The Financial Conduct Authority (‘FCA’) is taking steps to improve levels of consumer protection in retail financial markets by introducing a ‘Consumer Duty’. It hopes this will bring about a fairer, more consumer-focused and level playing field in which firms consistently place their customers’ interests at the centre of their businesses.
Prioritising consumer outcomes
The FCA is concerned that regulated firms are not consistently and sufficiently prioritising consumer outcomes, and this causes consumer harm and erodes trust. It wants to set a higher expectation for the standard of care firms give consumers. This will require a significant shift in both culture and behaviour for many firms. They will need to focus consistently on consumer outcomes and put customers in a position where they can make effective decisions.
The Consumer Duty
The FCA plans to introduce a Consumer Duty by 31 July 2022. The proposed duty is essentially a package of measures, consisting of the following elements:
- A Consumer Principle, obliging firms to “act to deliver good outcomes for retail clients”. The proposed wording is intended to emphasise the expectation for firms to consistently focus on consumer outcomes and put consumers in a position where they can act and make decisions in their own interests.
- Cross-cutting rules, which will require firms to (i) act in good faith towards retail customers, (ii) avoid foreseeable harm to retail customers, and (iii) enable and support retail customers to pursue their financial objectives.
- Outcomes, which provide more detailed expectations for the key elements of the firm-consumer relationship:
- products and services – all products and services for retail customers should be fit for purpose
- price and value – all consumers should receive fair value
- consumer understanding – firms’ communications should support and enable consumers to make informed decisions about financial products and services by giving consumers the information they need at the right time, presented in a way they can understand
- consumer support – firms should provide a level of support that meets consumers’ needs throughout their relationship with the firm, enabling consumers to realise the benefits of the products and services they buy and ensure that they are supported when they want to pursue their financial objectives.
The Consumer Duty is underpinned by the concept of reasonableness. This is an objective test. It means the rules must be interpreted in line with the standard that could reasonably be expected of a prudent firm (a) carrying on the same activity in relation to the same product or service and (b) with the necessary understanding of the needs and characteristics of its customers based on the needs and characteristics of an average customer.
It imposes a higher standard of conduct than exists under Principles 6 and 7 of the Principles for Business in the FCA Handbook. This is underlined by the FCA’s decision for the Consumer Duty to be enabled by introducing a new principle, rather than adapting old ones. (The FCA’s existing principles require firms to pay due regard to the interests of their customers and treat them fairly; and pay due regard to the information needs of their clients and communicate information to them in a way that is clear, fair and not misleading.)
In short, the message from the FCA is that the new rules will set higher standards and be backed up with assertive supervisory and enforcement action. This aligns with the FCA’s focus on being more assertive, innovative and adaptable in its regulatory approach.
No private right of action
The Consumer Duty is a positive and welcome step for consumers.
There are, however, some limitations. Although the new duty will give the FCA a greater ability to hold firms and their senior management to account if poor outcomes are identified, the proposed duty stops short of introducing a private right of action.
The FCA decided against this because of industry and consumer concerns that the higher standards of the Consumer Duty or increased compliance costs associated with it could lead to firms removing products from the market. This could impact consumers in vulnerable circumstances. It also took the view that allowing the industry adequate time to embed the Consumer Duty without the prospect of private actions being brought would be important to fully realise the consumer benefits of the cultural and mindset changes the Consumer Duty aims to achieve.
Although such concerns are well-founded, the proposal not to make the new Consumer Duty actionable by the individuals whose treatment and experiences are at the heart of the proposals is unfortunate for the following reasons:
- While in most cases, the Financial Ombudsman would be able to provide sufficient redress for breaches of the Consumer Duty, compensation limits make this avenue unsuitable for larger claims.
- The Financial Services Compensation Scheme (‘FSCS’) will not be able to pay compensation for breaches of the Consumer Duty in situations where FSCS protection might otherwise have applied.
- The absence of a private right of action may mean the Consumer Duty lacks a sufficient ‘deterrent’ effect.
Nevertheless, the FCA has indicated it will keep the proposal not to introduce a private right of action under review.
The FCA’s proposals are set out in Consultation Paper 21/36 (CP 21/36). The consultation is open until 15 February 2022. Any final rules are expected to be confirmed by the end of July 2022.
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