On 17 July 2018, the FCA published two documents: its approach to consumers document (Approach) and a discussion paper on a new duty of care (Discussion Paper). The publications follow an earlier consultation paper (Consultation) by the FCA and build the “Our Mission” document (Mission) published in 2017. These two publications, taken together are intended to provide further clarity about the actions the FCA will take to protect consumers and ensure there are no gaps in the consumer protection regime in the financial sector.
Of significance in the Approach document is that the FCA have dropped their updated definition of ‘vulnerable consumers’ proposed in the Consultation, in response to feedback that many firms had already adopted the existing definition and the updated drafting had the potential to narrow the scope of affected persons.
The Discussion Paper is intended to explore whether the lack of an existing duty of care could be perceived as a gap in the current legal and regulatory system, and whether the ability to ensure adequate protection for consumers could be improved by its introduction. It follows responses by stakeholders to the Consultation and to similar questions posed in earlier publications.
Approach to Consumers
The Approach sets out the FCA’s vision for well-functioning markets for consumers and its expectations on how consumers should be treated by financial firms. It gives an insight into the wide range of powers the FCA has to ensure consumers are protected, particularly some of the most vulnerable people in society.
The Legal and Regulatory Framework
The Approach sets out the framework in which the FCA operates and outlines its main powers and rules for protecting consumers. It lists the FCA’s statutory objectives and explains the conditions for consumers it expects to see when competition is working well and market integrity is observed. It also highlights how the consumer protection legislation and the Equality Act 2010 impact on its objectives. The FCA stated the importance of a strong consumer complaints and redress framework to ensuring that “consumers can have confidence that when things go wrong they will be put right“.
The FCA also recognised that it “may not always be best placed to resolve the harms” and outlined a number of areas where it works in partnership with other organisations and services to protect consumers, as well as the areas where it is more appropriate for the UK Government to act.
In response to feedback on the Consultation, the FCA dropped its plan to update the definition of “vulnerable consumer”. The FCA now intend to retain the definition originally published in Occasional Paper No. 8, namely as “someone who, due to their personal circumstances, is especially susceptible to detriment, particularly when a firm is not acting with appropriate levels of care“).
This followed feedback that the existing definition had already been put into practice by many firms, and that the revised wording risked narrowing the definition and shifting responsibility on consumers to self-identify vulnerability. The FCA concluded that the existing definition provided a sound basis for stakeholders to develop and adapt the concept to their business.
To provide further clarity in the area, the FCA noted that it intends to consult on guidance for firms on identifying and treating vulnerable consumers in early 2019, focussing on the FCA’s expectations in this area.
The FCA provided details on the decision-making framework it uses to achieve the greatest impact of its interventions in the market. Much of this information is provided in more detail in other FCA approach documents produced following the Mission publication.
Of most note in this section, however, are the sources of information that the FCA use, which range from the expected (for example routine supervisory contact with firms and calls to the contact centre) to the more novel (including social media scanning software and commercial third party data and information).
The FCA’s Key Principles
The FCA explains how it uses four key, and interconnected, principles to make “complex and finely balanced judgements about what is reasonable to expect of different types of consumers and firms in any given situation“:
- Firm Responsibility: Firms are responsible for making sure all their customers are treated fairly, even if they have no direct contact with retail customers. This includes taking into account the real world consumer behaviours and not exploiting biases.
- Consumer Responsibility: The general principle is that consumers should take reasonable responsibility for their choices and decisions. However, some consumers’ low levels of financial capability, financial resilience or level of confidence in managing their money and finances, coupled with behavioural biases, make it difficult for this to be a universal expectation. The FCA will therefore “take these factors into consideration when determining the precise level of responsibility a consumer should be expected to take for their decisions“.
- Vulnerability: Consumers have different needs, and some may be more vulnerable than others. Consumers who are vulnerable may be significantly less able to represent their own interests than the average consumer, and more likely to suffer harm. The FCA expects firms to identify vulnerable consumers and treat them appropriately.
- Access and Exclusion: Some consumers can find that they are inadvertently excluded from participating in financial services due to their particular characteristics or circumstances, or that firms actively do not wish to service them due to the perceived risk that they represent, which may damage their longer-term wellbeing. Although the FCA does not have a specific responsibility to ensure access for all consumers, it will seek to develop practical strategies to tackle access problems in partnership with firms and stakeholders.
Discussion paper on a new duty of care
The FCA explained that some stakeholders had raised concerns that its current regulatory framework does not provide adequate protection for consumers and called for the introduction of a “duty of care” for firms when dealing with consumers. Introduction of such a duty might bring financial services firms on a par with solicitors and doctors, who have similar such duties.
The FCA therefore produced this Discussion Paper to:
- better understand whether there is a gap in its regulatory and legal framework, or the way it applies it in practice, that could be addressed by introducing a new duty;
- assess whether change is desirable and, if so, what form it could take, how it would work in practice alongside its current framework, and what consequences it would have for consumers, firms and the FCA;
- better understand and consider possible alternative approaches that might address stakeholders’ concerns; and
- understand what a new duty for firms might do to enhance good conduct and culture in financial services, and how this could influence consumer outcomes, alongside the Senior Managers and Certification Regime (SMCR).
The FCA distinguish a ‘duty of care’ from a ‘fiduciary duty’, stating the latter is a stricter standard. A duty of care would impose a positive obligation on firms to ensure their conduct meets a standard, whereas a fiduciary relationship would prohibit particular actions which may be disloyal or inappropriate. The FCA has stated that the duty of care is a legal obligation to take care which, when breached, will make the person at fault liable to compensate the victim for the loss they have suffered. The FCA has said the position is complicated by the fact that, in many cases, a person who has fiduciary duties is also subject to a duty of care. In the Discussion Paper, the FCA explains that the term “new duty” is used to “cover all possible formulations of any new duty of care or fiduciary duty on firms and any other changes that could address stakeholders’ concerns“.
The FCA invites stakeholders to comment on whether the current regime has any gaps and on whether and how the new duty of care could be used to address these. The FCA sought views on several options, including:
- FCA rules introducing a new duty;
- a new statutory duty imposed by government;
- extending the client’s best interest rule; and
- additional rules or guidance on the Principles.
A question on whether a duty of care would help ensure financial markets functioned well, contained in the Consultation, attracted a wide range of responses. Some respondents felt that the current rules did not remove conflicts of interest and did little to deter misselling, and once poor performance was found, there was a lengthy process to obtain redress. Others, however, argued that the current regime, supplemented by the SMCR extension, all but added up to a duty of care, and that an introduction of a new duty would bring needless complexity and uncertainty for limited benefit and may expose the industry to huge litigation and redress costs whilst the definition was clarified and tested. It would not be surprising if similar views were expressed in response to the Discussion Paper.
There is also the question of whether the new duty might extend to wholesale markets as well as retail markets, and if so, to what extent it might differ. The FCA appear open to the possibility and have included questions to seek feedback on the point.
Stakeholders can submit their comments on the Discussion Paper by 2 November 2018.