposed next steps. It is to be hoped that the FCA would swiftly inform industry if, following what we would expect to be a negative response to its proposals, it still intends to make substantive changes to the scope of the Consumer Duty.

In our next briefing, we will explore what will still need to be done to comply with the April 2023 deadline on the basis that (a) push-back to the FCA proposal will be so vehement that it won’t make the changes now or (b) it may extend the implementation period but only to those areas affected by the changes - leaving everything else subject to the original dates. 

If you need advice on the Consumer Duty and meeting its requirements, please contact our experienced expert, Alex Carr: a.carr@puntersouthall.law

[1] CP22/26: Quarterly Consultation Paper No. 37 (fca.org.uk)