Securing Consumers’ Interests

The Central Bank’s consultation period on its review of the Consumer Protection Code ended on 7 June. The Bank advises that it expects to publish the revised Code in early 2025 taking account of the consultation responses received. We forecast the likely shape of things to come when the Code is revised. We also look at how the Central Bank’s ultimate expectations could be informed by developments in other jurisdictions.

Consultation paper

Market participants know that public consultation responses rarely cause the Central Bank of Ireland (CBI) to make dramatic changes to consultation proposals. Firms can therefore assume that the revised Consumer Protection Code (CPC) will follow the broad thrust of the proposals outlined in the consultation paper. Firms with UK affiliates will also know that the FCA’s UK Consumer Duty imposed a multi-year implementation burden on firms and caused the withdrawal of many products from the UK market. Irish firms would therefore be well advised to start thinking about any possible changes to products or processes that might be required by the revised CPC well ahead of its publication, since lead times could be substantial.

The CBI’s consultation paper places particular emphasis on “Securing Customers’ Interests”. The consultation paper argues that this is not intended to introduce more extensive best-interest obligations for firms. Instead, it aims to provide greater clarity and predictability regarding existing requirements. We think however that the CBI will expect firms to take action to review and if necessary, revise their processes and procedures in light of the revised CPC. We think our reading is consistent with the detailed provisions of the CBI’s proposals.

In addition to the consultation paper, the CBI also published draft Standards for Business Regulations and draft Guidance on Securing Customers’ Interests. Regulations 4 and 5 of the draft Regulations impose a new statutory duty for firms to “deliver fair outcomes for consumers”. Currently, under the CPC, a firm must “act…fairly…in the best interests of its customers”. The CPC also requires that advertising is fair and that, for insurance firms, any claim settlement offered is fair. These current requirements fall short of a general expectation to deliver “fair outcomes” for consumers. What exactly does a “fair outcome” mean? Does this shift in terminology indicate that CBI’s conduct expectations for firms will be raised? And what should firms do to prepare for this?

The new focus on outcomes is consistent with broader international regulatory developments. The FCA’s ’Treating Customers Fairly‘ (TCF) principles were first introduced in 2015, preceding the Consumer Duty. Under the TCF principles, firms’ conduct is evaluated against six defined “consumer outcomes”. The TCF focus on “outcomes” appears to have influenced the CBI’s thinking in its consultation paper. The CBI’s paper reads: “the way in which a business measures its success should include consideration of outcomes for its customers. Protecting consumers requires a focus, not only on the actions taken by firms at a point in time but also, more importantly, on the ultimate outcome for the customer. We want to ensure firms focus on delivering positive outcomes for consumers in all their actions and decisions, meaning, for example, product and delivery channel design.”

Securing customers’ interests

Ultimately, since “fair outcomes” will be a legal requirement in the new regime, a firm that fails to deliver “fair outcomes” for consumers will be subject to CBI enforcement, fines and penalties. This makes it critical for a firm to understand what a fair outcome will look like. The CBI’s draft Guidance comments extensively on its understanding of how firms must take customer outcomes into account at all levels of their:

• Cultures
• Strategies
• Business models
• Decision-making
• Systems
• Controls, and
• Policies, processes, and procedures

In particular, the Guidance gives detailed expectations relating to pricing, product structure and use of incentives. Under the draft Regulations and Guidance, firms must consider the interests of consumers when designing products and services and ensure that their products are not designed to unfairly exploit the behaviours, habits, preferences, or biases of consumers leading to consumer detriment. This requires a focus on outcomes at every level of the organisation built into every process and procedure but falls short of giving guidance on what a “fair outcome” will look like. Firms will have to define “fairness” in this context for themselves.

Furthermore, the legal standard in the CBI’s draft Regulations is set at “fair outcomes” but the consultation paper and draft Guidance refer repeatedly to “positive outcomes”. One way of reading the CBI’s draft Guidance therefore is that the CBI is likely to presume a negative outcome for a consumer to be unfair and will require the firm to justify the steps that it took to avoid such an outcome. This comes very close to the UK’s Consumer Duty standard, under which firms are obliged to act to “secure good outcomes” for customers. In the UK, this obligation has led to widespread revision of firms’ pricing models on the basis that their fees and pricing structures were deemed excessive to secure “good outcomes”.

Comment

We think that firms would be unwise to assume that the revised CPC will not require a significant internal implementation project. Firms will need, at a minimum, to carry out a gap analysis between their existing policies and procedures and the revised CPC, Regulations and Guidance. They will also need to review their policies, procedures and product suite against the “fair outcomes” standard. In doing so, they will need to consider how to justify their existing product suite, customer processes and pricing, and if they decide they cannot do so, they will need to discontinue any offending products and processes.

We therefore expect the CBI’s revised CPC to give rise to “mini-Consumer Duty” implementation processes in regulated firms. Given the burden these processes imposed on firms in the UK, we think Irish firms should start planning for them now.

For more information, contact a member of our Financial Regulation team.

The content of this article is provided for information purposes only and does not constitute legal or other advice.