The Financial Conduct Authority (‘FCA’) is taking steps to improve levels of consumer protection in retail financial markets by introducing a ‘Consumer Duty’. The FCA has said the Consumer Duty will “fundamentally improve” how firms serve customers. It hopes the Consumer Duty 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.
Darren Kidd and Alex Lerner outline the FCA’s proposed Consumer Duty and consider some of the implications of the FCA’s proposal not to create a private right of action in relation to it. This article was updated and published on 30 September 2022 in ThoughtLeaders4 Disputes Magazine Issue 6.
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 and see firms compete vigorously in consumers’ interests.
The Consumer Duty 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 proposed duty is essentially a package of measures consisting of the following elements:
- A Consumer Principle requiring firms to “act to deliver good outcomes for retail customers”. The 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. Notably, the FCA opted against introducing a higher standard of care (ie acting in consumers’ “best interests”).
- Cross-cutting rules requiring 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 providing more detailed expectations for the key elements of the firm-consumer relationship, which the FCA considers to be instrumental in helping to drive good outcomes for customers:
- 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 carrying on the same activity in relation to the same product and taking appropriate account of the needs and characteristics of its customers based on the needs and characteristics of retail customers in the relevant target market or of individual customers as the context requires.
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.
The FCA wants the Consumer Duty to be in effect as soon as practicable so that consumers can start to benefit from enhanced protections sooner rather than later. The FCA has therefore proposed a phased approach to the introduction of the Consumer Duty, which will apply to new and existing products and services open to sale (or renewal) from 31 July 2023. This only gives a relatively short period for firms to implement the significant changes the Consumer Duty entails.
No private right of action
The Consumer Duty sets higher expectations for the standard of care firms give customers, aiming to put consumers’ needs first. It 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.
- Without a private right of action, there will not be any industry‑wide consumer redress scheme under section 404 of the Financial Services and Markets Act 2000 (FSMA), and the Financial Services Compensation Scheme will not be able to provide compensation for breaches of the Duty.
- 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 possibility of a private right of action under review. In the meantime, in response to feedback from consumer organisations in the course of its consultations, the FCA has strengthened the governance and accountability and redress requirements. Further, the FCA has the power to require restitution from firms in breach of the Consumer Duty under section 384 FSMA.
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