The Consumer Duty is one of the most significant pieces of regulation to land in the financial services industry for some time and represents a major shift in how firms will need to view customer outcomes and proactively address harm in the retail market. For Insolvency Practitioners (IPs) appointed over a regulated firm that has products within the scope of the duty, this will form part of the regulatory obligations with which the firm (and the IP) will need to ensure compliance. This article will set out the Consumer Duty at a high level and highlight why IPs will need to keep the duty at the forefront of considerations when dealing with firms facing insolvency.

What is the Consumer Duty?

The Consumer Duty sets out a higher standard of care, extends key sectoral rules and seeks to build on the FCA's previous interventions in relation to consumer protection (for example, addressing behaviour biases, sludge practices, fair value and vulnerability). It requires firms to recognise the diverse needs of their customers, including those in vulnerable circumstances and to continue to understand, monitor and drive behaviours and decision-making around consumer outcomes. The FCA published its final guidance for the Consumer Duty (FG22/5) in July 2022.

The duty came into force on 31 July 2023 for all products and services that are open to sale or renewal. It will apply to all closed products and services from 31 July 2024. Closed products are those which are no longer marketed or distributed to retail customers or open for renewal (including those where customers can continue to make payments under the existing product terms).

There are three key elements to the Consumer Duty:

• The new consumer principle: Principle 12 states that a "firm must act to deliver good outcomes for retail clients".
• Cross-cutting rules: There are three rules that support Principle 12 by setting expectations for firms' behaviour. These require firms to act in good faith, avoid foreseeable harm, and enable and support retail customers to pursue their financial objectives.
• The four outcomes: These outcomes relate to (i) the quality of products and services (ii) the price and value of products and services (iii) consumer understanding and (iv) support for consumers.

Under the Consumer Duty, the FCA expects firms to put consumers at the heart of their business and focus on delivering good outcomes for their customers; provide products and services that are designed to meet customer needs and provide fair value; help customers achieve their financial objectives and not cause harm; and ensure that the firm communicates and engages with customers so that they make effective and informed decisions about financial products and services.

It is important to note that the Consumer Duty applies to all firms with a key role in delivering retail customer outcomes. As a result, even IPs appointed over regulated firms which have no direct customer relationship may still need to ensure compliance.

What do IPs need to know?

The Consumer Duty applies throughout the lifecycle of a firm's products, it also applies throughout the lifecycle of the firm. This includes, for example, from the early stages of the authorisation process right through to firms in an insolvency procedure (pre-insolvency, entering and during insolvency and restructuring) that remain authorised in order to service existing customers. IPs appointed over regulated firms will need to ensure compliance with the FCA's rules and guidance, including the Consumer Duty.

In May 2021, the FCA published its guidance for insolvency practitioners and how to approach regulated firms FG21/4 (the IP guidance) which makes clear that it expects IPs to know what regulatory requirements apply to a firm and identify any issues with compliance.

While the IP guidance touches on key areas of the FCA's Handbook, it was published before the introduction of the Consumer Duty. Further updates to the IP guidance, particularly regarding how the Consumer Duty interacts with an IP's statutory duties, are needed. The FCA has signalled that a review is currently underway, but the timescale is uncertain. It may be necessary for the FCA to consult on any changes, extending the timeframe further.

In the meantime, when considering the application of the Consumer Duty to their cases, we anticipate that two of the four outcomes will be front of mind for IPs, namely consumer understanding and customer support.

The IP guidance already provides details of the FCA's expectations where a firm is considering entering or has entered into an insolvency process. In such circumstances, the FCA expects IPs to have adequate communication strategies in place with appropriate support provided to customers. For the IP, this requires consideration of (i) the key messages for customers and their immediate concerns and (ii) what information the customers may need. The information needs to be clearly understood by the audience (i.e. the customers). Getting the message across clearly will be a key issue for IPs as they seek to explain the implications of insolvency to customers.

The Consumer Duty, on the other hand, sets out its key expectations around firm practice, including requiring firms to ensure that communications consistently support consumers to enable them to make informed decisions about financial products and services. It is likely that more support from an IP will be expected under the Consumer Duty than what is required under the IP guidance, particularly since in an insolvency the two key objectives of minimising material impact and avoiding foreseeable harm for customers will be heightened. One example is the scenario where an IP is considering communications around the sale of customer data. Under the IP guidance, where an IP is considering selling a client book or part of a client book (i.e. the client's personal data) as part of a transfer or sale of the business of a failed firm, an IP would be required to consider whether this is in the interests of the customers and treat them fairly under Principle 6 (A firm must pay due regard to the interests of its customer's interests and treat them fairly) and communicate with the customers in a way consistent with Principle 7 (A firm must pay due regard to the information needs of its clients and communicate information to them in a way which is clear, fair and not misleading). However, under the Consumer Duty, Principles 6 and 7 are disapplied by the new consumer principle. This means that, while there is overlap between the consumer principle and Principles 6 and 7, the latter will remain relevant only to the extent of guidance for firms considering their obligations under the consumer principle. Compliance with Principles 6 and 7 will no longer be enough in and of itself. This is a clear area where the IP guidance would benefit from an update. For an IP, this is likely to be a particularly difficult area, bearing in mind the balancing act between the range of duties and obligations they must adhere to under the IA, and the need to comply with regulatory obligations such as the Consumer Duty.

From July 2024, IPs appointed to firms with products that are live this year, but that are withdrawn during the insolvency process, will also have to consider and apply the duty to closed products.

If you are concerned about whether you are complying with the Consumer Duty as an IP of a regulated firm, or if you are concerned that the firm is non-compliant but should be, please feel free to reach out to one of our team who will be more than happy to assist.