Retail Clients: Obligations Of A Firm Towards Its Retail Clients

Question 1

What are the two main obligations for a firm towards its customers that are set out in the FCA’s Principles for Businesses (PRIN)?

Answer 1

1. Principle 6
   A firm must pay due regards to the interest of its customers and treat them fairly
2. 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
3. Principles 6 & 7 are only applied for out of scope products and services

Question 2

A key change was introduced in July 2023 that introduced the Consumer Principle - Principle 12.

Explain what this principle is

Answer 2

1. Principle 12
   Firms must act to deliver good outcomes for retail customers - introduced as part of the consumer duty rules
2. Principle 12 imposes a higher standard of care than principles 6 & 7
3. For products and services aimed at retail clients only Principle 12 applies and Princples 6 & 7 are not applied.

Question 3

What are some additional consumer duty rules?

Answer 3

1. Conduct Rule 6 –
   All firm employees must ensure good customer outcomes.
2. Senior Managers’ Responsibility –
   They must oversee compliance with the Consumer Duty.

Question 4

Consumer Duty Rules vs Principle 12 (Consumer Principle) difference

Answer 4

1. Consumer Duty is a broader framework introduced by the FCA, and Principle 12 (Consumer Principle) is its core requirement.
2. However, the Consumer Duty includes additional rules and guidance to support Principle 12.

Question 5

List the four outcomes from the consumer duty rules

Answer 5

1. Products and services
2. Price and value.
3. Consumer understanding.
4. Consumer support.

Question 6

For each of the outcomes of the consumer duty rules - explain what they are

OUTCOME 1: products and services

Answer 6

1. Firms must develop and design financial products and services that are fit for purpose, ensuring they meet the needs and characteristics of their identified target market.
2. Distributors (such as brokers or financial advisers) must ensure that the distribution strategy aligns with the target market’s needs.
3. The FCA expects firms to:
   A. Test their products and services before launch.
   B. Conduct regular reviews of their product and services book to identify any issues.
   C. Use focus groups and gather customer feedback.
   D. Obtain relevant information from manufacturers where necessary.
   E. Take action to remedy any problems found in these reviews.
4. Firms that comply with Product Governance Rules (PROD) — which apply to financial instruments, structured deposits, insurance products, and funeral plans — are considered to meet this outcome.

Question 7

For each of the outcomes of the consumer duty rules - explain what they are

OUTCOME 2: price and value

Answer 7

1. Firms must ensure their products and services provide fair value to customers. I.e. price charged must be reasonable compared to the benefits provided.
2. The FCA does not require firms to charge all customers the same price —charging different prices to different customers is allowed, as long as it is justifiable and does not lead to unfair outcomes.
3. Firms involved in Collective Investment Schemes (CIS) can comply with this outcome by meeting the COLL fair value assessment rules. However, this exemption only applies if fund managers fully comply with the COLL rules and FCA expectations.
4. The Consumer Duty extends beyond just price and value -
   A. Firms must consider how fair pricing interacts with other elements of the duty, such as consumer understanding and support.

Question 8

For each of the outcomes of the consumer duty rules - explain what they are

OUTCOME 3: consumer understanding

Answer 8

1. Firms must ensure that customers receive clear, accessible, and relevant information so they can make informed financial decisions.
2. This means:
   A. Providing appropriate levels of detail based on what the customer needs to know.
   B. Avoiding jargon and making communication clear and straightforward.
   C. Presenting information in a way that is not misleading and supports effective decision-making.
   D. Ensuring that customers understand risks, costs, and features before making a commitment.

Question 9

For each of the outcomes of the consumer duty rules - explain what they are

OUTCOME 4: consumer support

Answer 9

1. Firms must ensure that customers can use their financial products and services as expected and have access to adequate support when needed.
2. The consumer duty requires firms to meet three cross-cutting obligations under this outcome. These are:

A. Firm must act in good faith towards retail customers
B. Firm must avoid causing foreseeable harm/ barriers to retail customers.
C. Firm must enable and support retail customers to pursue their financial objectives.

Question 10

Under the FCA - what is the definition of “vulnerable clients”?

Answer 10

1. The FCA defines vulnerability as a state where a consumer is more susceptible to harm and less able to protect their own interests.
2. Vulnerability can be temporary, sporadic, or permanent.

Question 11

What are the potential risk factors that can contribute to vulnerability in the context of investment services?

Answer 11

1. Health-Related Factors
   A. Physical disability
   B. Severe or long-term illness
   C. Mental health problems
2. Financial & Personal Circumstances
   A. Low income and/or high debt
   B. Caring responsibilities (including power of attorney)
   C. Sudden life changes (e.g., job loss, bereavement, divorce)
3. Age & Experience
   A. Over 80 years old (linked to physical/mental decline)
   B. Young customers (less financial experience)
4. Language & Credit History
   A. Limited English language skills
   B. Non-standard financial background (e.g., armed forces personnel returning from abroad)

Question 12

In FCA’s 2017 mission statement - what did they mention with regards to dealing with vulnerable clients fairly?

Answer 12

The FCA’s 2017 mission statement emphasized that firms must recognize and address customer vulnerability in their regulatory decisions.

Question 13

What is FCA’s 2021 Guidance for firms on the fair treatment of vulnerable clients?

What are the four main actions firms should take?

Answer 13

1. Understanding Vulnerable Customers
   A. Identify vulnerable customers within their target market and existing customer base.
2. Training Staff to Recognize & Support Vulnerable Clients
   A. Ensure employees have the necessary skills to identify and address vulnerability.
   B. Monitor customer interactions to improve how vulnerable clients are treated.
3. Practical Adjustments in Product & Service Design
   A. Tailor product offerings, support systems, and communication methods to meet the needs of vulnerable customers.
4. Monitor & Evaluate Outcomes for Vulnerable Clients
   A. Regularly assess whether vulnerable customers’ needs are being met and take corrective action if necessary.