As Canada awaits the coming into force date of its federal Financial Consumer Protection Framework[1] (FCPF), the UK’s Financial Conduct Authority (FCA), on May 14, 2021, released a consultation paper on new proposed standards of care that firms will be called upon to exercise towards consumers. The FCA is pursuing the consultation with a view to publishing new rules July 2022.

Basis for a new Consumer Duty

The FCA’s proposed approach focuses on consumer outcomes and is meant to enable consumers to make better financial decisions that meet their needs. The measures are necessary, according to the FCA, to address ongoing issues related to unequal bargaining power, asymmetries of information, lack of consumer understanding, behavioural biases, sludge practices[2] and the specific needs of vulnerable consumers. Without them, the FCA argues, consumers run the risk of buying products that are not appropriate for their needs, incurring unnecessary costs and encountering more difficulty in making informed decisions, switching firms or getting better deals.

Proposed new duty

The FCA purports to tackle these legacy issues through new Consumer Duty standards with which firms would have to comply and which would consist of the following measures:

  • a Consumer Principle that sets a clear tone and uses language that articulates an overarching standard of conduct expected from firms. Firms would have to consider the reasonable expectations of their customer base as a whole, rather than achieving the absolute best outcome for each and every individual customer;
  • Cross-cutting Rules which develop and clarify the Consumer Principle’s overarching expectations of conduct and set out how the Principle should apply in practice. The Rules would dictate the behaviours expected from firms and make them accountable for acting in good faith and taking all reasonable steps to avoid harm to consumers, thus enabling consumers to pursue their financial objectives; and
  • Four Outcomes related to key elements of the firm-customer relationship, specifically communications, products and services, customer service and price and value. As examples, the FCA offers these outcomes:
  1. Communications: Communications equip consumers to make effective, timely and properly informed decisions about financial products and services.

The communications outcome would require firms to communicate in a way that, in addition to being fair, clear and not misleading, is understandable and facilitates informed decision-making. Further, firms would be required to test their communications to demonstrate that they are indeed understood by consumers. And, if found not to be, then firms would be required to adapt them to realize the stated outcome.

  1. Product and Services: Products and Services are specifically designed to meet the needs of consumers and sold to those whose needs they meet.

This outcome would ensure that products and services are designed to benefit consumers and perform as intended.

  1. Customer Service: Customer Service meets the needs of consumers, enabling them to realise the benefits of products and services and act in their interests without undue hindrance.

The FCA remarks that this outcome is needed to ensure that the needs of consumers are met throughout the duration of their relationship with firms. As an example, the FCA points to the fact that it should be at least as easy to exit a product or service as it is to purchase it in the first place.

  1. Price and Value: The price of products and services represents fair value for consumers.

This outcome is designed to work with the other proposed outcomes to deliver fair value for consumers. As a result, firms would be expected to demonstrate that the benefits derived from their products and services are reasonable relative to their price. If well executed, the FCA maintains, this outcome would reduce the need for future market-wide interventions, in the form of price-setting or price caps, on its part.

Potential impact of new duty

The FCA flags the potential impacts of a new Consumer Duty on firms, consumers and on itself, as a regulatory authority.

a. Firms

For firms, the FCA believes that a new duty would result in:

  • a stronger focus on customer interests and outcomes that goes beyond the narrow focus on compliance with the rules;
  • the consideration of the Consumer Duty at every stage of their processes and at every level of their organizational structure;
  • a focus on getting it “right in the first place”, particularly as it relates to the design of products and services;
  • clear and well understood responsibilities and expected outcomes;
  • the exercise of more judgment in determining how behaviours, policies and processes impact their ability to achieve such outcomes;
  • the ongoing monitoring, testing (where necessary) and adaptation of their practices and processes to ensure that they are delivering the expected outcomes;
  • the provision of information and data to the FCA, to substantiate the results of their monitoring and testing activities; and
  • a reduction in any ‘first mover disadvantage’ that could be a barrier to putting “the customers first”.

b. Consumers

According to the FCA, the proposed measures would be beneficial for consumers, who would:

  • have more confidence that firms are acting in good faith, in line with their interests;
  • be able to choose from a range of products and services that are fit for purpose, by being explicitly designed to meet the needs of a particular target market;
  • receive clear and understandable information, tailored to the channel they are using to interact with firms, that enables them to assess which products and services are most likely to meet their needs;
  • receive the benefits expected of the products and services they have purchased and to reasonably expect them to;
  • receive service that consistently meets their needs and would not hinder firms from acting in their interests; and
  • obtain fair value for the financial products and services they purchase.

Views on a potential private right of action

As part of the consultation process, the FCA also invited views on how a private right of action for breaches to the Consumer Duty might support or hinder the success of the proposals and their intended impact on firms, consumers and markets. The FCA considers the potential private right of action as forming part of a wider range of measures through which firms could be held accountable for breaches to the rules.

The recourse introduced in the consultation paper would be in addition to the other recourses available to consumers, including: a firm’s own redress arrangements, the FCA’s enforcement activities, redress through the UK’s Financial Ombudsman Service and recourse to the UK’s Financial Services Compensation Scheme.

Why are these developments relevant?

The FCA’s proposed Consumer Duty, rules and outcomes, while novel in approach, nonetheless mostly purport to solve the age old and ongoing questions tied to the unequal bargaining power between consumers and financial institutions, asymmetries in consumer information and the lack of consumer understanding related to financial products and services. What’s more, the ultimate goal remains unchanged: more informed decision-making by consumers that better suits their needs.

Expectations, which are expressed in the form of conduct examples, and outcomes, which touch on variants of common themes, are anchored in the Consumer Principle for which two options are proposed:

Option 1: ‘A firm must act to deliver good outcomes for retail clients’

Option 2: ‘A firm must act in the best interest of retail clients’

Looking more closely at the “Communications” outcome suggested by the FCA, it mandates that, in addition to being fair, clear and not misleading, communications with consumers ought to be understood by them. As mentioned above, this would require firms to demonstrate to the regulator that their communications are well understood by their customers. In contrast, the new FPCF requires that communications with consumers, in the form of information, disclosure, advertising or to seek consumers’ express consent, be in language that is clear, simple and not misleading. There is no legislative obligation, however, requiring financial institutions to test these communications for consumer understanding.

The FCA’s proposed outcome related to “Products and Services”, which provides that products and services be “specifically” designed to meet the needs of consumers, shifts the traditional focus of product development from purely profit-generating to consumer needs gap-filling. What’s more, products and services launched into the UK marketplace will be expected to perform as anticipated, thereby requiring firms to provide and substantiate product performance assessments to the FCA. In Canada, the new FPCF legislation covers the disclosure and sales of products and their appropriateness[3] for consumers.

In addition, the “Customer Service” function within firms, under the FCA’s proposed outcomes, would be expected to “act in the interest” of consumers throughout the duration of the firm-customer relationship, thereby broadening the scope of this “duty” to services areas.

Finally, the FCA introduces “Price and Value” as a proposed outcome which is meant to ensure, as the title suggests, that consumers get value for their money. To achieve this outcome, firms will be expected to demonstrate that the resultant product benefits are reasonable, relative to their price. This last and final outcome is explained as somewhat of a warning to firms to avoid eventual price-setting and cap fixing by the regulator.

While one might question the relevance of tracking regulatory developments related to financial consumer protection abroad, it is important to remember that many of the recent Canadian developments in this space, including the new FPCF, were inspired by international practices emanating from countries such as the UK. If eventually found to be a best practice by international regulatory organizations or standard-setting bodies, the FCA’s new Consumer Duty might, one day, see wider application by market conduct regulators across the globe, including Canada.