This week the FCA published a Feedback Statement summarising the responses to their July Discussion Paper on 'A duty of care and potential alternative approaches'.
While the FCA appears to be stepping away from introducing a duty of care via legislative changes, what is clear is that opinion continues to be divided on how to address the potential for consumer harm in financial services, which many suggest is at unacceptably high levels requiring changes to better protect customers.
On the same day as the FCA's CEO, Andrew Bailey, gave a speech on "The future of financial conduct regulation" in which he also focussed on fairness and sustainability, including fairness "to all groups in society reflecting the different capacities and vulnerabilities that exist", the FCA's Feedback Statement identified that it will review how it authorises, supervises and enforces its Principles for Businesses (Principles) and how transparently it communicates this with firms.
The Discussion Paper was originally triggered because of concerns in the market that the regulatory framework, including the Principles, are not sufficient or applied effectively enough to prevent harm to consumers. The discussion also tackles some of the FCA's key priorities outlined in its 2019/2020 Business Plan published on 17 April: namely considering the future of regulation as the UK leaves the EU, and exploring issues of culture and governance in financial services.
The Feedback Statement not only addresses whether an explicit duty of care is needed but also considers alternative options (alone or in combination) that might protect consumers (a New Duty). But what's the case for change?
The case for change
On the whole, there is a call for change to the way the FCA uses the existing regulatory framework to protect consumers whilst recognising a need to balance this against the FCA's objectives to promote competition and enhance market integrity. Issues related to fair pricing, high-cost credit, cash savings, mortgages and pensions were cited as being evidence enough that a change is needed. The key arguments that supported a New Duty were that a duty would:
- be critical to triggering a fundamental culture change with firms asking 'is this right?' instead of 'is this within the regulations?'
- give regulatory clarity to existing rules
- give an express duty to avoid harm which would incentivise firms to evaluate consumer risk at every stage of business, and
- give clarity for consumers of the standard of care they can expect and demand of firms.
The case against change
Only a handful of respondents believed there to be no case for change, arguing that the FCA's current approach is working well and that recent initiatives need time to be embedded before we can evaluate the need for change, for example, the SMCR and the Fair Pricing Discussion Paper.
Most of these arguments centred on the SMCR which is seen as an already significant change in the regulatory landscape and proposed that we should wait to understand its effect on culture, management and governance before introducing any more change. This combined with existing Principles (particularly Principle 6 on Customers' interests i.e. treating customers fairly), rules and guidance amounts to a sufficiently robust duty on firms. Respondents also cited Principle 2 (Due skill, care and diligence), Principle 8 (Conflicts of interest) and the 'client's best interests' requirement that already applies in other sectors as dispensing with the need to introduce a New Duty.
It seems that the volume and nature of the arguments for a change may be too compelling for the FCA to ignore. But what are the options to enhance consumer protection?
A New Duty expressed within the Principles
One option is to revise the FCA's Principles to communicate the concept of a New Duty which would help the FCA use its other tools, such as its supervisory and enforcement powers, to achieve a higher standard of firm conduct and greater harm prevention. For example, by revising Principle 6 (Customers' interests) to incorporate a stricter requirement to act in consumers' best interests and avoid harm.
In the same way, many believe that Principle 6 has not been effective enough in improving customer outcomes because the concept of 'fairness' is too vague.
What is clear is that changes to words alone would not be enough; any such change could only be effective in the context of stronger FCA regulatory approach and application.
A statutory duty of care
Another option is to create a duty of care in legislation. Those in favour think it would create a powerful, overarching legislative standard of care, sitting above the rest of the legal and regulatory framework which would restore consumer trust and motivate firms to put consumer interests at the heart of their business. In addition, it would create a right of action, giving consumers the ability to take court action to recover losses as a result of a breach of that duty.
Most, however, did not support an actionable statutory duty of care. Many reasons were advanced such as:
- duplication and confusion of the existing regulatory framework
- precedents would develop slowly which would hinder the FCA'S ability to be flexible and respond to market change
- increased costs to firms and false claims
- restriction on competition and innovation as firms will act too cautiously
- it would not create an additional deterrent effect on firms to comply with current regulations
- costly and stressful litigation is not in the consumers' interests, particularly exploitation by management firms
- consumers already have a cheaper and more consumer-friendly avenue of redress, namely the Financial Ombudsman Service, which is now more attractive given the recent increase in the Ombudsman's compensation limits.
A private right of action for damages based on breaches of the Principles
Only a few respondents commented on this option and many of the arguments for and against were the same as those made about an actionable statutory duty of care. Nevertheless, the FCA has said it will explore this option further, potentially because it won't involve the slow process of a change to primary legislation requiring Parliament's approval and also because the FCA would be able to order a redress payment to consumers for Principles breaches alone, under section 404 of the Financial Services and Markets Act 2000.
A fiduciary duty
Again, only a few respondents commented on whether a firm's duty to its customers should be classed as fiduciary. Those in favour felt it would create an explicit obligation on firms to avoid conflicts altogether, however, those against the idea felt that the concept of undivided loyalty to a customer is inconsistent with commercial enterprise.
The FCA will now consider the issues and publish a further paper in Autumn 2019 seeking detailed views on specific options for change. As part of the FCA's consideration, it will investigate the different types of consumer harm so it can assess how to tackle each one using one or a combination of the options discussed.
Another avenue the FCA want to consider is whether it can better use the tools it already has to address some of the gaps in consumer protection.
The FCA has been told that its current approach can be prescriptive and overly rules-based which encourages firms to adopt a 'tick-box' compliance approach. Respondents are calling for the FCA to broaden its application of the Principles and its appetite for supervisory action in cases where there is no other detailed rule breach resulting in a better culture whereby firms do not focus on detailed rules but become Principles led when considering whether their activity is right for consumers.
It is also clear that the FCA needs to be more transparent when communicating what it expects of firms in their day-to-day business practice, telling them what 'good' looks like. Suggestions made, which we hope the FCA takes on board, were publishing a volume of 'good' and 'bad' practice guidance, regularly revising the Treating Customers Fairly Outcomes, publishing supervisory intelligence about firm conduct, trends and risks, publishing lessons learned from their supervisory and enforcement work and publishing enforcement action early with a higher profile.
Predicting the future
The FCA has said that its primary focus will now be on 1) how it applies and communicates about the existing regulatory framework, particularly the Principles and the FCA's supervisory and enforcement functions, and 2) changing the Principles to strengthen and clarify firms' duties to consumers. We expect to see a move away from the potential statutory duty of care which would entail Parliament making changes to primary legislation, and a move towards a potential private right of action for Principles breaches.
It is unclear why the FCA has chosen to focus on this option when it attracted minimal interest in the Feedback Statement, with preference leaning towards revising the Principles coupled with a stronger FCA regulatory approach and application. Nevertheless, could a private right of action based on breaches of the Principles create the balance the FCA desires of increased incentivisation for firms to avoid consumer harm and the provision of a better service without stifling competition whilst giving those consumers claiming more than £350,000 or a complex claim a clear avenue of redress? Of course, it is hoped that consumers with straightforward complaints below this amount would rely on the Ombudsman as usual, but it is inevitable regulated firms will face some degree of unnecessary claims and increased costs, particularly at the hands of claims management firms.
Regulated firms will continue to feel strongly about this issue and the FCA must consider how it will address any unintended consequences of creating such a right. Only time will tell what the FCA reveals this Autumn but firms should not be reticent at providing their feedback to the FCA as part of this process as this may be their only chance to impact what will almost inevitably be a proposal by the FCA which opens regulated firms up to more claims for redress which may be valid or otherwise.